India has eased investment rules for countries with which it shares a land border, clearing the way for China-backed foreign direct investment (FDI) into the country.
On 10 March 2026, the government relaxed Press Note 3 by allowing investments where Chinese shareholding is below 10% and carries no management control or board representation to enter through the automatic route. For larger Chinese investments in critical manufacturing sectors such as electronics and solar components, a 60-day fast-track approval mechanism has been introduced.
The move is significant for three reasons.
First, India remains heavily dependent on Chinese supply chains for key industrial components, reflected in a trade deficit of nearly $100 billion with China. Local production funded by FDI could substitute a part of these imports.
Second, net FDI inflows have fallen significantly in recent years, making new sources of capital increasingly valuable.
Third, the Israel–Iran war has once again exposed India’s energy vulnerabilities. While India has little choice but to import crude oil and gas, it can partly offset this dependence by attracting foreign capital into strategic sectors.
Global playbook
India’s approach remains cautious—perhaps inspired by the European playbook.
Earlier this month, the European Commission proposed the Industrial Accelerator Act, which seeks to impose strict conditions on investments exceeding €100 million in strategic sectors when they originate from a single country controlling more than 40% of global manufacturing capacity.
The regulation clearly targets China, much like India’s Press Note 3 and its partial relaxation. The proposed rules include requirements such as majority EU shareholding, technology transfer commitments, integration into EU value chains and local job creation.
These safeguards are designed to slow Chinese outward direct investment (ODI), which expanded rapidly until 2017 before facing scrutiny from the US and its allies.
India has historically received very little Chinese investment. Between 2000 and 2024, cumulative Chinese FDI into India stood at roughly $2.5 billion—an insignificant portion of China’s $3.1 trillion global ODI stock and a small share of India’s overall FDI inflows.
Industry disruption
While there is no evidence that the relaxation of norms will unleash a surge of FDI, clearly, the government is signalling greater openness to Chinese investment.
In this context, it would be useful to learn from the experience of other countries that have been recipients of FDI from China. Specifically, two concerns need to be addressed.
First, FDI can disrupt existing domestic suppliers, even when localization is enforced. This was the experience of Thailand’s automotive parts industry. Thailand has a strong automobile sector, originally built by Japanese investment. As the government incentivized electric vehicle (EV) adoption, Chinese investment poured into the sector.
There were strict localization rules: the ratio of locally produced to imported EVs was staggered to increase from 1 in 2024 to 3 by 2027. But Chinese EV producers are highly vertically integrated and don’t need local suppliers. Further, the traditional auto part suppliers in Thailand tend to be small units without expertise in battery production or software processes, both critical to EVs. Thus, they were left out of the EV boom: in 2023, over 10 auto parts firms closed, and production was down by 30%.
Subsequently, a push for hybrid vehicles and a pivot towards producing railway parts has enabled a partial recovery. Meanwhile, Chinese EVs had grabbed over 20% of the market share in 2025, by overtaking established Japanese car makers.
Second, it is not enough for FDI to bring in capital and technology and create jobs; it should empower the host country to innovate independently.
The World Bank’s “3i” framework—investment followed by infusion and innovation—is relevant here. Infusion is the process of adopting modern technology from advanced countries and diffusing it through the domestic economy via knowledge sharing and skills training.
Innovation is the stage when domestic firms begin building new technologies and products independently. Most Asean countries have benefited through the infusion of Chinese FDI, but have not crossed over to the innovation stage in a big way.
Consider Indonesia, which has received vast amounts of Chinese FDI into its nickel industry. Indonesia is unable to move up the value chain from nickel mining to producing nickel-based EV batteries. Chinese firms control over 70% of its nickel refining capacity, but Indonesia has less than 1% of global EV battery production.
Malaysia is trying to create an ecosystem that nurtures innovation for its semiconductor industry by augmenting FDI with other measures. Malaysia is a key hub for chip packaging, assembly, and testing, but aspires to move up the value chain into chip design.
Instead of relying solely on FDI, it is attracting “China-plus-one” investments through tax incentives, policy support under a national semiconductor strategy, intensive pre-employment training for engineers and world-class infrastructure in dedicated chip design parks.
Competitive reality
Finally, given India’s very limited opening up to Chinese FDI, the economic impact is likely to be greater than the political fallout. The experience of other countries shows that Chinese capital is patient and plentiful, and the Chinese manufacturing machine is formidably efficient.
Brazil is a case in point: China’s interests in the country have gradually shifted from primary resources to infrastructure, EVs, and, most recently, to e-commerce. Brazil’s large, internet-enabled population has quickly taken to Chinese apps for food delivery, shopping, and ride-hailing. The total number of visas granted to Chinese workers is the highest for any nationality since 2013.
Indian companies must be open to the fact that their Chinese counterparts are likely to be competitive on both price and quality fronts. Opening the door—even slightly—to Chinese investment should therefore serve as a signal for domestic industry to raise productivity and strengthen competitiveness.
The author is an independent writer in economics and finance.