Demands of certain developed countries from India to negotiate 'investment protection' elements under an FTA is inappropriate as negotiating the matter as part of a separate chapter under the trade pact could have larger and detrimental implications, source said.

Legally speaking, they said, the investment protection element provides a wide range of obligations and commitments bestowed upon foreign investors, which are expansive in nature. "Recently, a lot has been heard about countries that are desiring India to negotiate 'investment protection' elements vis-a-vis investment chapter as part of the free trade agreement (FTA). However, this is incorrect," one of the sources said.

For instance, the European Union (EU) has been negotiating a separate investment protection agreement or treaty with India, and not as part of the India-EU free trade agreement.

"Having 'investment protection' as a chapter of a FTA could have larger and detrimental implications even on the trade agreements' structure, especially when FTAs have specialised dispute settlement mechanisms which shall allow countries to take retaliatory measures in unrelated sectors, even for investment disputes," the source said.

However, such a concern would not arise when investment protection agreements are negotiated independently and free from FTAs.

While prior to its Model BIT (Bilateral Investment Treaty) of 2016, India has negotiated investment chapters in FTAs with countries like Japan, Korea, and Singapore, but there is a need for a caution as such provisions carry the perpetual risk of disputes spilling over the trade realm when matters are escalated to a country-country level of dispute resolution.

"India has argued that trade and investment protection agreements should remain separate to ensure better clarity in regimes and minimize risks that might arise out of regime interactions, that is, trade and investments," sources said.