On 10th March, India loosened the rules governing foreign direct investment (FDI) from countries with which it shares land borders. The regime—known as Press Note 3—was introduced in April 2020, ostensibly to prevent opportunistic takeovers during the pandemic but in practice aimed squarely at China after the Galwan Valley clash. The latest relaxation allows investors with a non-controlling stake of up to 10% to use the automatic route, dispensing with prior government approval. Officials say that the change will improve the ease of doing business, boost inflows and deepen integration into global supply chains. That is wishful thinking. Chinese FDI does not consider India an attractive destination. What China does consider attractive, however, is India as a huge export market for its products.
On 8th April, Xu Feihong, the Chinese ambassador to India, posted on X: “Glad to know that China has become India's largest trading partner in FY2026—for the 11th straight month.” This was great news for China, but not for India. The US$151.1bn (billion) trade between the two was made up of US$131.63bn of exports from China to India and a meagre US$19.47bn of imports from India. It was a one-way street. China was flooding Indian markets, even as it became India’s “largest trading partner.”
These two pieces of information on trade and investment tell us how asymmetric China-India economic relations are. India makes minor tweaks to its FDI rules while China doubles down on its exports. India must import electronics and electrical equipment (US$40bn–US$50bn), machinery (US$27bn), organic chemicals (US$12bn–US$13bn), plastics, steel, medical equipment, and so on from China every year. These are critical products without which the Indian economy would not be able to function. Alternative sources exist for some, but at a much steeper price. Moreover, China has diversified its supply sources, so even if not directly from China, Chinese goods would still reach India through Southeast Asian and other manufacturing bases.
With a cumulative overseas investment stock of roughly US$3trn–US$3.5trn (trillion) and annual outflows in the range of US$160bn–US$190bn, China is a major FDI player across virtually every region. Asia absorbs close to two-thirds to 70% of China’s outward investment stock, or roughly US$2trn–US$2.2trn into Southeast Asia. In these economies, Chinese firms have not simply invested capital; they have transplanted entire manufacturing ecosystems, particularly in electronics, textiles, electric vehicles and intermediate goods. These investments are often export-oriented and deeply integrated into global supply chains, effectively extending China’s industrial base into neighbouring geographies.
Latin America represents the second major destination, with cumulative Chinese investment estimated in the range of US$300bn–US$500bn. The earlier phase of engagement was dominated by resource extraction—oil in Brazil, copper in Chile and Peru—but more recent flows have targeted renewable energy, electric mobility and logistics infrastructure. Europe, while smaller in share, has still absorbed between US$100bn and US$200bn in Chinese capital, with a shift from earlier acquisitions of industrial and technological assets towards more recent investments in electric vehicle and battery manufacturing, particularly in Eastern Europe.
Africa, though accounting for a smaller share—perhaps US$50bn–US$100bn in cumulative terms—occupies a strategic position. Chinese investments here are closely tied to resource security and infrastructure development, often under the framework of the Belt and Road Initiative. Mining, energy and transport corridors dominate, creating long-term linkages between resource-rich regions and Chinese industrial demand. The Middle East, meanwhile, has emerged as a fast-growing destination, attracting multi-billion-dollar annual investments in energy, petrochemicals and increasingly renewables.
Chinese FDI in India amounts to a trivial US$2.51bn, or 0.32% of India’s cumulative equity inflows since 2000. Even if one broadens the definition to include venture capital investments and indirect flows routed through third countries, the total rises only to around US$15bn–US$20bn. The reason is simple: India cannot make up its mind whether it wants Chinese FDI, which it suspects could undermine its sovereignty and weaken its self-sufficiency plank. China’s outward investment is frequently intertwined with industrial and geopolitical objectives. Dependence in critical sectors—whether batteries, telecom equipment, or APIs—can translate into vulnerability, especially in periods of geopolitical stress. But caution, hesitancy and irrelevant policy tweaks are not a policy option. The real option is to learn from the Chinese themselves how they handled FDI.
Beginning in the 1990s and accelerating through the 2000s, China actively courted foreign direct investment and technology, particularly from Japan, the United States and Europe, in a period known as 'reform and opening up' (gaige kaifang). China did not see foreign capital as a threat; it saw it as an instrument of transformation, provided the state retained strategic control over direction. Multinational corporations were often required to form joint ventures, localise production and, in many cases, transfer technology—the phrase 'bring it in' (yin jin lai) capturing this mindset. To take full advantage of this, special economic zones provided infrastructure, policy stability and export incentives, enabling China to integrate into global manufacturing networks and develop deep supplier ecosystems, skilled labour pools and process expertise. China used this phase to absorb technology, build domestic champions, and gradually move up the value chain, eventually becoming both an exporter and an investor in its third phase, 'go out' (zou chu qu). Before China, Japan and Germany had demonstrated a similar strategy of importing foreign technology, absorbing it and becoming world champions.
What India needs to do is build a system in which firms, finance and the state all pull in the same direction—towards production, technology, scale and competitiveness, regardless of the source of FDI. But even before that, there must be clarity of objective. India often tries to pursue multiple goals simultaneously—self-reliance, export growth, domestic champions, revenue raising, and low consumer prices—without clearly ranking them. Successful industrialisers made a clear choice: production capability first. When will India do the same?
(This article first appeared in Business Standard newspaper)
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