31-07-2025
Chinese FDI: Global lessons for India's guardrails strategy
Figure 1 - India's FDI inflows from China over the years. Source: DPIIT Newsletters
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Figure 2: Distribution of FDI inflows from China to various industries in India, as per the NIC 2008 section-wise classification (2016-2025). Source: Author's Calculations using FDI data from DPIIT Newsletters and Classification from NIC 2008.
This is the first article of a three-part bilateral relationship between India and China, long defined by a complex interplay of geopolitical frictions and economic interdependencies, has recently shown cautious signs of improvement, particularly after being severely strained by the 2020 Galwan Valley clashes. This shift has been evident since October 2024, marked by the renewal of high-level dialogues and the softening of stance towards Chinese investments by India in recent years. Amid these ongoing efforts, NITI Aayog's recent proposal to allow Chinese companies to acquire up to a 24% stake in Indian firms without prior approval signals a further positive shift in both India's approach to Chinese FDI (foreign direct investment) and broader diplomatic present, all Chinese investments into India fall under the purview of Press Note No. 3 (PN3), which was introduced by the Department for Promotion of Industry and Internal Trade ( DPIIT ) in April 2020. This note outlines the guidelines regarding the treatment of FDI inflows from countries that share land borders with India. As stated in the official note, the PN3 was introduced for 'curbing opportunistic takeovers/acquisitions of Indian companies due to the Covid-19 pandemic' by requiring prior government approval for all investments from countries sharing a land border with India, including China. The policy amendment was an immediate response to growing concerns over predatory Chinese capital acquiring stakes in Indian firms and start-ups, triggered particularly by the decision of the People's Bank of China to increase its shareholding in HDFC Bank from 0.8% to 1%.China's history of strategic acquisitions in the US and Europe had also prompted several countries, including Germany, Italy, Spain, and Australia, to tighten their FDI norms, which further influenced India's decision to adopt stricter screening measures. The situation was only further intensified following the clashes between the countries in Galwan Valley, prompting India to take further steps to restrict Chinese investment in India, such as rejecting several high-profile investment proposals, including one from electric vehicle manufacturer impact of the changing policy environment is evident in the FDI inflow trends. Between 2016 and 2025, cumulative FDI from China amounted to approximately $954 million (see Figure 1). The average annual inflows stood at $886 million during 2016-2020, before the issuance of PN3, but dropped sharply to just $68 million during 2021-2025, following the announcement of the inflows over the past decade (2016-2025) were concentrated in manufacturing industries, which account for 68.2% of the total FDI inflows (Figure 2).At a more disaggregated level, electrical equipment and electronic goods accounted for around 31%. Thus, the Indian government's gradual signalling over recent months towards a possible openness to Chinese investments in the electronics sector in the future, provided they come through joint ventures (JVs) with Indian firms and include clear technology transfer provisions, reflects a cautiously evolving official approval of such decisions would not mark an unprecedented shift but rather a continuation of India's selective approach to Chinese investments. In recent years, the government has demonstrated a willingness to approve JVs involving Chinese firms, particularly in strategic sectors like electronics and automobiles, where such collaborations promise technology absorption and value addition while also aligning with national interests. For instance, in 2024, approvals were granted to the Micromax-owned Bhagwati for a JV with Chinese original design manufacturer Huaqin and to Dixon Technologies for acquiring a stake in Ismartu India, a subsidiary of China's Transsion on these evolving stances, the way forward for India lies in adopting a calibrated framework towards Chinese investments—one that incorporates lessons from other countries' regulatory experiences and establishes clear guardrails to safeguard national security while facilitating the inflow of capital and technology.A key step in this direction for India would be to adopt a sector-specific FDI framework that clearly defines, maintains, and periodically updates the list of sensitive and non-sensitive sectors. For example, Australia maintains a list of sensitive sectors, including critical infrastructure, critical minerals, advanced technologies, investments near sensitive government sites, and those involving access to sensitive data, which are particularly subject to enhanced scrutiny under its investment regime. In fact, Australia not only screens foreign investments at the pre-entry stage but also exercises 'call-in' and 'last resort' powers to reassess previously approved investments if national security concerns arise—a safeguard that India can also consider US, in February 2025, also outlined specific sectors where it would restrict investments, particularly from China-affiliated entities. These sectors included advanced technology, critical infrastructure, healthcare, agriculture, energy, raw materials, and other strategically significant areas. On similar lines, Germany and Italy also cover a broad range of strategically sensitive sectors subject to strict scrutinising mechanisms, such as defence, critical infrastructure, healthcare, media, artificial intelligence, cybersecurity and data security, semiconductors, and other high-tech by carefully identifying its strategic and non-strategic sectors, India can consider restricting Chinese investments in areas critical to national sovereignty, such as defence, telecommunications, critical infrastructure, and emerging technologies, while continuing to permit and even encourage foreign equity inflows in its non-sensitive sectors. In non-strategic sectors, such as manufacturing, India could permit up to 49% equity from China—higher than the proposed 24%, provided there is a strong pre-entry screening mechanism, which could perhaps be more attractive for Chinese investors and at the same time would not compromise on national addition, India can work towards institutionalising post-approval review mechanisms, establishing a central registry to monitor foreign ownership patterns, and enabling conditional approvals, such as restrictions on board representation, mandatory technology transfer clauses, and periodic compliance writers Nisha Taneja is professor at ICRIER and Vasudha Upreti is Research Assistant.
