In a rather curious Budget proposal which has gone unnoticed, Union Finance Minister Arun Jaitley mooted the idea of a Centre-State investment agreement to be signed between the Centre and various State governments to ensure effective implementation of BITs or bilateral investment treaties. BITs protect investments made by an investor of one country into another by regulating the host nation’s treatment of the investment. Mr. Jaitley noted in his Budget speech that “this will ensure fulfilment of the obligations of the State government under these treaties. States which opt to sign these Agreements will be seen as more attractive destinations by foreign investors.” It is believed that the Centre will not make it mandatory for States to sign the agreement, but if any State chooses not to, this will be informed to India’s BIT partner.

Reportedly, the Finance Ministry has already begun preparing a model Centre-State investment agreement and the draft is likely to be placed before the Union Cabinet for approval in the next two or three months. The motivation behind the proposal — “to facilitate ease of doing business for foreign investors and their domestic recipients” — is certainly laudable. However, there are two key issues that emerge from this which require a more detailed discussion.

Obligations under international law

Let us assume that a State government does not sign an agreement with the Centre. Further, through omission or commission this government infringes the rights enjoyed by a foreign investor under the BIT. If the investor challenges this as a violation of the BIT under international law, can the Central government, while responding to the claim against the Indian republic, say that it is not liable as this alleged violation is because of a particular State government’s measure?

The answer to this question is a resounding ‘no’. As laid down in Azadi Bachao Andolan v Union of India (2004), a combined reading of Entry 14 of the Union list, which provides for entering into treaties, and Article 73, which extends the power of the Central government to matters in the Union list, shows that the Central government has the power to enter into treaties on behalf of the Indian republic. This includes, but is not limited to, BITs. Once the Central government has acceded to the terms of a treaty on behalf of the republic, the international obligations assumed thereunder, generally speaking, bind the entire country, including its constituent States, at least externally. This is irrespective of whether the Central government has entered into an agreement with the State governments regarding the implementation of the said treaty. Internally, the Centre does not bind India (courts, State governments, etc.) till the treaty has been incorporated — usually through enabling legislation — into domestic law.

However, as far as India’s international law obligations are concerned, the Central government cannot justify the non-compliance of its BIT obligations by invoking “provisions of its municipal law, or because of any special features of its governmental organisation or its constitutional system.” This is consistent with the unitary conception of a sovereign nation under international law, where distribution of sovereign powers among its constituent states is deemed to be an internal matter, not regulated by international law. The Centre’s proposal to warn their counter parties about non-compliant States before they make their investment in the State, unless framed as a reservation to the BITs, does not carry much legal significance.

Cooperative federalism

Apart from the legal confusion ensuing from the proposal, there are practical considerations. India is a quasi-federal structure with a multiparty system. The Centre and State governments are often politically non-aligned. In this context, a proposal by the Centre to enter into investment agreements with States as an optional arrangement may further sour fragile Centre-State relations for two reasons. First, the State governments will not like the shifting of the blame for violation of a BIT from New Delhi to State capitals. Second, the State governments will also not like the Centre informing India’s BIT partner country that a particular State government has not signed the agreement and thus, by implication, is not a safe destination for foreign investment.

One of the objectives of the proposal could be to sensitise State governments about India’s BIT obligations given the fact that many regulations of State governments directly impact foreign investors. However, this objective would be better served by institutionalising the involvement of State governments in the process of treaty-making. A forum such as the NITI Aayog, which has all the Chief Ministers as members of the governing council, could be used to create a Centre-State consultative process on treaty-making. Also, this sensitisation should not be restricted to BITs but also extend to other international agreements like the World Trade Organisation treaty, numerous Free Trade Agreements, and Double Taxation Avoidance Agreements. The trade treaties are especially important because they cover many issues such as agriculture, which fall under the State list in our Constitution, and thus directly impact State governments. Cooperative federalism requires that Centre and States work together, which in turn would ensure better implementation of international treaties.

Co-author Dr. Prabhash Ranjan is an Assistant Professor in Faculty of Legal Studies, South Asian University. This article originally appeared in The Hindu on its 25th April 2016 edition. The same can be accessed in the publication’s website by clicking HERE.

Disclaimer: The views expressed here are solely those of the authors and do not in any way represent the views of the South Asian University.