Chinese FDI: Caution is a must amid easing of curbs

INDIA’s decision to ease restrictions on foreign direct investment (FDI) from China acknowledges an inescapable truth — Chinese capital inflows are vital to ensure deeper integration into global value chains. It also indicates that New Delhi won’t allow the festering border dispute with Beijing to act as a stumbling block on the economic front. The Galwan valley clash of June 2020 and the active support provided by China to Pakistan during Operation Sindoor in May last year have also been conveniently pushed to the sidelines.

The curbs, which required government approval for investments from countries sharing a land border with India, had been introduced in April 2020 during the Covid-19 pandemic. The ostensible aim was to prevent opportunistic takeover or acquisition of Indian companies. A prolonged military standoff cast a long shadow on India-China relations, even as bilateral trade kept growing (heavily in China’s favour). Diplomatic ties have improved significantly over the past six months or so; PM Modi’s visit to China and the resumption of direct flights between the two countries have signalled an unmistakable thaw.

The writing has been on the wall since July 2024, when the Economic Survey made a strong case for FDI from China to boost local manufacturing as well as exports. Chinese investment, however, often arrives not merely as capital but as influence, especially in strategically sensitive sectors such as telecommunications, fintech and critical infrastructure. Any relaxation in oversight could expose Indian companies to vulnerabilities, ranging from data security risks to supply chain dependencies. The challenge for the government will be to differentiate between productive investment and potentially strategic leverage. A calibrated approach — allowing investments in non-sensitive sectors while maintaining rigorous scrutiny in areas linked to national security — may be the most practical path forward.