Over the last six years, India got $366 bn of Fresh Inward FDI. But an astronomical $230 bn were also Repatriated/Disinvested out of India. In Part 1, India's Dollar Economy (Part 1): Net FDI Fell to Zero, we took an accommodating stance, calling it “perhaps a non-negative outcome”. But why did such a massive outflow occur? And does it remain a “non-negative” when we dig deeper? India’s economy was exuberant/euphoric for the first four years of Prime Minister Modi’s tenure, until mid-2018. Global crude prices crumbled from $100/barrel to below $50/barrel. Since the government did not lower pump prices, it reaped an unusual tax bonanza. Inflation contracted to five percent; Foreign Direct Investment (FDI) inflows nearly doubled to $60 bn. Aadhar created a public digital stack to make direct beneficiary payments into jan dhan (people’s wealth) accounts. India’s real GDP growth leapt to over eight percent, the fastest among major economies. The non-cascading Goods & Services Tax (GST), was steamrolled nationally. India’s goldilocks economy lulled everybody into a delightful exhilaration. The conflicts and nightmares inherited from the Manmohan Singh era were forgotten…no, hold on, the Indian state rarely forgets a defeat or defiance. Tax Cuts on Equities Was a Goldilocks Moment; Perversely, We Cut on Bonds!Vodafone, Cairn, Deutsche Telekom—Hounded, Counter Sued! In 2007, Vodafone’s Netherland holding company had bought an $ 11 bn stake in Hutchison Essar’s Indian telecoms operations. India’s taxman slapped a penal demand saying Vodafone should have paid a withholding tax. Vodafone appealed and won in the Supreme Court. An irked government changed the law retroactively in 2012, initiating a vicious action to disgorge $2.7 bn (Rs 22,000 cr) from Vodafone, who invoked the 1995 India-Netherlands Business Investment Treaty (BIT) at The Hague in 2014. India’s tax authorities had tasted blood and prowled for other prey. Earlier in 2006, UK-based Cairn Energy PLC had reorganised its business in India. Using the retroactive clause, the taxman seized Cairn’s assets, slapping a $1.4 bn (Rs 10,247 cr) demand. Cairn invoked the 1994 UK-India BIT to appeal at an international tribunal. Deutsche Telekom invested $ 100 mn to buy a 20 percent stake in Devas Multimedia, which had bought S-band spectrum (for orbital satellites) from Antrix, the commercial subsidiary of Indian Space Research Organisation (ISRO), a state authority. But a media campaign of alleged corruption terrified the Singh government, which abruptly cancelled the deal. Deutsche sued under the India-Germany BIT at Geneva. Distress Signals in FDI: Big Numbers Mask a Sharp Investor Exit2016 Model BIT Framework—“Modi Euphoria” Hides a Quiet TsunamiThe Modi government inherited these international treaty minefields. It quietly instigated a fissure in India’s global treaty architecture in December 2015, which was operationalised early the following year, so is called the 2016 Model BIT Framework. The slim Faultline, highly technical and legally obtuse, appeared bang in the middle of the first four years of a Modi-euphoric economy. It was barely noticed. But it’s a law of nature that the most destructive earthquakes and tsunamis begin with a tiny crack, a small tremor, somewhere on or in Mother Earth. To obviate a Vodafone or Cairn like challenge to the Sovereign, the 2016 Model BIT Framework virtually gave the government a divine right to tax, non-justiciable under any treaty. Article 2.4(ii) removes “taxation laws and measures, including measures enforcing taxation obligations” from treaty purview. The divine right extended to characterising and defining any disputed measure as a “taxation matter”, thereby making it un-challengeable. Article 15 of the model document stunned foreign investors. The government had ordained a five-year limitation on invoking any overseas court. Practically, a foreign investor was “condemned” to sue and agitate his case against the Indian state only in an Indian court or tribunal for five years before he could escalate to a foreign body. Article 3 de-fanged the foreign investor on Fair and Equitable Treatment (FET). Under earlier treaties, he could sue the Indian state for violating legitimate expectations, regulatory stability, and fair conduct. These soft protections were outlawed. Now a foreign investor had to prove hard infractions like denial of justice, fundamental breach of due process, targeted discrimination, and manifestly abusive treatment. The threshold and burden of proof had moved infinitely higher. The odds of winning against the Indian state in an Indian court got materially worse. In an ironic sense, the government got “vindicated” a few years later, because Vodafone, Cairn, and Deutsche Telekom won their cases with resounding damages inflicted on India at international tribunals. Had they fought under the 2016 Treaty Model, their chances would have been whittled. A triumphal government had ensured that pesky litigants like them were disarmed. All’s fair in love and war, eh!New Robes for India’s GDP: The Reality of Modi Govt's Growth StoryTreaties Rescinded, Investors Flee After aggressive legal drafting, it was time for coercive action on the ground. India swiftly moved to terminate 58—YES, FIFTY EIGHT – global treaties whose initial terms had expired. These included major European countries—UK, Germany, France, and the Netherlands—who had old, time-tested documents in force. Another 25 BITs were killed in the following years. A major trading partner like the US, who had been negotiating a BIT in the wake of the heady nuclear deal of 2008, pulled back, stung by the new construct.It’s perhaps a telling rebuke of the 2016 Model BIT Framework that no major county has signed on after the abrupt cancellations, despite a decade of tortuous negotiations. And the UAE recently agreed to a new treaty only after the government relented on the 5-year clause, replacing it with a 3-year clause on domestic limitation. India has now conceded; we will “relook” at the recalcitrant treaty model, but huge damage has occurred. Simon Hartmann and Rok Spruk examined 44 BITs terminated by India between 2013-19. Hold your breath—their study showed that FDI fell by 30 percent from the countries adversely affected by the treaty change. So, is there a grimmer reality to contend with here? Perhaps these “fleeing” foreign investors felt too unprotected, vulnerable, and rudderless without earlier treaty safeguards? At least some of them chose to take the money out—a total of Rs 20 lakh cr, or $230 bn, over six years—instead of reinvesting in India? It’s a sobering, withering thought for India’s policymakers, especially those who authored a somewhat cavalier and trenchant 2016 Model BIT Framework.