Introduction
Investor-State Dispute Settlement (ISDS) has become one of the most debated mechanisms in international investment law. It allows foreign investors to bring claims directly against host states for alleged violations of investment agreements. While proponents argue that ISDS protects investors from arbitrary state actions, critics highlight its potential to undermine national sovereignty and democratic processes. India, once a supporter of ISDS, has taken a cautious stance in recent years, opting to terminate several Bilateral Investment Treaties (BITs) and introducing a new model BIT in 2016. This essay examines whether India should reconsider its current position on ISDS, analyzing both the rationale behind its shift and the implications for future foreign investment.
India’s Evolving Stance on ISDS
India’s changing approach to ISDS is rooted in its experience with several high-profile cases. The White Industries case in 2011 marked a turning point. The Australian mining company successfully sued India under the India-Australia BIT, invoking the Most Favoured Nation (MFN) clause to benefit from more favorable provisions in India’s BIT with Kuwait. This case, and subsequent others, exposed India to unexpected legal and financial liabilities and prompted a reassessment of its BIT framework.
In response, India drafted a new Model BIT in 2016, significantly narrowing the scope for ISDS. It limits investors’ rights to sue the state, requires exhaustion of local remedies for five years before initiating international arbitration, and restricts provisions such as the MFN and Fair and Equitable Treatment (FET) clauses. Moreover, India began terminating or renegotiating older BITs based on this model.
Arguments Supporting India’s Cautious Approach
India’s new stance is driven by legitimate concerns. First, the ISDS mechanism can infringe on a state’s regulatory autonomy. Developing countries like India need policy space to pursue economic, environmental, and social objectives. The fear of costly litigation and investor retaliation can result in “regulatory chill,” deterring governments from implementing legitimate public interest regulations.
Second, ISDS has been criticized for its lack of transparency and consistency. Arbitral tribunals are often composed of private lawyers without accountability, and awards can be inconsistent, leading to unpredictability in outcomes. For a country with a complex and evolving legal framework like India, such uncertainty can be risky.
Third, the financial burden of defending ISDS cases is significant. Legal costs can run into millions of dollars, even when the state prevails. For a developing country with limited public resources, this is a substantial concern.
The Case for Reconsideration
Despite these concerns, a complete retreat from ISDS may not serve India’s long-term interests. Foreign investors typically seek legal certainty and enforceable dispute resolution mechanisms. India’s restrictive model BIT may deter investment, especially in capital-intensive sectors like infrastructure and energy, where long-term commitments require strong legal protections.
Moreover, India aspires to become a global manufacturing and investment hub under initiatives like “Make in India.” Competing economies such as Vietnam, Indonesia, and the UAE offer more investor-friendly dispute settlement mechanisms. By opting out of ISDS, India risks losing its competitive edge in attracting FDI.
Instead of outright rejection, India could adopt a balanced approach by reforming rather than eliminating ISDS. This includes supporting multilateral efforts like the UNCITRAL Working Group III on ISDS reform, which aims to address concerns around transparency, independence, and coherence in arbitration. India could also consider incorporating mediation and state-to-state dispute mechanisms as alternatives to traditional ISDS.
Conclusion
India’s cautious approach to ISDS reflects valid concerns about sovereignty, legal uncertainty, and financial exposure. However, in an increasingly globalized economy where investor confidence is crucial, an overly restrictive stance may hinder India’s economic ambitions. A middle path—one that safeguards sovereign rights while providing credible legal protections to investors—might be the most pragmatic course. By engaging in international reform efforts and crafting balanced BITs, India can create a more stable and investor-friendly environment without compromising its national interests.