On FDI, opening the door, easing the flows

In April 2020, the government amended the FDI policy to prevent “opportunistic” takeovers of Indian firms during the pandemic-induced economic disruptions. The amendments then, directed primarily towards China, had made government approval mandatory for investments from countries that share a land border with India (LBCs). On Tuesday, the Union cabinet approved changes in the guidelines on investments from countries sharing a land border with India. Now, investors with non-controlling LBC beneficial ownership of upto 10 per cent will be allowed under the automatic route. Further, proposals for LBC investments in key manufacturing sectors such as capital goods, electronic components, and others will be “processed and decided within 60 days”. Given the imperative for building domestic manufacturing capabilities in these sectors, the government can be more flexible in calibrating Chinese investments through joint ventures with Indian partners. This will be a win-win for both New Delhi and Beijing. These policy changes, which have been designed to encourage greater FDI flows, ease access to newer technologies and facilitate greater integration with global supply chains, have come at a time of dwindling capital inflows into the country. Capital flows had fallen to $18 billion in 2024-25 and thereafter turned negative during April-December 2025 — underlining the need to facilitate more foreign investments in the country, and for a more comprehensive approach vis a vis the trade and investment relationship with China.

In the past, sections of the policy establishment have articulated the need to encourage investments from China. The Economic Survey 2023-24 had pointed out that to gain from the China +1 strategy, India can integrate with Chinese supply chains or ease FDI from China. It argued that “focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past”. A high-level committee chaired by Niti Aayog member Rajiv Gauba had also recommended removing the curbs on Chinese investments, as per a report in this paper.

Considering the centrality of China to global manufacturing — from intermediate goods and rare earths to tech and technicians — India needs a clear strategy. In recent years, while investment flows from China have dwindled, trade between the two countries has only deepened. Imports from China have surged from $70 billion in 2018-19 to $113.4 billion in 2024-25, despite India opting out of the RCEP trade agreement. Considering that India needs both capital and technology to assist in its development trajectory, along with being more open to trade, it needs to be pragmatic. Its approach must be guided by the need to balance economic imperatives with strategic caution.