India toughens stance on Dutch trade deal

India’s government is taking a hardline stance over renewing a trade deal with the Netherlands just days before it expires, which European officials warn could undermine business ties with the rest of the EU.

The bilateral investment treaty between the two countries will end on November 30 — the first in a succession of such agreements that New Delhi has decided to terminate as it looks for more favourable terms. 

Despite concerted lobbying by the European Commission, whose investment commissioner visited New Delhi last week, Indian ministers have so far refused to extend the Dutch agreement.

People close to the talks say there has been no communication from the Indian government since that visit, and observers are pessimistic about the chances of a last-minute change of heart.

Kavaljit Singh, director of New Delhi’s Madhyam think-tank, said: “The Indian government is not very keen to renegotiate the existing treaty. They want to let it lapse and force the Europeans to come and negotiate for future ones.”

India’s willingness to let the agreements expire suggests an increasing confidence towards trade negotiations but also threatens to undermine the government’s push to improve the ease of doing business in the country, analysts say.

Mihir Sharma, senior fellow at the Observer Research Foundation, said: “There’s a big gap between the rhetoric on the ease of doing business, and the actual anti-investor moves the government has made.

“India still imagines that the ease of doing business is about using bureaucratic discretion to help investments, rather than improving institutions.” 

The stand-off has also left officials on both sides trying to assess prospects for a new trade agreement between India and the whole EU, which has stalled after nine years of talks.

The roots of the stand-off lie in a five-year-old judgment that saw India lose its first international arbitration case to a foreign investor. White Industries, an Australian mining company, successfully argued that India had failed to protect it in a contract dispute with Coal India, its local partner.

Following that decision, New Delhi decided to change the terms it offered foreign countries in bilateral investment deals. After a two-year review, ministers decided this year to tighten rules governing when foreign investors could go to international arbitration, including a demand that companies should first pursue cases in India’s domestic courts — often a long and tortuous process.

India also announced that it would also unilaterally cancel 57 bilateral treaties.

Last week, Jyrki Katainen, the EU’s investment commissioner, flew to India to urge the country’s finance and commerce ministers to extend trade agreements with all EU countries while new terms are negotiated. “European businesses are extremely worried about a potential legal gap,” he said afterwards.

Mr Katainen warned that the cost of capital for European investors was likely to rise without the protection of an underlying bilateral agreement.

Indian officials point out that since the rules were first drawn up in 1993, foreign direct investment has risen from around $650m to $40bn, and is likely to carry on rising as the country grows.

“The government is now convinced that investment treaties are not going to bring in investment,” said Mr Singh. “What is more important is improving infrastructure to encourage investors to commit money.”

Many believe New Delhi’s robust stance will make it less likely that the EU and India will now be able to agree terms on a new longer-term deal.

But some supporters of a new deal believe talks could be reinvigorated. “The Indian government can cancel the current bilateral agreements if it wants,” said one person briefed on the talks. “But if it does so it will soon realise the benefit of trade agreements, and that might actually be good news in the longer term.”