28 October 2024 : Indian Express Editorial Analysis

1. India-UAE, BIT By BIT     

(Source: Indian Express; Section: The Editorial Page; Page: 10)

Topic: GS2 – International Relations

Context:

The article discusses the new India-UAE Bilateral Investment Treaty (BIT) of 2024, aimed at enhancing foreign investment by addressing past treaty limitations and adopting a more flexible approach to investor protections.

Introduction to the India-UAE Bilateral Investment Treaty (BIT)

• The Bilateral Investment Treaty (BIT) between India and the United Arab Emirates (UAE) came into effect on August 31, 2024, replacing the lapsed Bilateral Investment Promotion and Protection Agreement (BIPPA).
• The BIT is a strategic effort to deepen economic ties with the UAE, which represents a significant source of Foreign Direct Investment (FDI) for India.
• With UAE’s cumulative investments in India totaling $19 billion from 2000 to 2024, this new treaty aims to rejuvenate and bolster investment flows between the two nations, contributing to India’s vision of a more interconnected, $5 trillion economy.

Background and Challenges of the Model BIT of 2016

• Since the introduction of the model BIT in 2016, India has faced challenges in attracting FDI due to the rigidity and investor constraints associated with this model.
• This treaty structure led to the termination of 68 out of 74 BITs active in 2015, as the model BIT was criticized for being overly restrictive and a generalized response to adverse rulings from international tribunals.
• The stringent requirements, such as the mandatory exhaustion of local remedies, made it difficult for India to renegotiate terms with other countries, leading to a 24% decrease in FDI equity inflows from April 2023 to September 2024.
• The introduction of the India-UAE BIT symbolizes a more pragmatic approach, with India showing flexibility to attract foreign investments while maintaining regulatory sovereignty.

Key Amendments: Local Remedy Exhaustion Period Reduced

• One of the significant changes under the India-UAE BIT is the reduction in the mandatory period for local remedy exhaustion from five years to three years.
• This clause, a critical factor in India’s ongoing negotiations with the United Kingdom, highlights India’s willingness to accommodate investor concerns without compromising on legal safeguards.
• By reducing this waiting period, the treaty aims to offer a more investor-friendly dispute resolution mechanism, potentially creating a framework for similar concessions in future treaties with other trade partners.

New Prohibition on Third-Party Funding in Disputes

• The BIT introduces a prohibition on third-party funding for investor-state disputes, a departure from India’s recent domestic trend toward embracing third-party funding.
• Although the Supreme Court of India permitted third-party funding under the 2018 ruling in Bar Council of India v AK Balaji, this BIT clause restricts such funding in international investor disputes.
• The restriction contrasts with recommendations from an expert committee of the Ministry of Law and Justice that advocated for the inclusion of third-party funding in India’s arbitration framework.
• The implications of this clause highlight the government’s cautious stance on aligning international investment disputes with domestic policy shifts.

Expansion to Portfolio Investments: Broader Scope and Potential Risks

• Another essential feature of the India-UAE BIT is its inclusion of portfolio investments, which were specifically excluded in the model BIT.
• This expansion provides UAE investors holding financial securities in India with legal protections and access to investor-state dispute mechanisms, thereby broadening the scope of investable assets under the treaty.
• While this aligns with India’s intent to attract diverse investment streams, experts from the Global Trade Research Initiative caution that the move may expose India to an increased risk of disputes over financial instruments, including those with limited impact on economic development.

Conclusion: A Balancing Act for Economic Growth

• The India-UAE BIT underscores India’s intent to reinvigorate FDI inflows while balancing investor interests and regulatory autonomy. As India continues negotiating FTAs with the UK, EU, and other countries, the India-UAE BIT could provide a template for future agreements.
• However, with India’s low rankings in contract enforcement and ongoing geopolitical challenges, only time will reveal whether this new BIT framework succeeds in building a resilient and investor-friendly economic landscape.
• The BIT represents a renewed commitment to fostering robust cross-border economic cooperation and investment, laying the groundwork for India’s ambitious economic aspirations.

Significance of BITs

Investor Confidence: BITs play a pivotal role in boosting investor confidence, ensuring a level playing field and non-discrimination in all matters. They also establish an independent forum for dispute settlement through arbitration. FDI Inflow: These treaties facilitate increased FDI inflow by addressing hurdles such as enforcing contracts, a current challenge for India, as seen in ongoing negotiations with trade partners. Economic Growth: By attracting foreign investment, BITs contribute to economic growth and employment generation in the host country. Legal Protection: BITs offer legal protection to investors, a critical aspect in countries where domestic legal frameworks are unpredictable or unstable.

