Recent news reports suggest that the Government of India is considering easing restrictions on investments originating from China. To understand the implications of such a move, it is important to revisit the policy framework established in 2020.
In April of that year, the government issued Press Note 3, which required prior government approval for investments from countries sharing a land border with India. The measure applied not only to China but also to Bangladesh, Pakistan, Nepal, Bhutan, Myanmar, and Afghanistan. Importantly, the rule also stipulated that even if an investment was routed through a third country, approval would still be required if the ultimate beneficial ownership was located in any of these neighboring states.
Before the introduction of Press Note 3, foreign direct investment in most sectors of the Indian economy flowed through the automatic route, requiring no prior government clearance. The policy change was widely interpreted as a response to growing concerns about opportunistic takeovers of Indian companies during the economic uncertainty caused by the COVID-19 pandemic.
However, the policy acquired a far sharper geopolitical significance after the violent clash between Indian and Chinese troops in the Galwan Valley in June 2020. In the aftermath of the clash, relations between the two countries deteriorated sharply. India adopted a series of measures that included tightening scrutiny of Chinese investments and banning more than 200 Chinese mobile applications, among them TikTok, citing concerns related to national security and data privacy.
In the years since the Galwan incident, large-scale military confrontations along the border have not occurred, yet strategic distrust between the two countries has remained substantial. China continues to be viewed globally as a state capable of leveraging technology, digital infrastructure, and supply chains for strategic advantage.
Concerns about cyber intrusions, data harvesting, and electronic surveillance remain central to policy debates across many countries, including India. Against this backdrop, the possibility that India might relax restrictions on Chinese investment after more than five years has prompted debate in policy circles about the rationale behind such a shift.
Some reports suggest that the proposal to reconsider the investment restrictions may have emerged from discussions within the government’s policy think tank, the NITI Aayog. Data indicates that since the introduction of Press Note 3, the share of Chinese foreign direct investment in India has remained extremely small.
Between April 2000 and December 2025, FDI from China accounted for only about 0.32 percent of total FDI inflows into India, amounting to roughly $2.51 billion. While Chinese investment slowed under the approval regime, India’s trade relationship with China continued to deepen. Imports from China have steadily increased, contributing to a trade deficit that reached approximately $99.2 billion in the financial year 2024–25.
Before the restrictions came into force in 2020, Chinese investors had been among the most active participants in India’s start-up ecosystem. Venture capital and strategic investments from Chinese technology companies were visible in sectors such as fintech, e-commerce, and digital platforms. After the introduction of mandatory approvals, however, new investments slowed considerably.
In parallel, Chinese infrastructure companies were excluded from several new contracts in India, and projects where decisions were pending were also subject to additional scrutiny.
Within this context, NITI Aayog is understood to have presented the government with two possible approaches. The first option involved repealing Press Note 3 and restoring the earlier regime under which Chinese investments could enter through the automatic route. The second option proposed a calibrated relaxation, allowing investments of up to 24 percent equity in an Indian company without requiring prior approval, while maintaining oversight for larger stakes. These proposals are advisory in nature, and the final decision rests with the government.
The debate over Chinese investment has also been influenced by specific high-profile cases. One example often cited in policy discussions is a proposal by Chinese electric-vehicle manufacturer BYD to invest approximately $1 billion in a joint venture for automobile manufacturing in India.
The project reportedly did not proceed under the existing approval framework. Analysts have argued that restrictions on investments from neighboring countries have also had unintended spillover effects on capital flows from parts of South Asia, contributing to a broader decline in net foreign direct investment in certain periods.
Another influential policy research institution, the Indian Council for Research on International Economic Relations (ICRIER), has also examined the issue. Its recommendations suggest that India could consider allowing Chinese investment of up to 49 percent in non-sensitive manufacturing sectors. The proposal excludes sectors such as defence, telecommunications, critical infrastructure, and emerging strategic technologies.
At the same time, ICRIER emphasizes that any relaxation should be accompanied by strong regulatory safeguards. These could include rigorous pre-entry security checks, institutional screening mechanisms, post-approval monitoring, a centralized registry of foreign ownership, mandatory technology-transfer commitments, and periodic independent compliance audits. Improved coordination among different government agencies has also been recommended as an essential component of such a framework.
If India ultimately decides to ease the approval requirements and restore some degree of automatic access for Chinese investment, the move would raise important questions about the broader economic and strategic consequences. Supporters of liberalization argue that increased investment flows could benefit India’s manufacturing sector by expanding production capacity, creating employment opportunities, and boosting exports.
They also point out that Chinese companies possess considerable expertise in sectors such as electronics manufacturing, electric vehicles, solar energy equipment, and battery technologies. Access to capital, technology, and supply-chain integration could accelerate industrial growth in these areas. In addition, renewed participation by Chinese venture capital could provide additional funding channels for Indian start-ups.
At the same time, critics of the proposal caution that the potential benefits must be weighed carefully against strategic risks. Many Chinese corporations operate in close alignment with state policy objectives, and concerns remain about the possible national security implications of foreign ownership in sensitive sectors. Industries such as electronics, automotive systems, pharmaceuticals, and chemicals involve complex data flows, intellectual property, and critical supply chains.
Some analysts argue that investments in these sectors could create vulnerabilities if they allow external actors access to sensitive information or strategic infrastructure.
Another concern frequently raised in policy discussions relates to the structure of manufacturing investment. In several instances globally, Chinese investment has been associated with assembly-based production models that rely heavily on imported components. If similar patterns were to emerge in India, the country could risk becoming an assembly hub without significantly strengthening its domestic manufacturing ecosystem.
In such a scenario, disruptions in the supply of key components—such as semiconductors, electronic modules, or rare earth materials—could have cascading effects on domestic production.
The debate is further shaped by developments in global markets. Chinese manufacturing firms have achieved significant scale and competitiveness in multiple sectors, particularly electric vehicles and renewable-energy technologies.
Companies such as BYD have expanded rapidly across international markets. In some regions, including parts of Europe and Southeast Asia, Chinese manufacturers have captured substantial market share within a short period. Governments in several countries have responded by examining subsidy structures, supply-chain dependencies, and potential competitive distortions associated with these firms.
For India, the policy challenge therefore lies in balancing economic pragmatism with strategic caution. Greater openness to investment could bring capital, technology, and industrial integration, yet excessive dependence on external supply chains—particularly from a single country—could run counter to the objective of strategic autonomy and the broader vision of building resilient domestic manufacturing capabilities.
The central question, therefore, is not simply whether Chinese investment should be permitted, but under what conditions it should be allowed. A carefully calibrated framework that combines economic openness with rigorous national-security safeguards may ultimately determine whether such investments strengthen India’s manufacturing ecosystem or deepen structural vulnerabilities.
(The author is National Co-Convenor, Swadeshi Jagran Manch, and Former Professor, PGDAV College, University of Delhi; Views expressed are personal)
