In March 2026, India eased regulations that had restricted Chinese capital in local companies, in a development that marks New Delhi's cautious pragmatism towards capital flows from Beijing. Instead, the new rules mandate that decisions on whether or not to allow proposals on capital flows from countries that share a land border with India will be taken within 60 days. Yet, India has not fully opened the sluice gates, and the relaxation is being allowed in sectors such as capital goods, electronic components, polysilicon and ingot wafers. Another caveat is that majority control must stay with an Indian company or entity, but investments from bordering countries that involve 'beneficial ownership' to the limit of 10% are permitted under the automatic route, which does not need government approval.
Economic engagement between India and China nosedived in the wake of the COVID-19 outbreak in 2020, a situation that was compounded by China's military coercion and border clashes that led to deaths of soldiers on both sides. In the wake of the pandemic, when stock prices plummeted, China's central bank raised its equity stake in India's HDFC from 0.8% to 1.1%, which immediately triggered a political blowback that China was indulging in opportunistic takeovers of India's corporate assets.
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This development led to the government promulgating Press Note 3 (PN3), which stated that all investment from bordering countries such as Bangladesh, Nepal, Bhutan, Afghanistan, Myanmar and China will go through deep scrutiny. It reflected New Delhi's effective targeting of Chinese capital and its befitting response to Beijing through economic signalling. Prior to 2020, India's startup ecosystem had a lot of Chinese investors, funding a wide range of technology companies in fintech, e-commerce, and digital services. The restrictions curbed BYD's plan to establish a plant in India and Great Wall Motors' $1 billion investment, while Ant Group, Shunwei Capital, and Tencent Holdings Group also sold their share to Indian investors.
In October 2024, Prime Minister Narendra Modi and Chinese President Xi Jinping conferred on the sidelines of the BRICS summit in Russia and decided to defuse the military standoff. By agreeing to patrolling arrangements on the border, the Chinese tacitly admitted to their act of trying to create new facts on the ground. The understanding reached with China in October 2024 met an important aim, which was ensuring that the Indian Army could patrol till relevant points, and the resumption of grazing. With the resumption of patrolling, both sides began to take steps towards normalising relations.
The impetus for economic normalisation has come from both sides, with the 'Economic Survey 2023-24' suggesting that India must open doors to Chinese capital, inviting businesspeople to set up manufacturing units in India to reduce the trade deficit. Following this development, Niti Aayog member Rajiv Gauba suggested a calibrated reopening to economic cooperation with China. Finance Minister Nirmala Sitharaman disclosed that China Inc had also approached the government through the Ministry of External Affairs to relax curbs, but added that a "sense of caution" would be built into the re-engagement. Thus, opening its doors to Chinese Foreign Direct Investment (FDI) in select sectors through the automatic route - though with caveats - reflects India's cautious decision-making and economic pragmatism. The recent moves of relaxing the rules demonstrate a pragmatic shift in India's foreign policy to balance national security with economic imperatives.
Economically, the relaxation of foreign direct investment rules could revive India's manufacturing and technology sectors, which are facing technological and capital gaps. Post-Galwan, Chinese FDI flows declined sharply. From April 2019 to March 2020, Chinese FDI in India was approximately $163.8 million, but it went down drastically to $2.7 million in April 2025-March 2025, creating financing challenges for several sectors, including electronics, manufacturing, renewable energy, and startups.
Allowing minority shares 10% beneficial ownership through automatic routes in these sectors, such as capital goods, electronic capital goods, electronic components, and solar manufacturing inputs such as polysilicon - except strategic sectors such as semiconductors - with a scrutiny period of 60 days is a calibrated approach.
This calculated relaxation could also complement New Delhi's broader industrial policy, such as "Make India 3.0" and the production-linked incentive (PLI) scheme, which aims to make India a manufacturing hub for traditional and new developing technology and strengthen manufacturing capacity.
In addition, it could play a role in strengthening India's integration into global supply chains. India has long sought to position itself as an alternative manufacturing hub amid rising costs in China, primarily for the MNCs that are planning to diversify their production base in response to geopolitical tensions and supply chain disruptions amid protracted geopolitical crises. However, developing manufacturing capacity requires access not only to markets but also to capital and technology and supplier networks; Chinese companies are dominant in several global manufacturing supply chains and technology and are looking for overseas expansion. This limited window could give India an impetus to establish domestic component manufacturing and reduce vulnerability.
The strategic calibration in investment easing is also good for small and new tech startups, which are looking for fiscal support and technological backing.
However, this relaxation is also accompanied by some invisible risks. Chinese companies often operate with strong state backing and fiscal support; this raises concern about potential market dominance or strategic influence in critical industries. So, Indian policymakers are sceptical that, rather than facilitating the creation of an independent ecosystem, it might create new dependencies or increase the level of dependencies. The Indian market is already heavily dependent on China; around 70-75% of mobile phones used by Indians are accounted for by Chinese companies such as Xiaomi, Vivo, Oppo, OnePlus, Nothing, etc. Even a lot of electronics components, toys, apparel, etc., are imported from China despite trade barriers and anti-dumping duties. Therefore, efficient regulatory screening and sector-specific firewalls are crucial to mitigate this anomaly.
In the domestic policy sphere, it is being debated that the relaxation might undermine national security and render consumer and critical data vulnerable, or even enable Beijing to have economic leverage to create complex interdependence. However, industrial groups and economists say this move is a pragmatic shift, necessary to fill investment shortages, thanks to the deep pockets and technology know-how of Chinese companies.
In sum, the calibrated decision of India reflects its effort to navigate an increasingly complex geopolitical atmosphere amid the ongoing Middle East crisis. As major power rivalries intensify and global supply chains undergo stress, India's selective engagement with China while preserving strategic autonomy represents a pragmatic approach in advancing its long-term developmental goals.
(Kalpit is a China Fellow at Observer Research Foundation's Strategic Studies Programme, and Amit is an intern at the institute)
Disclaimer: These are the personal opinions of the author
