India has moved to ease stringent restrictions on foreign direct investment (FDI) from neighbouring nations, including China, signalling a potential thaw in the economic relations six years after a border standoff frayed ties.
The Union Cabinet — chaired by Prime Minister Narendra Modi — has approved amendments to Press Note 3 (2020) on Tuesday, PTI reported on Tuesday citing sources. The original policy, enacted at height of the covid pandemic and following military clashes in the Galwan Valley, mandated prior government clearance for any investment originating from countries sharing a land border with India.
A Strategic Pivot
The move marks a significant departure from India’s FDI policy for neighbours that had effectively sidelined Chinese capital in the country’s burgeoning tech and manufacturing sectors. While the restrictions applied to seven nations—including Pakistan and Bangladesh—the primary target was China.
Despite the geopolitical friction, the economic reality has remained stubborn. China has emerged as India’s second-largest trading partner, even as investment remained anaemic. Between April 2000 and December 2025, China accounted for a mere 0.32% of India’s total FDI equity inflows, totalling $2.51 billion, according to data from the High Commission of India in London, UK.
Widening Trade Deficit
The policy shift comes as New Delhi grapples with a widening trade gap. In the fiscal ended 31 March 2025, India’s trade deficit with China ballooned to $99.2 billion, driven by a double-digit surge in imports of electronics, machinery, and active pharmaceutical ingredients.
By easing investment hurdles, the government may be looking to swap “trade for investment”—encouraging Chinese firms to set up local manufacturing units rather than simply shipping finished goods into the Indian market.
Market Implications
The relaxation could provide a lifeline to sectors such as electric vehicles (EVs) to electronics, where Chinese supply chains are dominant. However, New Delhi is expected to maintain a “vetted” approach for sensitive sectors like telecom and data-heavy industries, ensuring that national security remains balanced with economic necessity.
