Chinese engagement: India has struck an optimal new balance

India’s recalibration of its approach to Chinese investments marks an important moment in the evolution of India-China economic ties. The revised framework under Press Note 3 (PN3) signals a pragmatic attempt to balance India’s strategic and security considerations with the economic opportunities that carefully structured investment from China could bring. PN3 was issued in covid year 2020 to prevent opportunistic takeovers of Indian firms. It was a year marked by high tension after a border conflict with China.

The objective of the revised PN3 framework is clear: to enable Indian companies to gain access to new technologies, deepen domestic value addition, integrate more effectively with global value chains and expand manufacturing capabilities. As India seeks to strengthen its position in emerging sectors and advanced manufacturing, carefully structured partnerships with technologically capable economies can help accelerate this process.

India’s economic relationship with China has historically been marked by a sharp imbalance between trade and investment. While China is India’s largest source of imports and among its important export destinations, Chinese investment in India is limited.

Foreign direct investment (FDI) equity inflows from China between 2000 and 2020 were just $2.4 billion, or 0.45% of the $522 billion India received from around 160 countries (including NRI inflows). After the introduction of PN3, requiring government approval for investments from land-bordering countries, Chinese FDI fell to $67.35 million or 0.034% of the money India got between 2021 and 2024.

This contrasts sharply with China’s outward FDI trends since 2000-01, around the time it joined the World Trade Organization. By the end of the decade, China had emerged as a leading global investor, a position reinforced by its Belt and Road Initiative.

Hong Kong, Singapore, Germany and the UK are major recipients of Chinese FDI, while the UAE and Switzerland are emerging partners. The sectoral focus has also shifted significantly—from raw material acquisition to high-technology manufacturing, R&D, energy systems and infrastructure, including sectors such as mining, metals, consumer products, technology, media and telecommunications.

These trends are relevant as India considers how best to leverage prioritized investment flows to strengthen its industrial ecosystem. The sectors identified in the recent PN3 revision—including electronic capital goods, components, polysilicon and ingot- wafer production—are areas where deeper integration with global supply chains can significantly enhance India’s manufacturing competitiveness.

Importantly, the revised framework reflects a calibrated approach. Investor entities with non-controlling beneficial ownership of up to 10% are now permitted through the automatic route, without requiring prior government approval, while being subject to sectoral caps, entry routes and regulatory conditions. The investee entity must report the information to the department for promotion of industry and internal trade.

For investments requiring approval, the government has indicated it will be provided within 60 days. Crucially, the framework also specifies that resident Indian entities or citizens must retain majority shareholding and control of the investee entity at all times. These provisions ensure that while capital, technology and manufacturing expertise may be leveraged, strategic oversight and control stays in India.

This approach aligns with India’s ambition to emerge as a global hub for emerging technologies and Industry 5.0. Technologies such as digital twins, artificial intelligence, Internet of Things, big data analytics and collaborative robots are expected to shape the next phase of manufacturing transformation. China’s focus on R&D and strong intellectual property output through high-value patent filings can make technology partnerships beneficial to India in select sectors.

At the same time, India’s engagement with China inevitably has a strategic dimension. A persistent concern has been India’s widening trade deficit, now at over $100 billion. India’s dependence on imports from China is particularly pronounced in areas such as industrial machinery, electronics, semiconductors and components required for the country’s green and digital transitions.

Addressing this imbalance requires diversification of supply chains and enhanced domestic manufacturing. In this context, well-designed investment partnerships that promote local production, technology transfer and export capacity could help reduce structural dependence while strengthening India’s role in global supply chains.

A pragmatic approach balancing economic opportunity with strategic caution is key. Safeguards such as majority Indian ownership, reporting requirements and sectoral approvals enable collaboration without compromising security. The amended PN3 comes at a time when countries are resetting bilateral relationships. New alignments and strategic engagements with restored partners are the need of the hour to catalyse India’s development ambitions.

Note: This article was first published in Mint