Investment lessons from the India-EFTA trade deal 

The recently concluded Free Trade Agreement (FTA) between India and the European Free Trade Association (EFTA) stands out for several reasons, particularly in comparison to recent FTAs signed by India with countries like Australia, the United Arab Emirates (UAE), and Mauritius. Notably, the India-EFTA FTA includes a comprehensive investment chapter, which has been notably absent in other recent Indian FTAs.

Unlike conventional investment protection clauses, the investment chapter of the India-EFTA FTA primarily focuses on investment facilitation issues. However, it introduces a remarkable and unprecedented feature. India has successfully negotiated a commitment from the EFTA countries to "aim to" increase foreign direct investment (FDI) to India up to $50 billion within 10 years of the FTA's implementation, followed by an additional $50 billion over the subsequent five years. Similarly, Article 7.1(3)(b) of the investment chapter stipulates that the EFTA states shall "aim to" facilitate the creation of one million jobs in India.

From a legal standpoint, these articles establish what is known as an obligation of conduct, signifying a commitment to earnestly pursue a goal, irrespective of the eventual outcome. This contrasts with an obligation of result, which would necessitate achieving a specific outcome. In essence, the EFTA countries are legally bound to exert sincere efforts towards investing $100 billion and generating one million jobs in India, without being mandated to achieve these objectives outright.

The Indian negotiators deserve commendation for incorporating such groundbreaking specified obligations of conduct in the investment chapter, a departure from conventional FTAs and investment treaties. This innovative approach creates a noteworthy template that could serve as a model for ongoing negotiations with other key partners such as the United Kingdom, the European Union (EU), and additional countries.

3. Crafting an FTA Policy for India

India stands at a crucial juncture, necessitating a coherent FTA policy, particularly concerning international trade and foreign investment laws. In envisioning a robust strategy, India must integrate two pivotal elements into its FTA framework.

1. India should adopt a holistic approach by negotiating both trade and investment within a single comprehensive economic treaty. The decoupling of trade from investment, as witnessed in past agreements, presents inherent limitations. By amalgamating trade and investment considerations, India can wield enhanced negotiating leverage, fostering mutually beneficial outcomes. This integrated approach enables India to advocate for concessions in one realm in exchange for concessions in the other, fostering a balanced agreement. For instance, India could seek favorable terms in trade negotiations in exchange for commitments on investment or vice versa.
2. India should broaden the scope of investment provisions beyond mere facilitation to encompass robust protection mechanisms, supported by an effective dispute settlement framework under international law. Ensuring comprehensive legal safeguards for foreign investors bolsters their confidence, particularly amidst declining levels of foreign direct investment in India. By offering enforceable legal protection, India can instill greater certainty and security, thereby incentivizing increased investment inflows.

A clear and comprehensive FTA policy serves as a catalyst for propelling India towards a trajectory of higher economic growth. By embracing FTA 3.0, characterized by the integration of trade and investment considerations alongside robust protection mechanisms, India can navigate the complexities of global trade dynamics and position itself as an attractive destination for foreign investment, fostering sustainable economic development and prosperity.

4. Free Trade Agreements (FTAs)

Key Components

• FTAs typically involve the gradual elimination of tariffs on imports and exports between member countries, thereby lowering the cost of traded goods.
• In addition to tariffs, FTAs address non-tariff barriers such as import quotas, licensing requirements, and technical regulations to facilitate smoother trade flows.
• Many FTAs also cover trade in services, including sectors such as finance, telecommunications, and healthcare, allowing for increased market access and regulatory cooperation.
• FTAs often include provisions related to intellectual property protection, enforcement, and harmonization to safeguard innovation and creativity.
• Some FTAs incorporate investment provisions to promote and protect cross-border investment flows, including measures related to investor protection, dispute resolution, and market access.

Advantages

• FTAs can stimulate economic growth by expanding market access, promoting specialization, and fostering competition, leading to increased efficiency and productivity.
• Lower trade barriers and enhanced market access under FTAs can create opportunities for businesses to expand and generate employment.
•  FTAs can result in lower prices for imported goods and a wider variety of products for consumers, thereby improving consumer welfare.
•  FTAs can strengthen diplomatic ties and strategic partnerships between participating countries, fostering greater political and economic cooperation.

• Negotiating FTAs involves addressing diverse interests, regulatory differences, and sensitivities among participating countries, often leading to lengthy and complex negotiations.
• While FTAs offer opportunities for economic growth, they can also lead to transitional challenges, including job displacement in certain sectors and adjustment costs for affected industries.
• Achieving regulatory coherence and harmonization across diverse legal and regulatory frameworks can be challenging, requiring significant coordination and cooperation among participating countries.
• Ensuring compliance and enforcement of FTA provisions, including dispute resolution mechanisms, can be challenging, requiring effective monitoring and enforcement mechanisms.