Dressed up a flawed system: Surjit Bhalla on why India struggles to attract foreign investors
The former IMF Executive Director explained that this signals investor concerns around India's dispute-resolution framework.
- Jun 3, 2026,
- Updated Jun 3, 2026 1:17 PM IST
India often pitches itself as the world's greatest investment destination. But veteran economist Surjit Bhalla says that India needs to swallow a hard pill.
Surjit Bhalla, former Executive Director at the IMF for India, Bangladesh, Bhutan, and Sri Lanka, said in his opinion in The Indian Express that foreign direct investment (FDI) has been falling for years, and that this is not due to global uncertainties.
According to him, a 2015 investment treaty is at the root of the issue. He mentioned that New Delhi should take the right lessons from Indonesia instead of dressing up what he called a "flawed system".
The former IMF Executive Director explained that this signals investor concerns around India's dispute-resolution framework.
DO CHECKOUT | India among most resilient economies, but crude oil and rupee pressures remain: Govt report
What is the 2015 investment treaty that Bhalla is talking about?
The 2015 India Model Bilateral Investment Treaty (Model BIT) was triggered by the White Industries arbitration case, which won an international arbitration award after Indian courts failed to resolve the dispute for years.
Bhalla said, "India's response to this embarrassment was to pass a new Model BIT in 2025 that is the most restrictive one passed by any government — it is a model of defensive state protection."
According to the treaty, investors are required to exhaust domestic legal remedies before seeking international arbitration. "Sixty months in Indian courts before any international arbitration could begin. This was not reform — it was retrenchment."
Despite the CEA's 'weak or no effect', the policy seems to have backfired on investor confidence, as per Bhalla. Even though India recorded inward FDI of $43 billion in 2025-26, outflows by Indian companies stood at $33.3 billion, reducing net FDI significantly, and its net share of GDP fell to its lowest level since the mid-2000s, at around 0.7%.
MUST READ | 'Indian economy is in trouble': Ex-IMF economist Surjit Bhalla on what went wrong
Why does the Indonesian model work when India's BIT has not given the desired outcomes?
The genesis of a new dispute resolution framework in Indonesia was similar to that of India's.
In 2014, Indonesia decided to do away with many of its Bilateral Investment Treaties (BITs) and replace them with a new framework following a dispute involving foreign mining firms, including Churchill Mining and Newmont.
The authorities in Jakarta uncovered forged documents and corruption involving local partners and government officials, and Indonesia was able to successfully defend itself in arbitration. After this, the country adopted a BIT policy which comprised a 12-month cooling-off period before arbitration, a neutral three-member arbitration panel and continued access to international dispute resolution.
This not only led to improved investor confidence but also boosted FDI flows. After reforms, the inward FDI increased to around $20 billion annually from $14 billion annually before 2015. Net FDI rose from 1.1 per cent of GDP before to 1.4 per cent of GDP.
Bhalla pointed out the key differences in both countries' approach vis-a-vis dispute resolution.
"Indonesia bet on the rule of law, a cleaned house, and watched investment flow in. India dressed up a flawed system in new paperwork and called it reform — and capital has responded accordingly. When a country cannot persuade the world that a $2-million arbitration award will be honoured without a decade of courtroom theatre, the numbers in the FDI ledger are not a mystery. They are a verdict."
This, however, was not the first time that Bhalla warned India of a deepening investment crisis. In an interaction with India Today TV, he said that it was "high time for the Modi government to course correct". Bhalla mentioned that India's immediate challenge is not poverty but slowing growth and collapsing investor sentiment.
When asked whether he fears a return to mass poverty due to global conflicts, Bhalla said that is not the case. "But what I do think is that in India's case, something has happened, and we can discuss that about our growth process. Investment is not taking place. Private investment is not taking place, and FDI has really declined into negative territory."
India often pitches itself as the world's greatest investment destination. But veteran economist Surjit Bhalla says that India needs to swallow a hard pill.
Surjit Bhalla, former Executive Director at the IMF for India, Bangladesh, Bhutan, and Sri Lanka, said in his opinion in The Indian Express that foreign direct investment (FDI) has been falling for years, and that this is not due to global uncertainties.
According to him, a 2015 investment treaty is at the root of the issue. He mentioned that New Delhi should take the right lessons from Indonesia instead of dressing up what he called a "flawed system".
The former IMF Executive Director explained that this signals investor concerns around India's dispute-resolution framework.
DO CHECKOUT | India among most resilient economies, but crude oil and rupee pressures remain: Govt report
What is the 2015 investment treaty that Bhalla is talking about?
The 2015 India Model Bilateral Investment Treaty (Model BIT) was triggered by the White Industries arbitration case, which won an international arbitration award after Indian courts failed to resolve the dispute for years.
Bhalla said, "India's response to this embarrassment was to pass a new Model BIT in 2025 that is the most restrictive one passed by any government — it is a model of defensive state protection."
According to the treaty, investors are required to exhaust domestic legal remedies before seeking international arbitration. "Sixty months in Indian courts before any international arbitration could begin. This was not reform — it was retrenchment."
Despite the CEA's 'weak or no effect', the policy seems to have backfired on investor confidence, as per Bhalla. Even though India recorded inward FDI of $43 billion in 2025-26, outflows by Indian companies stood at $33.3 billion, reducing net FDI significantly, and its net share of GDP fell to its lowest level since the mid-2000s, at around 0.7%.
MUST READ | 'Indian economy is in trouble': Ex-IMF economist Surjit Bhalla on what went wrong
Why does the Indonesian model work when India's BIT has not given the desired outcomes?
The genesis of a new dispute resolution framework in Indonesia was similar to that of India's.
In 2014, Indonesia decided to do away with many of its Bilateral Investment Treaties (BITs) and replace them with a new framework following a dispute involving foreign mining firms, including Churchill Mining and Newmont.
The authorities in Jakarta uncovered forged documents and corruption involving local partners and government officials, and Indonesia was able to successfully defend itself in arbitration. After this, the country adopted a BIT policy which comprised a 12-month cooling-off period before arbitration, a neutral three-member arbitration panel and continued access to international dispute resolution.
This not only led to improved investor confidence but also boosted FDI flows. After reforms, the inward FDI increased to around $20 billion annually from $14 billion annually before 2015. Net FDI rose from 1.1 per cent of GDP before to 1.4 per cent of GDP.
Bhalla pointed out the key differences in both countries' approach vis-a-vis dispute resolution.
"Indonesia bet on the rule of law, a cleaned house, and watched investment flow in. India dressed up a flawed system in new paperwork and called it reform — and capital has responded accordingly. When a country cannot persuade the world that a $2-million arbitration award will be honoured without a decade of courtroom theatre, the numbers in the FDI ledger are not a mystery. They are a verdict."
This, however, was not the first time that Bhalla warned India of a deepening investment crisis. In an interaction with India Today TV, he said that it was "high time for the Modi government to course correct". Bhalla mentioned that India's immediate challenge is not poverty but slowing growth and collapsing investor sentiment.
When asked whether he fears a return to mass poverty due to global conflicts, Bhalla said that is not the case. "But what I do think is that in India's case, something has happened, and we can discuss that about our growth process. Investment is not taking place. Private investment is not taking place, and FDI has really declined into negative territory."