Welcoming the dragon: India can gain from easing restraints on Chinese FDI

The NITI Aayog’s recommendation that Chinese entities be allowed to acquire up to 24 per cent in Indian companies without the need for additional security clearance could be a great leap forward in institutional thinking on the subject. It builds on a tentative suggestion in the Economic Survey of 2023-24 for a calibrated easing of restrictions on Chinese foreign direct investment (FDI) to boost India’s integration into global supply chains and increase exports. The government think tank’s recommendations are not always accepted by the policy establishment, but this one assumes significance since it coincides with External Affairs Minister S Jaishankar’s first visit to China in five years to discuss economic cooperation and de-escalation of military operations along the Line of Actual Control. 

A meaningful thaw in Sino-Indian relations is hard to discern yet, after Chinese incursions into Indian territory in Ladakh in mid-2020 prompted the government to subject investment from countries sharing a land border with India to government approval and security clearance. Since then, the government has granted approval for 14 Chinese suppliers to Apple. Reports suggest that the impulse for easing investment restrictions on China has come from the Department of Industries. The proposal has been circulated to key ministries, including finance, to elicit their views. Given the weak investment impulses in the Indian economy, the proposal should be welcomed, but with caveats. Considering China’s overwhelming dominance of global supply chains — recent anxieties over rare earths and magnet supply being one example — its repository of technological know-how and the shrinking space for rule-based global trade, greater Chinese investment will enable deeper linkages with Southeast Asia, the most economically dynamicregion worldwide. 

  It would allow India to gain some ground in the China+1 race, in which Vietnam has surged ahead, with China emerging as one of the top three investors, together with Singapore and South Korea. In contrast, China, the world’s second-largest economy, accounted for less than 1 per cent of FDI inflows into India between April 2000 and March 2024. The fact that India touched a record trade deficit of $99.2 billion with China in 2024-25 underlines the Indian economy’s dependence on Chinese imports. Most of these imports are critical — such as active pharmaceutical ingredients (APIs) or solar panels and cells (on which the government imposed steep duties in the vain hope of encouraging domestic manufacture). 

The NITI Aayog’s proposal for Chinese companies to acquire stakes of up to 24 per cent would also balance investor interests with misgivings in Indian policy and business circles at the prospect of Chinese “domination”. Though not a majority stake, 24 per cent gives the shareholder the enabling power over the company’s direction and management, including the powers to block crucial resolutions requiring special majority. At the same time, it would be prudent for any Chinese-oriented FDI policy to include some element of technology transfer —whether in manufacturing or software services — so that India gets to develop the kind of technological foundations that has made China a formidable player in the global economy.