India, explained.
In India's manufacturing sector, investment protection clauses will stop deterring foreign direct investment (Anindito Mukherjee/Bloomberg via Getty Images)
Can New Delhi use new trade agreements to fix its abysmal record on contract enforcement?
Subscribe to The Informer for monthly expert analysis, and to Events for advance notice of visiting world leaders and distinguished guests.
You may unsubscribe from Lowy Institute newsletters at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
The business of doing business: India’s flawed investment protection modelThe business of doing business: India’s flawed investment protection model
After nearly a decade of inertia, the Indian government has resumed the business of trade negotiations. Over the past few years, New Delhi has signed agreements with the United Kingdom, Australia, the European Free Trade Association, and the United Arab Emirates, among others, and has on-going negotiations with the United States and the European Union.
The geopolitical backdrop and the clamour for supply chain rebalancing has certainly played a role in nudging Indian policymakers towards increased industrialisation and global value chain integration via industrial policy.
Considerable research has gone into decoding India’s failure to industrialise. From an uneven electricity supply to the absence of single-window clearance to expensive factor inputs – there are many reasons for the dire state of India’s industrial ambitions.
The most universally cited deterrent to India’s manufacturing take-off has been the abysmal state of contract enforcement.
Yet the most universally cited deterrent to India’s manufacturing take-off has been the abysmal state of contract enforcement. There is no way to sugar-coat this, India’s contract enforcement – and naturally, its larger judicial system – is broken.
“As of 26 April 2022, there were nearly 30 million cases pending for over one year in the district judiciary, and nearly 5 million such cases in the High Courts. Among cases pending for over a year in district courts, 29 per cent have been so for over five years, and 11 per cent have been pending for over ten years. In sum, over 3.5 million cases have been pending in our district courts for over ten years,” writes Karthik Muralidharan.
India’s Supreme Court, which is seemingly better performing than the lower and high courts, has seen its number of pending cases rise from around 59,000 in 2019 to more than 85,000 in 2025. More than 18,000 of its cases have been pending for over 30 years. India has a meagre 21 judges per million people. In comparison, the United States and the European Union have 100 and 200 respectively.
These judicial delays have a pretty chilling effect on India’s quality of contract enforcement. If one of the two contracting parties believes it can get away with breaking a contract – because the judicial recourse might take years – then it has every incentive to cheat.
If India wants to present itself as a viable manufacturing destination, then it will have to accept some minor restrictions on its sovereignty (Sikandar Ali/Unsplash)
When it comes to enforcing contracts, India ranks 163rd out of 190 countries, according to the World Bank. The average time to enforce contracts is a staggering 1,445 days. The difference becomes even more stark when one compares India with Vietnam, Thailand, and Malaysia – countries India is trying to compete with as new destinations for companies relocating away from China. In those three countries, it takes 400, 420, and 425 days respectively to enforce contracts.
According to a study by economists Johannes Boehm and Ezra Oberfield, weak contract enforcement limits the formation of dense supply chains, resulting in reduced specialisation and hampering the overall scaling and competitiveness of manufacturing firms.
So, what has India’s shoddy contract enforcement track record got to do with the country’s recently negotiated trade agreements? Plentiful evidence suggests that contract enforcement has a positive impact on a country’s trade flows and foreign direct investment inflows. From India’s perspective, the absence of effective contract enforcement has adversely affected these two streams.
A common feature among all of India’s recent trade deals is the glaring absence of clear investment protection clauses.
One way to overcome this handicap is by facilitating foreign investment protection either through bilateral investment treaties (BIT) or specific investment protection clauses within the free trade agreements. In effect, the country agrees to an external mechanism of investment dispute resolution, instead of relying on its domestic courts.
“Investment treaties are viewed as important tools to reduce the perceived high risk of doing business in these (risky) jurisdictions, which might otherwise discourage foreign investment,” contends international law expert Prabhash Ranjan. “Countries that import capital, willingly accept some restrictions on their sovereignty in exchange for increased foreign investment.”
However, a common feature among all of India’s recent trade deals is the glaring absence of clear investment protection clauses. Even in the cases where there is a separate chapter on investment protection, there are no emphatic investment protection clauses. To make matters worse, India has unilaterally withdrawn most of its BITs, including its 2016 Model BIT, which New Delhi is yet to replace.
Meanwhile, the global economy now features ever more complex and disaggregated supply chains – where leading multinational firms not only demand robust investment protection clauses in trade agreements (between their home and host country) but also the harmonisation of standards and rules among all the member-countries hosting its supply chain. While there may be issues with multinational firms having such disproportionate power in the global economy, they do reflect the underlying political economy of today’s trade agreements and supply chains.
If India wants to capitalise on the “China Plus One” moment and present itself as a viable manufacturing destination, then it will have to accept some minor restrictions on its sovereignty. Realistically, the presence of investment protection clauses will not automatically unlock manufacturing foreign direct investment and help Indian firms integrate with global value chains, but they will at least stop deterring those inflows.
About the author
Srijan Shukla
Srijan Shukla is an Associate Fellow with the Security Studies Program at the Observer Research Foundation, India.
Topics
The most-pressing world events explained by Lowy Institute experts and global contributors, in your inbox, every Thursday.
You may unsubscribe from The Interpreter at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
