It’s been more than five years since the government altered its stance on investments from China by changing the rules in Press Note 3 (PN3). However, the global economic and political environment has changed dramatically since then, and perhaps, it’s time to review the regulation and even consider scrapping it.
It was in April 2020, just ahead of the face-offs and skirmishes between the Chinese and Indian troops along the Sino-Indian border, that the government decided to bar Chinese foreign direct investment (FDI) from coming in through the automatic route.
Under PN3, any investment into India from a country sharing a land border—or where the beneficial owner is from such a country—must seek prior government approval. Though China wasn’t specifically named, the target was obvious.
No one disputes that geopolitical vigilance is necessary.
How do you thread the needle between openness and protection?
The Economic Survey 2023-24 suggested that India could benefit more by relaxing PN3 constraints rather than doubling down, especially if China-linked FDI could be harnessed to deepen India’s role in global value chains.
If other nations effectively vet sensitive deals through security reviews, India should too—but without the blanket stigma and overhang of PN3. India needs to do it fast as it struggles to negotiate a trade agreement with the US and braces for the impact of the 50% import tariffs. At such a juncture, rebalancing economic and political relations with China is crucial. To be sure, the thaw seems to have set in.
Even before Prime Minister Narendra Modi’s presence at the Tianjin Shanghai Cooperation Organisation leaders’ summit, Chinese foreign minister Wang Yi’s India visit in August had paved the way for improved bilateral ties. Chinese nationals can now apply for Indian tourist visas and direct flights between the two countries are set to resume by end-October. There has even been talk of China resuming exports of rare earth magnets.
However, there are no easy fixes, especially since the attempts by multinational corporations like Apple to shift some part of their supply chain bases to countries like India impact China. Consider how Apple’s largest iPhone assembler, Foxconn, recalled hundreds of Chinese engineers and technicians from its factories in India. Clearly, China is not about to stand by and watch its manufacturing capacity move out to other countries.
Efforts to rebuild relationship with China
But serious efforts need to be made to rebuild relations with China, and a change in the investment laws is a good way to show the eastern nation that India is willing to bond. While becoming self-reliant is an admirable goal, we must realise it will take many years and large amounts of capital to get there. Becoming a key player in the global supply chain isn’t going to be easy in the new global environment where protectionism is becoming the norm.
For the moment, as we pursue our ambitions, Chinese imports will help keep Indian industry going. Even otherwise India can do with some FDI inflows at a time when these have not been up to the mark. A dose of Chinese capital and technology can lift India’s manufacturing to the next level.
Nearly half a decade after PN3, the world has changed—and India’s investment climate must evolve too. What made sense as a precaution in 2020 now functions as a drag on growth, innovation, and capital formation. It’s time to restore clarity, credibility, and openness in India’s FDI regime.