India's ambition to be a leading global investment destination is being undermined by a "flawed system," according to veteran economist Surjit Bhalla. The former Executive Director at the International Monetary Fund (IMF) for India and several neighboring countries argues that declining foreign direct investment (FDI) is not merely a reflection of global economic uncertainties but rather a direct consequence of India's restrictive dispute resolution framework.
India's 2015 Investment Treaty Under Scrutiny
At the core of Bhalla's concerns lies the 2015 India Model Bilateral Investment Treaty (Model BIT). This treaty was enacted following the White Industries arbitration case, where an international award was granted after Indian courts failed to resolve a dispute for many years. Bhalla critically describes India's response as a "model of defensive state protection" rather than genuine reform.
The Model BIT mandates that foreign investors must exhaust all domestic legal remedies—a process that can take up to 60 months in Indian courts—before they are permitted to seek international arbitration. This requirement, in Bhalla's view, represents a significant step backward, or "retrenchment," that actively deters potential investors.
Declining Foreign Investment and Investor Confidence
The economist points to tangible evidence of this policy's negative impact. Despite India recording inward FDI of $43 billion in the 2025-26 fiscal year, substantial outflows by Indian companies, totaling $33.3 billion, significantly reduced the net FDI. This resulted in India's net FDI as a share of GDP plummeting to approximately 0.7%, its lowest level since the mid-2000s.
Bhalla asserts that such figures are a clear "verdict" from the capital markets, signaling deep investor concerns about the reliability and efficiency of India's dispute resolution mechanisms.
Indonesia's Model for Investor Attraction
To illustrate a more effective approach, Bhalla highlights Indonesia's experience. Following disputes involving foreign mining firms like Churchill Mining and Newmont in 2014, Indonesia similarly decided to overhaul its investment treaties. However, Jakarta's strategy differed significantly.
Indonesia successfully defended itself in arbitration by uncovering issues of forged documents and corruption. Subsequently, the country adopted a new BIT policy that included a 12-month cooling-off period before arbitration, the establishment of a neutral three-member arbitration panel, and crucially, continued access to international dispute resolution.
Contrasting Approaches, Divergent Outcomes
The results of Indonesia's reforms were striking: inward FDI increased from an annual average of $14 billion before 2015 to around $20 billion annually afterward. Net FDI as a percentage of GDP also rose, from 1.1% to 1.4%.
Bhalla contrasts these outcomes sharply: "Indonesia bet on the rule of law, a cleaned house, and watched investment flow in. India dressed up a flawed system in new paperwork and called it reform — and capital has responded accordingly." He underscores that when a nation cannot guarantee the timely honoring of even a modest arbitration award, the decline in FDI is not a mystery.
Broader Economic Implications
This is not the first time Bhalla has cautioned India regarding a potential investment crisis. He has previously emphasized that India's immediate challenge is not mass poverty but rather a slowdown in growth and a significant erosion of investor sentiment. He notes that private investment is lagging, and FDI has "declined into negative territory" in real terms, urging the government to "course correct" swiftly.