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Backing down on BIPA PDF Print E-mail
Friday, 22 March 2013 02:42
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Raj's edit

Deferring review of treaties a good idea

 

Given the threat by telecom companies like Norway’s Telenor and Russia’s Sistema to take the Indian government to arbitration court under various bilateral investment promotion and protection agreements (BIPA)—and UAE’s Etihad Airways desire to have a BIPA in place before coming into India—it’s not surprising the government wanted to review various BIPAs. Since both Telenor and Sistema said they would start arbitration proceedings after the Supreme Court cancelled the licences—22 for Telenor and 21 for Sistema—issued to them when A Raja was the communications minister, the idea behind the review was to take out such instances from various BIPAs. In the BIPA signed with Lithuania in March 2011, for instance, this possibility has been firmly dealt with. Since BIPAs offer compensation to companies in case their assets are either nationalised or expropriated—each BIPA has details of how the compensation is to be arrived at—the Lithuania BIPA has a clause that says “actions and awards by judicial bodies of a party that are designed. applied or issued in public interest … do not constitute expropriation or nationalization”. The idea was to get various countries India has a BIPA with to agree to such exclusions.

 

But given the urgent need to increase FDI flows as well as the fact that the Telenor/Sistema threat has receded, the government has done well to put on the backburner the proposal to review BIPAs—once the government auctioned spectrum following the cancellation of the licences, Telenor won bids in 6 circles while Sistema (through its JV with Shyam Telecom) won 8 circles and both companies withdrew their threat to take action under various BIPAs. While FY13’s current account deficit (CAD) is projected to be 4.8% of GDP, what’s made this worse is the manner in which this is being financed. While a little over 100% of India’s CAD was financed by FDI inflows in FY08, this is now down to around a fourth. FDI inflows rose more than 10 times from just $4 billion in FY01 to $46.55 billion in FY12, but in the April-January period of FY13, these fell 39% vis-a-vis the same period in FY12. The rest of the CAD is now being financed by FII and other volatile capital flows. As a result, while short-term debt has risen from 16.2% of total debt in FY07 to 22.5% in FY12, the share of volatile capital flows to reserves has risen—according to the RBI Financial Stability Report—from 67.3% at the end of March 2011 to 81.3% at the end of June 2012. In time, India will do well to review various BIPAs, but this is clearly not the time to do it.

 
 

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