India’s reopening to Chinese investment reflects strategic pragmatism

In April 2020, as the world struggled with the Covid-19 pandemic and soldiers from India and China moved towards a large-scale border stand-off, New Delhi amended its foreign direct investment (FDI) policy to require prior government approval for all investments from countries sharing a land border with India – a measure directed at China.Nearly six years on, India has changed its FDI policy again. It is a significant move for India-China relations.During the pandemic, the FDI regulation served two purposes. First, it was a supply chain wake-up call. Covid-19 exposed India’s acute vulnerability in global supply chains. India needed to build manufacturing capacity. Second, it was an economic response to the brewing border crisis. As the stand-off with China intensified, New Delhi tied the relationship, including investment approvals, to stability at the Himalayan border.The context has changed. October 2024 brought troop disengagement at the border, followed by the restoration of high-level diplomatic mechanisms. Indian Prime Minister Narendra Modi and Chinese President Xi Jinping have since met twice – in Kazan, Russia, and Tianjin, China – marking a meaningful thaw. Air connectivity is being restored and the Kailash Mansarovar Yatra – a pilgrimage significant to Hindus – has resumed. Beijing has also lent support to India’s Brics chairmanship.India’s lifting of the FDI restrictions, announced on March 10, is a measured but significant signal that it is willing to follow diplomatic optimism with economic pragmatism.The revised guidelines establish a two-tier framework. Investments by Chinese entities of up to 10 per cent ownership can now proceed automatically, in line with applicable sectoral caps. For strategic sectors such as capital goods, electronics and the upstream solar supply chain including polysilicon and ingot-wafers, FDI will continue to require government approval. But decisions will be fast-tracked within 60 days. Crucially, majority ownership in these sectors must remain with Indian entities.