India has a problem: it is creating a strategic and legal vacuum for its multinational firms by abandoning legal protections they need to survive abroad. Over the last few years, India has dismantled a vast network of Bilateral Investment Treaties (BITs), which extended legal cover to foreign investors and held governments accountable. These protections are typically, reciprocal, i.e., they also similarly protect Indian investments abroad and dismantling them has the effect of Indian investors losing this cover against foreign governments. As India’s largest companies look to expand their global footprint, they are left vulnerable without institutional protections against expropriation or regulatory retaliation, which their competitors from other countries can take for granted. Once criticised as encumbrances on India’s economic sovereignty, robust BIT protections now appear more indispensable for India’s private sector to expand abroad than previously thought.
The context
Despite India’s economic dynamism, its private sector looks largely inwards. India has the third largest number of unicorns (startups with >$1Bn valuation) in the world, but barring few exceptions, even its startups are unable to make a dent in the global market. Even legacy Indian corporations skew heavily towards domestic operations; of the top Indian companies only a handful firms in pharma and IT earn a majority of their revenues abroad. This stands in contrast with developed markets where companies of this scale have significant overseas investments and revenues. There are several reasons for this, and it is also a natural symptom of a healthy consumption-oriented domestic market. Nonetheless, it means that large Indian corporates are heavily dependent on the vagaries of our domestic market and unable to achieve the scale economies available by expanding abroad.
That said, there are exceptions. Indian industry has matured to expand globally in telecom and IT-linked sectors such as Airtel’s ventures in Africa, Infosys’ investments in the US and Europe, etc. Additionally, industries with exposure to heavy manufacturing/refining activities in oil & gas, minerals, coal, etc., require access to natural resources across the world, necessitating, for instance, investments by Oil and Natural Gas Corporation (ONGC) in Sudan and Venezuela, the $12 Bn takeover of Corus by Tata Steel in 2007, Adani’s mining contracts in Australia, and Reliance’s (as yet unsuccessful) attempts at acquiring a stake in Saudi Aramco etc.
Overseas expansion also demonstrates India’s ability to execute projects and build global brands – which are a tool for financial diplomacy and soft-power. However, such expansion has come with a myriad of challenges and risks. Consider Airtel; it invested $10 Bn into its African expansion but immediately faced arbitrary tax changes in Nigeria, closure of its offices in Niger over a tax dispute, and disputes with minority shareholders of its business partners (which were later settled). These may seem like commercial challenges commonly faced by foreign investors everywhere, many would similarly complain of unfair treatment by India —just ask Vodafone, Cairn Energy or Amazon. However, unlike governments of those companies which have persistently echoed their companies’ stance, India has been feeble in supporting its companies abroad.
