The Economic Times reports on 07NOV12 the SENSEX surging nearly 100 points after media analysts projected President Barak Obama’s re-election. According to a TNN report, “A win for Obama is a positive for the capital market as that would ensure flow of FII money into India,” so says Arun Kejriwal, director of KRIS, an investment advisory firm.
However more sobering, A K Prabhakar, senior vice president at Anand Rathi Securities was quoted by the WSJ as saying, “The stocks are up but we don’t see a runaway rally as the reality is going to set in soon, and problems in Europe and Greece are going to take centre stage.”
While I certainly agree more with the latter, the US and India’s ever closer relationship may certainly provide further avenues for investment and by extension further market confidence.
So what’s the quick and dirty:
Back in 2010, India watchers’ interest was peaked when India signed a Trade Investment Framework Agreement, which is generally considered to be a precursor to signing a bilateral investment treaty (or BIT). While a BIT certainly provides US investors more protection–ergo making the Indian market more attractive–there are certain risks that can impact Indian domestic enterprise and government coffers.
For Example, US BITs generally try to liberalize “pre-establishment” conditions while also including certain provisions on intellectual property rights, as well as environmental and labor standards that go beyond current Indian regulation. Then there’s the binding provision for investor-state dispute settlement (ISDS) to ensure greater protection for investors under international law–as opposed to local domestic law–something India has recently come out against (ref April 2012).
Without going into greater detail, there are certainly differences in the way India has negotiated its previously signed 61 bilateral investment treaties with others states. But India’s weakening credit rating and its requirement of more than $1 trillion in infrastructure investment (over the next five years) may be a tipping point to go all in. With the recent reforms in FDI (which also saw the SENSEX jump 443 points to a 14 month high) and other divestment provisions put into place, India may be tipping its hat to the USTR which has been promoting a BIT behind the scenes for some time.
However, what will be interesting to see is whether India will keep its negative line on ISDS, something I doubt the USTR will be willing to let go.
To continue reading more about ISDS see the recent report by the OECD here.