India, explained.
Allowing Chinese foreign direct investment will increase India’s global supply chain participation (Getty Images)
Relaxed foreign direct investment rules will test whether New Delhi can draw Chinese capital away from Southeast Asia.
Subscribe to The Informer for monthly expert analysis, and to Events for advance notice of visiting world leaders and distinguished guests.
You may unsubscribe from Lowy Institute newsletters at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
India cautiously unlocks Chinese investment after years of resistanceIndia cautiously unlocks Chinese investment after years of resistance
On 10 March this year, India’s cabinet approved changes to foreign direct investment (FDI) rules that had restricted investments from China and other neighbouring countries since the 2020 India-China border clashes. The new rules, “Press Note 2, 2026”, amend “Press Note 3, 2020” and allow non-controlling stakes of up to 10% in Indian firms without prior government approval. Additionally, the government will provide a 60-day expedited approval process for investments in priority manufacturing sectors such as electronics, capital goods, and solar cells, including those from Chinese companies. India hopes the move will accelerate FDI from China and attract manufacturing hubs away from Southeast Asia.
Formed in the aftermath of the border skirmishes between India and China in the Galwan Valley and the subsequent military standoff, the 2020 rules sought to impose punitive action by halting all investment proposals by Chinese companies in India. However, in the post-2020 period, the volume of bilateral trade between the two countries kept rising, with China emerging as India’s second-largest trading partner.
In reality, the move to curtail Chinese investment was more about optics than substance. China has never been a major source of FDI in India. A mere US$2.5 billion, or 0.3% of the total equity inflow reported in India between April 2000 and December 2025 was from Chinese investments, making China the 23rd-largest investor in the country. However, indirect investments by global venture capital and private equity funds with Chinese connections were affected. In July 2024, India’s Commerce Minister Piyush Goyal confirmed there would be no rethink on Chinese investment, repeating his point the following year.
Meanwhile, voices within and outside the Indian government had taken a contrarian view, many wanting to take advantage of the China+1 strategy – a business approach where companies maintain primary manufacturing in China but have subsidiaries in another country. The 2023–24 Economic Survey, the flagship annual publication of India’s Ministry of Finance prepared under the guidance of the Chief Economic Adviser (CEA), argued in favour of seeking FDI from China to boost local manufacturing and tap the export market. Unlike the political elite and ministers, the CEA, under the Indian system, is a professional economist with a defined role within the Finance Ministry.
The Survey assessed that as the United States and Europe were shifting their immediate sourcing away from China, it would be more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from Beijing. Welcoming Chinese FDI as a strategy to increase India’s global supply chain participation is more advantageous than relying on trade alone, the report stressed. Commerce Minister Goyal, however, was quick to dismiss the suggestion, saying that the recommendations of the Economic Survey were not binding.
The government now appears to have realised that accelerated FDI inflows, especially from Chinese companies into India, will boost manufacturing.
The policy tweak this year, therefore, is a cautious volte-face in an attempt to stave off a gloomy economic outlook precipitated first by high US tariffs and then the war in Iran. In the past few years, Indian manufacturing firms have pointed out that scaling high-tech manufacturing is impossible without Chinese intermediate components, supply chains, and technology. The government now appears to have realised that accelerated FDI inflows, especially from Chinese companies into India, will boost manufacturing, increase domestic capabilities and reduce reliance on imports, in line with its self-reliance (Atmanirbharta) mission. According to expert assessments, the changes in Press Note 2026 can help China regain a 2% share in total Indian FDI.
Against this backdrop, questions arise regarding whether Indian policy, specifically aimed at high-priority manufacturing sectors, can effectively challenge the dominance of ASEAN countries such as Vietnam, Thailand and Malaysia in the fields of electronics, electric vehicles, and components. These countries are already well established within diversified supply chains. In Vietnam, electronics exports reached US$165 billion in 2023, accounting for approximately 41% of the country's total exports. Both Thailand and Malaysia are pivotal locations for the EV, battery and semiconductor industries. Thailand is ranked 10th among emerging markets according to the 2025 Foreign Direct Investment Confidence Index.
India is competing with the established strengths of these countries. It seems to be hoping that the 60-day approval window for capital goods and components will be a key factor in enticing investors. The newly relaxed rules could potentially facilitate joint ventures with Chinese component makers, and offer India as an alternate destination to global companies looking to diversify away from China and its integrated supply chains in Vietnam and Thailand.
It remains to be seen whether the relaxed FDI regulations will enable Chinese companies to transfer manufacturing expertise to India through joint ventures, thereby accelerating India’s ability to localise production. The concern is that this could potentially undermine the competitive advantage that ASEAN nations currently have in attracting supply chain relocations, particularly from China. New Delhi will need to build confidence in the new system and commit to ongoing reforms. And, most difficult of all, it will need to overcome its preference for caution.
About the author
Shanthie Mariet D’Souza
Dr Shanthie Mariet D’Souza is the founder and president of Mantraya Institute for Strategic Studies (MISS), a senior research fellow at University of Massachusetts Amherst, and visiting faculty at the Naval War College, Goa, India.
The most-pressing world events explained by Lowy Institute experts and global contributors, in your inbox, every Thursday.
You may unsubscribe from The Interpreter at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
