India has recently tweaked Press Note 3 (2026), reopening the door to Chinese investment despite persistent security concerns. This marks a significant shift from the restrictions imposed after the Galwan Valley clash, which led to the tightening of foreign investment norms from countries sharing land borders with India.

The revised policy permits Chinese investments through the automatic route, albeit with a caveat: only companies with less than 10 percent Chinese equity are eligible. While the move signals a cautious economic opening, its limitations raise questions about its effectiveness in achieving India’s broader industrial and trade objectives.

Rationale Behind 10 Percent Cap

The 10 percent ceiling on Chinese equity is designed to address national security concerns. By restricting Chinese investors to minority, non-controlling stakes, the policy aims to prevent potential takeovers of Indian firms while retaining operational control in domestic hands.

At one level, this appears to be a pragmatic compromise—allowing limited capital inflows while safeguarding strategic sectors. After nearly six years of restrictions, the move also suggests a willingness to cautiously re-engage China as a potential economic partner.

However, this very restriction may undermine the policy’s intended benefits.

Not Attractive Enough for Chinese cos.?

Minority shareholding is unlikely to attract major Chinese corporations, particularly in capital-intensive and technology-driven sectors. Global giants such as BYD, NIO, LONGi, JinkoSolar, and CATL typically seek significant stakes to justify large investments and facilitate technology transfer.

China’s dominance in electric vehicles, renewable energy, electronics, and emerging technologies like AI makes it a crucial potential partner for India’s industrial ambitions. Yet, without meaningful ownership and control, these firms may hesitate to commit capital or share advanced technologies.

This raises a critical question: can India reduce its trade deficit with China and strengthen domestic manufacturing under initiatives like Make in India without deeper Chinese participation?

China’s Role in Indian Manufacturing 

Paradoxically, China has already played a pivotal role in India’s industrial evolution—primarily through imports. India’s export basket has undergone a structural shift over the past decade. Traditional, labour-intensive exports such as textiles, garments, leather, and agricultural products have gradually been overtaken by higher value-added manufacturing.

Electronics, for instance, emerged as the third-largest export category in 2024–25, rising from seventh place in 2014–15. Its share in total exports increased from 2.4 percent to 9.4 percent over the same period.

This transformation has been heavily supported by imports of critical components from China. In 2024–25, China accounted for nearly 39.7 percent of India’s electronic goods imports, including printed circuit boards (PCBs), display panels, and semiconductor devices.

India’s electronics production surged nearly sixfold—from $21.3 billion in 2014–15 to $127 billion in 2024–25—making it the world’s second-largest mobile phone manufacturer.

Similarly, Chinese components remain integral to the telecommunications and automobile sectors, underpinning supply chains even as investment flows come largely from countries like Japan.

Thus, while India seeks to reduce dependence on Chinese imports, its manufacturing ecosystem remains deeply intertwined with Chinese supply chains.

The Vietnam Model

A useful comparison emerges with Vietnam. Despite ongoing tensions with China in the South China Sea, Vietnam has pursued a pragmatic “shelving disputes” strategy.

China is Vietnam’s largest trading partner and its third-largest foreign investor. This economic engagement has enabled Vietnam to attract investment, access technology, and integrate into global supply chains, even while managing geopolitical frictions.

Experts note that both countries maintain a delicate balance, driven by deep economic interdependence. For Vietnam, economic pragmatism has complemented strategic caution.

Time for Strategic Recalibration

India’s calibrated reopening to Chinese FDI is a step forward, but its restrictive framework may limit the inflow of capital, technology, and expertise needed to boost high-tech manufacturing. If the objective is to transform India into a global manufacturing hub and reduce the trade deficit with China, a more nuanced approach may be required—one that balances security concerns with economic imperatives.

Adopting elements of Vietnam’s “shelving disputes” strategy—without compromising national interests—could unlock greater opportunities for industrial growth, technology transfer, and export competitiveness.

(The writer is an Indian trade consultant and analyst. Views expressed are personal. He can be contacted at subratamajumder0604@gmail.com)