Exploring the Impact of Double Taxation Treaties on India’s FDI: A Panel Data Approach Using the Gravity Model

Since the liberalization reforms of the early 1990s, India has witnessed a significant surge in foreign direct investment (FDI), positioning itself as a major destination for global capital among emerging economies. FDI has played a crucial role in enhancing industrial productivity, fostering innovation, and accelerating economic growth. Among the key policy instruments aimed at attracting FDI, Double Taxation Avoidance Agreements (DTAAs) are designed to mitigate fiscal barriers, reduce tax uncertainty, and promote cross-border investment. Despite their widespread adoption, the empirical evidence on the effectiveness of DTAAs in driving FDI inflows remains inconclusive, particularly in the Indian context. This study investigates the role of DTAAs in influencing India’s bilateral FDI inflows using an augmented gravity model applied to a balanced panel dataset comprising India’s 22 major FDI partner countries from 1990 to 2022. The analysis employs Poisson Pseudo Maximum Likelihood (PPML) estimation, supported by robustness checks using Feasible Generalized Least Squares (FGLS) and Newey-West corrected OLS estimators. The findings reveal that the existence of a DTAA significantly enhances FDI inflows to India. Other key determinants include India’s GDP, trade openness, FDI openness, and language compatibility, while partner country GDP and colonial ties exert a negative influence. These results underscore the importance of tax treaties and institutional alignment in shaping India's investment climate and provide valuable policy insights for strengthening India’s global investment strategy.