In April 2020, during the economic slowdown caused by the COVID-19 pandemic, the Government of India amended its foreign direct investment (FDI) policy to prevent what it described as “opportunistic” takeovers of Indian companies. The amendment mainly targeted investments from China and required that any investment from countries sharing a land border with India must first obtain government approval. Now the Indian government’s decision to partially ease rules governing investments from neighbouring countries has sent a positive signal to the global investment community. This step is expected to attract more foreign investment into India.
In the second week of March 2026, the Union Cabinet approved revisions to the guidelines governing investments from countries that share a land border with India. The Indian government’s decision to partially ease rules governing investments from neighbouring countries has sent a positive signal to the global investment community. This step is expected to attract more foreign investment into India. Investments from China, particularly in sectors like solar energy and electronics, may increase and support the growth of related industries in the country. However, the government may need to relax these restrictions further and extend them to more sectors. Doing so could strengthen economic and trade cooperation between India and China, which has already begun to show signs of renewed growth since 2024.
These changes modify the approval process for such investments, which has been in place since 2020 under Press Note 3. In April 2020, during the economic slowdown caused by the COVID-19 pandemic, the Government of India amended its foreign direct investment (FDI) policy to prevent what it described as “opportunistic” takeovers of Indian companies. The amendment mainly targeted investments from China and required that any investment from countries sharing a land border with India must first obtain government approval.
Press Note 3 was introduced at a time when India and China were facing serious border tensions in the Galwan Valley. Under this rule, investments from neighbouring countries—including China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan—were brought under a mandatory approval route. The regulation also applied when the beneficial owner of an investment was a citizen of any of these countries, even if the investing company was registered in another nation. The aim was to protect financially vulnerable Indian companies during the pandemic from being acquired at low valuations. In practice, the policy added an extra level of examination involving several ministries and security agencies. As a result, the approval process often became slow, with many proposals remaining pending for long periods. The rule also influenced venture capital investments, as Chinese investors had earlier been among the major funding sources for Indian technology start-ups.
What is the Government’s Latest Move?
The government has not removed Press Note 3, but it has modified the way investment proposals will be handled. Under the new approach, proposals from countries sharing a land border with India in selected manufacturing sectors will be cleared within about 60 days. However, Indian partners must hold a majority controlling stake in these ventures. Faster approvals are expected in sectors related to domestic manufacturing, such as electronics, capital goods, and solar equipment. These industries rely on strong supply chains and often depend on component suppliers located in China.
Another important change concerns minority investments. Investments involving small stakes—such as up to 10% shareholding without any management control—will now be permitted through the automatic route. The objective is to allow the inflow of foreign capital while ensuring that ownership and strategic control of Indian companies remain with Indian stakeholders.
In recent years, the policy has encouraged Chinese companies to reorganise their operations in India by partnering with Indian firms. In the smartphone sector, where Chinese brands still have a strong market presence, the earlier model, based mainly on distributors, has gradually shifted toward contract manufacturing and joint ventures with Indian partners. For example, Xiaomi has partnered with Indian manufacturers such as Dixon Technologies and Optiemus to assemble smartphones and export them from India. This change highlights the balance the government is trying to maintain between two key policy goals.
On one hand, it wants to prevent strategic takeovers of Indian companies in sensitive sectors. On the other hand, India’s push for stronger domestic manufacturing requires access to global technology, components, and capital. Although India has made significant progress in assembling smartphones, the supply chain for many components still depends heavily on Chinese companies. Partnerships with these firms are often needed to produce important parts locally, such as display modules and printed circuit boards.
A similar trend can be seen in the automobile industry. MG Motor, which is owned by SAIC Motor of China, reorganised its Indian operations through a joint venture with the JSW Group. In this arrangement, JSW manages operations and investments in India, while SAIC provides technology and product support. Another example comes from the fashion retail sector. The fast-fashion brand Shein, which had earlier been banned in India, returned through a licensing partnership with Reliance Retail.
India Needs Balanced Policy Approach
The revised guidelines are expected to make it easier to do business in India and encourage more FDI. This is particularly important because capital inflows declined to about $18 billion in 2024–25 and even turned negative during April–December 2025. Such a trend highlights the urgency of attracting foreign investment and developing a broader approach to managing trade and investment ties with China. For a large economy like India, completely excluding China — the world’s second-largest economy — from economic considerations is neither simple nor practical. At a time when India is facing capital outflows and a balance of payments deficit amid global financial uncertainty, increasing FDI has become crucial. Persistent weakness in capital inflows could make external-sector management more challenging.
At the same time, geopolitical concerns cannot be ignored. India needs to carefully reassess its overall FDI policy. Many countries are already adjusting their economic engagement with China because of strategic concerns. In this situation, merely screening investments from particular countries may not be sufficient. Even with rules on beneficial ownership, it can be difficult to trace whether investments routed through financial hubs such as Singapore or some European countries ultimately originate from Chinese-controlled entities. Moreover, the issue is not limited only to China; risks can arise from any unfriendly country.
Therefore, India should clearly identify sectors that are strategically important for national security and economic resilience. These are areas where hostile powers could potentially create vulnerabilities. In such sectors, India may need to build strong domestic capabilities or collaborate only with trusted partners. Other sectors, however, could remain open to foreign investment in order to support growth. Since India’s domestic savings alone may not be sufficient to fund rapid expansion, foreign capital remains essential for achieving higher growth rates. At the same time, policymakers must ensure that economic openness does not compromise strategic interests in an increasingly uncertain global environment.
In the past, some policymakers have supported greater economic engagement with China. The Economic Survey 2023–24 suggested that India could benefit from the global “China+1” strategy by integrating with Chinese supply chains or easing restrictions on Chinese investment. The survey argued that such investment could help India expand exports to markets like the United States, following the experience of several East Asian economies. Similarly, a high-level committee chaired by NITI Aayog member Rajiv Gauba reportedly recommended reconsidering restrictions on Chinese investments.
China continues to play a dominant role in global manufacturing, supplying intermediate goods, rare earth materials, technology, and skilled technicians. Because of this, India needs a clear and well-defined strategy. Although Chinese investment in India has slowed in recent years, trade between the two countries has grown significantly. India’s imports from China increased sharply from about $70 billion in 2018–19 to over $113 billion in 2024–25, even after India chose not to join the RCEP trade pact.
Given that India requires both capital and technology to support its development goals, its policies must be practical and balanced. The challenge is to encourage investment and trade while remaining mindful of strategic and security concerns.
