India trade deal with EU hits roadblock over investor protection

    Tuesday, 15 October 2019

    News that the United States and India are close to finalizing details of a partial trade deal has given a boost to the previously moribund negotiations between the two nations, as concessions that allow for the shipment of more goods and the reduction of import duties on contentious items have reportedly been settled.

    Hopes for a breakthrough have been high before, however, only to be dashed as longstanding grievances have ultimately resurfaced, with both countries unwilling to move on their red lines. An assessment of the latest package is currently being undertaken with the goal of unveiling an agreement during the next meeting between India’s Prime Minister Narendra Modi and US President Donald Trump.

    It might be easy to blame Trump’s belligerence for the difficulties hammering out a deal between Washington and New Delhi, especially given the president’s preoccupation with rebalancing the US trade deficit. But the EU’s own experience – Brussels has been trying to negotiate a trade agreement with India since 2007 – emphasizes the extent to which the roadblocks originate in India’s own stubbornness.

    Reaching investment stalemate

    In some respects, the EU’s commitment to courting Indian business has been galvanized by the United Kingdom’s vote to leave the bloc, with the leaders of EU countries looking to re-route – and re-boot – a relationship with India that has been dominated in the past by the UK. For the EU, the prospect of gaining entry into an economy that is growing at around 7 percent a year is a tantalizing one. However, New Delhi has proved particularly intractable on one major stumbling block in the EU-India talks: the differences between India and the EU on the protection of foreign investors.

    While India may be the largest democracy in the world, its courts are regarded by those outside the system as slow and lacking in the necessary transparency. EU companies have demanded that India create a special arbitration system for foreign firms. India wants investors to settle any issues through ordinary courts. New Delhi also refuses to allow tax rulings to fall under investment protection – even though plenty of foreign firms are licking their wounds after being subjected to what they see as discriminatory tax rulings.

    India is proving unpredictable for foreign investors

    In recent years, investors have had to take their grievances to international tribunals after falling foul of India’s byzantine tax legislation. Just this year, a case was heard over a complaint by British telecom giant Vodafone triggered by a retroactive $5 billion tax demand on the company’s 2007 acquisition of a majority shareholding in Hutchison Whampoa. This, despite the facts that Hutchison no longer has any major assets in India and that the transaction took place in Hong Kong.

    India’s supreme court already ruled in Vodafone’s favour in 2012, but New Delhi merely responded by introducing a new law retroactively rendering this kind of transaction taxable. To make matters worse, India considers that the law extends to cases from the past 51 years – a move that has dismayed investors who already view India as a dangerously unpredictable investment market.

    In a similarly troubling case, German communications giant Deutsche Telekom is embroiled in a dispute with India over an annulled contract between satellite communications provider Devas Multimedia and Antrix, the commercial arm of the Indian Space Research Organisation. Antrix was ordered to compensate Devas for the lost contract but has so far avoided complying with the arbitration tribunal’s findings, claiming that as the deal was scrapped over national security concerns, no compensation is due.

    The Indian government has also been taken to task by Japanese car maker Nissan over non-payment of a $720 million incentive which formed part of a 2008 Comprehensive Economic Partnership Agreement (CEPA) to establish a car manufacturing plant in Tamil Nadu, Chennai. The CEPA is designed to offer protections to foreign-owned firms investing in India, although New Delhi is arguing that the dispute is a tax-related matter that falls outside the partnership agreement. Neither is it the first time a Japanese company has been stung in a battle with an Indian investment partner. NTT Docomo found themselves $1.27 billion out of pocket after a deal with Tata went sour, despite an international court of arbitration having ruled in Docomo’s favour. It took a further three years for Tata to settle the award.

    Is protectionism holding back growth?

    While China is often cited for its poor record of enforcing international law, India’s reluctance to stick by international rules is causing overseas investors to think twice before entering the Indian market. The most recent World Bank ‘Doing Business’ report shows that although India has made its debut on the list of the economies showing greatest improvement, the nation still lags behind other similar economic powers in overall rankings.

    India is making all the right noises but a disconnect exists between PM Modi’s rhetoric and the challenges being faced by international investors in India. In order to encourage inward investment, Modi’s government must create a pro-business environment that enforces the rule of law and where government agencies play by the rules.

    India should be a global economic powerhouse to rival China, with lucrative trade deals and ample foreign investment. But its protectionist streak is holding it back, just as it’s stymied the EU-India free trade talks for over a decade now.