India is considering a shift in its foreign investment policy that could allow more Chinese funds into specific sectors such as renewable energy, manufacturing, and auto components. The proposal is a move to ease the strict rules introduced during the Covid-19 years, which had limited Chinese companies from investing directly in Indian firms without government approval. This comes at a time when India is looking to increase capital inflows, create jobs, and strengthen its domestic industry.
The Background
In April 2020, India amended its Foreign Direct Investment (FDI) policy. The change made it mandatory for all neighboring countries to seek prior government approval before investing in India. The policy was widely seen as a step to prevent opportunistic takeovers of Indian companies during the pandemic, and it mainly targeted China, which was one of the largest investors in India at that time.
Since then, Chinese investments in India have slowed sharply. According to data from the Ministry of Commerce, approved Chinese FDI fell from about 6.2 billion dollars between 2017 and 2019 to less than 1 billion dollars in 2021. This was a significant drop, especially when compared to other countries such as Singapore and the United States, whose investments in India continued to grow.
What May Change
Now the government is planning to allow 20 to 25 percent Chinese investments through the automatic route in specific industries. It means that companies from China could invest up to that level without seeking separate approval for each deal. Officials say that investments would still be examined carefully to ensure there are no security risks.
Sectors like defense, telecom, space, and atomic energy would continue to be closed to Chinese funds. Instead, areas such as textile machinery, farm equipment, electrical goods, and auto components could benefit. In manufacturing, these funds could help India modernize production lines and reduce import dependence. For example, India imports nearly 70 percent of its solar module equipment and much of it comes from China. Opening the renewable sector to limited Chinese FDI could help lower costs and speed up India’s ambitious solar targets.
Economic Rationale
India is currently trying to increase overall FDI inflows to 100 billion dollars annually. At present, inflows stand around 80 billion dollars. Allowing Chinese participation in non-sensitive areas could help bridge this gap. Chinese firms already have a strong supply chain base and manufacturing capacity that Indian companies rely on. For instance, many Indian auto component makers depend on Chinese imports for raw materials. By letting Chinese investors set up joint ventures or minority stakes in India, domestic firms could gain easier access to technology and inputs.
At the same time, the government is mindful of concerns about over-dependence. Past experience shows that Chinese companies dominate entire product categories once they gain a foothold. For example, in the smartphone sector, Chinese brands account for more than 70 percent of India’s market share. A similar trend in industrial equipment or energy systems could create long-term vulnerabilities. This is why the proposed limit of 20 to 25 percent has been suggested to maintain balance.
Strategic Calculations
The move also has a geopolitical angle. US tariffs on Chinese goods have increased trade tensions. India could become a middle ground where Chinese capital finds new opportunities while India secures much-needed investments. The Shanghai Cooperation Organization summit, where Prime Minister Narendra Modi is expected to meet Chinese leaders, may provide a platform to advance this discussion.
If approved, the new rules would not only boost investment but also create jobs. According to a report by NITI Aayog, every 1 billion dollars of FDI in manufacturing generates about 45,000 direct jobs. If Chinese investments rise even modestly, the employment impact could be significant.
Final Take
India faces a delicate balance. It needs fresh capital and access to technology but it also needs to protect its industries and strategic sectors. The government’s plan to allow limited Chinese FDI with strict scrutiny shows a cautious but pragmatic approach. If implemented well, it could support India’s renewable push, lower costs for industries, and open new job opportunities while avoiding over-reliance on a single country.
In the coming weeks, all eyes will be on how New Delhi finalizes its decision. The outcome could reshape not just India’s investment landscape but also its broader economic ties with China.
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