Practice Question:  Discuss the significance of the India-UAE Bilateral Investment Treaty (BIT) of 2024 in the context of India’s evolving foreign investment policy. How does this treaty address the challenges posed by the model BIT of 2016, and what implications does it hold for India’s future trade and investment treaties? (250 words/15 m)

 

2. TOP Crops, Price Volatility & RBI

(Source: Indian Express; Section: The Editorial Page; Page: 10)

Topic: GS3 – Indian Economy

Context:

The article examines the RBI’s cautious stance on reducing the repo rate amid persistent inflation driven by food prices, particularly vegetables, and calls for structural reforms in agriculture to manage inflation beyond monetary policy.

RBI’s Caution on Repo Rate Reduction

• In the recent Monetary Policy Committee meeting, RBI Governor Shaktikanta Das highlighted the risks of lowering the repo rate, citing elevated inflation levels, which are still far from the 4% target.
• With the Consumer Price Index (CPI) inflation at 5.5% in September and food inflation exceeding 9.2%, the central bank is reluctant to ease monetary policy.
• This caution is rooted in the persistence of inflation, driven largely by food prices, which is a crucial factor in the broader inflationary landscape.

The Impact of Food Inflation on RBI’s Policy Limitations

• The RBI’s efforts to control inflation are complicated by the significant impact of food prices, especially vegetables.
• With vegetable inflation at 36% and accounting for 42.8% of CPI inflation, food prices have become a primary driver of overall inflation.
• The top contributors to CPI inflation in September were all vegetables, underscoring the limitations of monetary policy alone in addressing price pressures that originate from the agricultural sector, which is outside the RBI’s control.

Flexible Inflation Targeting: RBI’s Track Record and Challenges

• Since adopting the Flexible Inflation Targeting (FIT) framework, which sets a 4% target with a 2% tolerance range, the RBI has often struggled to maintain inflation within these bounds.
• Data shows that CPI inflation has exceeded the target 72% of the time over the past 101 months. External factors, including supply chain disruptions during COVID-19 and global tensions like the Russia-Ukraine conflict, have influenced inflation dynamics.
• While the RBI has managed to keep inflation relatively low compared to other emerging markets, high food weights in the CPI remain a structural challenge to controlling inflation through monetary policy alone.

Outdated CPI Basket and the Need for Updated Weights

• A significant factor impacting CPI inflation is the high weight of food and beverages in the CPI basket, which is based on outdated data from 2011-12.
• The current weight for food items stands at 39%, reflecting an outdated consumption pattern.
• Revising these weights using data from the 2022-23 consumption survey could lower the food component by about 5-6 percentage points, providing a more accurate measure of inflation that aligns with current consumption trends and lessens the undue impact of volatile food prices on overall inflation.

Structural Weaknesses in India’s Agricultural Supply Chains

• The recent surge in vegetable prices, particularly tomatoes, onions, and potatoes (TOP), is symptomatic of structural weaknesses in India’s agricultural supply chains.
• These crops contributed 63% to food inflation in September, driven by supply chain disruptions and adverse weather conditions. The perishable nature of these crops leads to frequent price volatility.
• Heavy rains in Karnataka and Andhra Pradesh delayed tomato arrivals, while pest infestations reduced yields, contributing to inflationary pressures. Similarly, the delayed arrival of onions and lower potato arrivals led to further price hikes.

Operation Greens and the Need for Resilient Agricultural Policy

• Operation Greens, launched in 2018 to stabilize TOP prices, aimed to strengthen agricultural value chains. However, its expansion to all fruits and vegetables diluted its focus, leading to continued supply disruptions and high post-harvest losses.
• Losses from post-harvest inefficiencies remain significant: 18-26% for potatoes, 25% for onions, and 11.6% for tomatoes.
• These inefficiencies not only impact prices but also affect consumers and farmers alike, underscoring the need for a more focused and resilient agricultural policy.

Strategic Interventions and Long-Term Solutions for Price Stability

• To address TOP price volatility, short-term government measures like export duties provide limited relief. Long-term solutions, such as processing surplus TOP crops into value-added products like tomato paste or onion flakes, could mitigate wastage and stabilize prices.
• Successful models, like the partnership between Jain Irrigation and farmers for onion dehydration, highlight the potential benefits of such initiatives.
• A dedicated agency focused exclusively on TOP crops could ensure targeted oversight and consistent price stability, benefiting both consumers and farmers.

Conclusion: A Call for Collaboration Beyond Monetary Policy

• The RBI’s challenges in managing inflation highlight the need for a collaborative approach that extends beyond monetary policy.
• Addressing vegetable inflation requires targeted agricultural reforms and supply chain improvements, areas beyond the RBI’s mandate.
• By advocating for long-term agricultural strategies, the RBI could contribute to a more stable inflation environment, allowing it greater flexibility in monetary policy adjustments while ensuring sustained economic stability.

Practice Question:  Critically analyze the limitations of the Reserve Bank of India’s monetary policy in controlling inflation driven by food prices. Discuss the structural reforms needed in the agricultural sector to address persistent food inflation and ensure economic stability. (250 words/15 m)