Centre State Investment Agreement and Its Impression on Federalism in India

- Rakshith Ponnathpur.

Finance Minister Arun Jaitley, in this year’s Annual Budget, proposed for an agreement to be signed between the Union and the states to facilitate smooth implementation of Bilateral Investment Treaties (BITs) that India is set to enter into with the nations of the world, replacing the existing Bilateral Investment Protection and Promotion Agreements (BIPPAs). While signing this agreement is not mandatory, the perception that states which sign the agreement are better investment destinations than states which do not, will serve as an incentive for the states to sign the agreement.

The primary objective of the Centre-State Investment Agreement (CSIA), as the agreement is called, is to ensure fulfillment of state governments’ obligations under these bilateral treaties. Many a time, investors feel cheated because of a state’s failure to fulfill the promises made by the Union while signing the agreements. But signing the CSIA will bind the states to fulfill their commitments, bringing in some accountability into the whole business. CSIA is the first such move to actually involve the states in an area which has been exclusively Union's realm so far.

However, critics rightly argue that CSIA will have very little legal significance should investors approach international courts for arbitration. Irrespective of any agreements signed between the Government of India and its states, only the former can be held liable and accountable externally. This is because only the Union Government has the power to enter into treaties on behalf of the Indian Republic and once it has acceded to its terms, the international obligations assumed thereunder bind the entire country and not any individual states. CSIA can only facilitate shifting of blame for the embarrassment from the Union to the states internally.

The introduction of this agreement will also impact federalism in India, an area which clearly does not feature among the strong points of Indian polity. The states will not particularly be impressed with yet another provision which will enable Delhi to shift the blame to their capitals. Creation of a negative perception about a state’s investment ecosystem should it excuse itself from signing the agreement and Union's plans to inform investors beforehand about states which have not signed the CSIA will further make the states feel that the agreement is unfair on them, which is understandable since the states have little say in the provisions of the bilateral treaties itself in the first place.

A solution for this would be to institutionalize the involvement of state governments in the treaty-making process. The states will not find the CSIA unfair if they themselves are involved in formulation of the provisions of these treaties. The Chief Ministers of states can be made members of a consultative commission on treaty making (like the Governing Council of Niti Aayog) and this need not just be restricted to investment treaties, but can also be extended to other international agreements like the WTO treaty, Free Trade Agreements and Double Taxation Avoidance Agreements. Many of these agreements involve domains like agriculture which fall under the State List and directly impact the states, and it would only be logical on the part of Union Government to include actual stakeholders.

CSIA featured in discussions held at the recent Inter-State Council Meeting, with Tamil Nadu Chief Minister Jayalalitha welcoming the Union's move to include states in the treaty-making process and also raising some of her reservations about the draft CSIA agreement. There is a possibility that the Union might try to pass on some financial burdens it might suffer from penalties under already existing bilateral agreements, which she feels is unfair since states are neither party nor aware of the provisions of earlier treaties. She also expressed her concern that the Union deducting such dues from the amount it transfers to states, would impact the implementation of schemes of state governments, and called for the deletion of the provision which enables the Union Government to resort to this practice.

Centre State Investment Agreement will be a commendable and an affirmative step, which will help in bringing some much needed order, accountability and cooperation between the Union and the states in smooth implementation of bilateral treaties, provided it makes the Union and the states part of the holistic treatyformulation process. Otherwise, it may well go on to be yet another provision which makes states liable to the shortcomings of provisions they were not even aware of, in the first place.

This is a golden opportunity for the Union Government to show it means no nonsense when it talks of cooperative federalism, and include states as equally responsible stakeholders in foreign investment.