Readers will know that my constant preoccupation regarding economic policy is with the following fact: We know, and have known, what the right policy is to follow. Yet, we don’t allow the right policy to happen. Among several recent concrete examples are the dire need for domestic deregulation, the revision of the 2016 Model Bilateral Investment Treaty (BIT) and the signing of a trade deal with the US. You have heard all the “excuses” as to why we can’t allow the right policy to happen. The world is in flux, so what to do? Unreliable Trump is in control, so what to do? But why are we not acting on policies totally within our control? As a concrete example, what is holding up the formulation and implementation of a new BIT?
This is what should worry us, and it doesn’t. Our record of bad or no action has nothing to do with whichever political regime is in power. It has to do with the Deep State, and with the officials who pull the strings on behalf of their political and economic masters. India has been the most obstructionist member of the WTO. With the “Model” BIT, it went on to construct the most obstructionist investment treaty in the world. Two continuing records, and a steady supply of policy band-aids that fool nobody except the apologists and those whose interests are served by India remaining closed and inactive. You might take this as an unfounded allegation, and you could not be more wrong. What follows is explicit documentation. For the full details and the data, readers are referred to my Substack.
It has been 18 months since Finance Minister Nirmala Sitharaman told Parliament that the Model BIT of 2016 would be revised; in foresight and in hindsight, it really wasn’t much of a model. Consider what it demanded. Before going to international arbitration, a foreign investor had to litigate in Indian courts for five years. The rest of the world, those who receive foreign investment and those who send it, asks for a consultation period — typically three to six months — in which the parties try to settle, rather like the cooling-off before a divorce. India asked for 10 times that, in a judicial system where five years does not produce a judgment anyway. Even the judiciary is criticised only cautiously, so as not to run afoul of India’s near-unique contempt laws.
The rule never brought any resolution. It only brought inordinate delay. The new treaties since that 2016 black-letter day, with the UAE in 2024 and Israel in 2025, cut the holding period to three years — still six times the norm. The recommendation, by some, is two years. Why don’t we ask for the logic, or the reasoning, behind our own recommendations? Where did two years come from? Why not the conventional and reasonable practice that the rest of the world follows — three to six months of consultations?
And what did the 2016 model get us? Exactly what its designers desired. Nine years and six new treaties. In exchange, the FDI network was dismantled, bit by bit. Treaties in force fell from 73 in 2015 to 29 in 2017, 16 in 2019 and just eight by 2021, where the count stayed for another four years. Of the eight survivors, not one covered a significant source of foreign capital.
But wait — did not 2025-26 record a record FDI inflow of $94.5 billion? In the same year, foreign investors repatriated or disinvested $53.6 billion, leaving $40.9 billion. Indian firms invested $33.3 billion abroad. Net foreign direct investment — just $7.65 billion. About 0.18 per cent of GDP — and that is the good news, being a recovery from 0.02 per cent in 2024-25. Still the second-lowest in three decades. Some record.
It is worse than it appears on the surface. Reinvested earnings of foreign firms — profits earned here and not taken home, a figure not part of India’s FDI statistics until the definition changed in 2000-01 — were $25.6 billion in 2025-26, more than three times net FDI. Retained earnings are not a new commitment to India. Net of what Indian firms sent abroad, every component that does require a fresh commitment has gone negative: On the definition India itself used until 2000-01, the country recorded a net direct investment outflow of roughly $18 billion.
The equity market reveals the same determination to vote with one’s feet. In 2025, Indian equities underperformed emerging markets by the widest margin since 1993, and trailed Asia-Pacific by the most since 1998. Foreigners withdrew $17.7 billion. This year till August 19, India was down 9.1 per cent in dollar terms while emerging markets were up 20.6 — a gap of 30 percentage points in under eight months. Korea was up 77.6 per cent, Taiwan 58. Another $10.5 billion has left.
And the band-aid from the masters of spin? One leak has it that portfolio investment held for more than three years may now be counted as direct investment. But the line between the two has never had anything to do with time. Direct investment means a stake large enough to give the investor a say in running the business; portfolio investment means a holding too small for that. Every country draws the line there, and the OECD’s Benchmark Definition, the international standard, expressly bars adding any further qualification to it. No country anywhere, at any time, has defined direct investment by how long the investor holds it. Nor would the reclassification bring in a single additional dollar. That such a proposal reached first base tells us nothing about foreign investors and a great deal about how badly the headline needs a “spinning narrative”.
One last comment, for those satisfied that India is an attractive destination and that foreign capital will come anyway, treaty or no treaty, trade deal or no trade deal. Wrong question, worse logic. We know that American investment is large and that it comes without a treaty. Should we not be asking what it would be with one? The cost of what we did is not what we lost. It is what we have been forgoing, year after year, and will go on forgoing until logic replaces obstruction.
In conclusion: The foreigners already here are reinvesting their profits. The foreigners who are not here, and the Indian firms sending $33 billion a year abroad, are saying something else.
Bhalla is chairperson of the Technical Expert Group for the first official Household Income Survey of India. Views are personal
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