Restrictions on investments into India from countries that share land borders—particularly China—may have been warranted five years ago when relations between the two countries were strained. At the time, tensions on the Indo-China border were high and the pandemic had just struck. It was perhaps necessary to guard against opportunistic purchases of large stakes in Indian companies by Chinese firms. But the global landscape has changed dramatically since then, with the rules-based order giving way to a far more polarised environment.
For India, in particular, higher US tariffs and delays in finalising a trade agreement with Washington have come as a setback. While New Delhi will always have reservations about Chinese investments, it is important for Indian companies to embed themselves in as many global supply chains as possible. In that context, the decision to ease the rules under Press Note 3 (2020) and facilitate capital flows into the country appears pragmatic. Net foreign direct investment (FDI) inflows have cooled significantly over the past year, and attracting fresh long-term capital—along with technology—especially in manufacturing has become increasingly important.
The amendments to Press Note 3 (2020) allow automatic investments of up to a 10% non-controlling stake by a beneficial owner without prior government approval, subject to sectoral caps. Approval processes are also being fast-tracked. Proposals from entities seeking to invest in sectors such as capital goods, electronic components, electronic capital goods, and polysilicon will now be cleared within 60 days. At the same time, majority shareholding and control in the investee companies must remain with resident Indian citizens or entities owned and controlled by them. Details of such investments will also need to be reported to the Department for Promotion of Industry and Internal Trade.
10% Threshold
The changes may not appear dramatic, given that the relaxation applies to only a limited set of sectors. While they simplify the process for Chinese venture capital and private equity funds—many of which are significant investors in India’s startup ecosystem—and could help channel funds into deep-tech ventures, a broader set of sectors could perhaps have been included under the automatic route. One understands the reluctance to allow Chinese participation in sensitive areas such as the banking system.
But sectors such as electric vehicles (EVs) could arguably have been considered. A leading EV manufacturer such as BYD, for instance, can currently invest in India only after receiving government approval. The policy approach appears to favour investments in manufacturing inputs rather than finished goods. Yet if India’s manufacturing output is to expand meaningfully, large-scale investments—from companies such as BYD—could prove valuable. Manufacturing currently contributes less than 18% to the economy, well short of the government’s stated ambition of raising the share to 25%.
Manufacturing Imperative
As the Economic Survey 2023-24 suggested, India could benefit from relaxing some of the constraints under Press Note 3. To be sure, there are signs of a thaw in India-China relations—flights are being restored and more visas are being issued to Chinese nationals working in Indian factories. A measure of improved engagement could potentially lead to further easing of restrictions in the months ahead. India’s caution on Chinese investments is understandable, and the need for geopolitical vigilance is beyond dispute. But policy adjustments that are too incremental may fail to deliver the scale of capital and technology inflows that the economy requires.