Will States do their BIT?

The Hindu Business Line, June 26, 2015

By Pradeep S Mehta

The Centre’s plan to let States take own initiatives to woo overseas investors and tweak policies is pragmatic

While launching the Make in India campaign, the Prime Minister had also unveiled ‘Team India’ — including the Prime Minister and chief ministers — to work in sync for development. This has become pivotal in economic decision making at the Centre, and its imprint can be seen in almost every policy.

That said, since States are pursuing investment they are also competing in improving the ‘doing business’ indicators furiously. And many are engaging in economic paradiplomacy — CMs are travelling abroad to woo investors. However, attracting investment is also tied up with the Centre’s policies — international agreements, for protection measures through its exclusive power to do so.

An opportunity for States

A revised draft of model bilateral investment treaty (BIT) was recently released for public comments. Many were surprised that it didn’t contain standard investor protection provisions like the most-favoured nation treatment (MFN) and limited the national treatment (NT) provisions to policies made by centre.

However, the draft nowhere prohibits States from treating all investors alike. Neither does it mandate the States to treat local industries preferentially. It merely leaves the field open for States to design, adopt and implement policies, as they deem fit. If a state wants to attract investment, it will have to treat investors alike. Unlike in the past, States will not have to conform to a uniform standard and would be able to modify their approach according to their needs and requirements, as they are doing in business procedures. They will have to compete and cooperate with each other, as envisioned under the theme of cooperative and competitive federalism.

Likewise, the condition precedent of exhausting local remedies for invoking dispute settlement provisions under the treaty is an opportunity for States to fix the judicial and quasi-judicial systems, within their respective jurisdiction. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015, has already been introduced in the Rajya Sabha. It enables creation of commercial divisions in high courts at State level, and commercial courts at the district level.

The States will need to push for implementation of the Bill. A State with effective and speedy justice delivery mechanism is bound to provide confidence to investors, and attract greater investments. This will be extremely important as international tribunals —under the draft BIT — will not be able review decided judicial matters.

Similarly, the model text prohibits expropriations made without public purpose, which has been left undefined. The States must seize such opportunity to clarify circumstances in which expropriation will be made, and provide appropriate comfort to potential investors.

Granted, the Constitution provides that only the Centre can enter international agreements and treaties and Parliament can legislate to give effect to them, but it does not prohibit States from adopting a non-discriminatory, predictable and investor-friendly regime, within the State. States have already started to use Article 254(2) of Constitution to customise economic policies under the Concurrent List, to suit their requirements.

Rise of paradiplomacy

These developments should not surprise those who have followed Narendra Modi from his Gujarat days. He has been an ardent supporter of greater power to States for attracting investments and direct engagement between States and foreign investors. The Vibrant Gujarat summits, aiming to promote Gujarat as a favourable investment destination, were part of this strategy and vision.

Taking cue, States such as Rajasthan and Madhya Pradesh have also been promoting themselves as attractive investment destinations. Non-discriminatory, favourable, stable and predictable policy regimes are being highlighted. Come November, Rajasthan is organising a large-scale Resurgent Rajasthan summit. The significant role of sub-national actors in attracting investments and conducting economic diplomacy is not a novel global phenomenon. Economic paradiplomacy related to trade and investment has become an institutionalised practice across the world — in federal countries such as the US, Canada and Belgium, and quasi-federal jurisdictions like Spain, among others. In US, State governors and other leaders undertake a host of international interactions to promote exports, attract investments and create jobs in their States. Given their capacity to promote understanding of available skills and business environments, US states have been frontrunners in attracting investments.

Brazil is a unique example of municipal model of paradiplomacy. The city of Sao Paolo is its poster child. It now attracts investments close to that of New York. All government departments of Sao Paulo have foreign partnerships or projects, especially in infrastructure area. Both the US and UK have formal bilateral relations with Sao Paulo, perhaps the only city in the world to have this distinction.

While Indian States cannot go as far as entering into bilateral agreements, they are well-placed to issue unilateral policy statements adopting non-discrimination, transparency and similar treatment. The policy on FDI in multi-brand retail, which provides States with an option to allow or reject FDI in the sector, is a perfect opportunity to initiate economic paradiplomacy.

Unfortunately, the surrounding uncertainty and lack of understanding made it more of a false start. Now, the Centre has started providing indications to States that they will be required to step up and step in to fill the void in areas which were hitherto controlled by the Centre. It has started to acknowledge that real action lies in the States, both in terms of execution to policies and making of investments.

States must correctly interpret these signals. The proposed model BIT, if successful, could be an apt start. It is an opportunity for States to fill the glass, which seems to have been intentionally left half filled by the Centre.

The writer is the secretary general of CUTS International

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