ISAS Briefs

Summary

Encouraging investments in strategic sectors like electric vehicles will signal India’s intentions to work closely with China. Otherwise, a strategic reset might not fetch investments.

The visit by India’s Prime Minister Narendra Modi to China from 31 August to 1 September 2025 after seven years underlines a significant warming-up of bilateral relations. However, will the thaw in bilateral relations lead to more balanced economic relations, especially through greater Chinese investments in India?

India’s trade deficit with China was almost US$100 billion (S$129 billion) during FY2024-25. The deficit is unlikely to disappear overnight despite warming of ties. However, there are views arguing for a more balanced bilateral economic relationship following from more Chinese investments in India. These views suggest some of India’s current imports from China can be replaced if Chinese producers make them locally. Furthermore, Chinese investments can also increase India’s overall exports to other markets, given their abilities to produce large-scale and generate export-oriented items.

Chinese investments in India began getting heavily screened after the outbreak of COVID-19 in 2020 and later souring of political ties between the two countries. Though India did not ban Chinese investments, the latter were subjected to scrutiny for security concerns. Without specifically naming China, India amended the foreign investment policy for countries with which it has ‘land borders’ by making them ineligible for automatic clearance and subject to government approval. The Press Note no.3 of 2020 that issued the directive remains in place.

In more recent times, there has been an increase in opinions favouring more liberal treatment of Chinese investments in India. The Economic Survey of 2023-24, prepared by the Indian Ministry of Finance, was the first to propose a rethink. Subsequently, NITI Aayog of India has suggested automatic clearance for all Chinese investments of up to 24 per cent of equity in Indian ventures. Chinese investments in India are currently at around US$2.5 billion (S$3.2 billion). This is only 0.3 per cent of India’s aggregate foreign direct investments (FDI) stock. The proportion looks dismally low, given that China is one of the world’s largest sources of outward FDI.

In 2023, outward FDI from China was around US$177 billion (S$228 billion), with its total global stock of outward FDI being close to US$3 trillion (S$3.87 trillion). Along with the United States (US) and Japan, China has figured among the world’s top three sources of outward FDI for quite a few years now. While the US and Japan are India’s third and fifth largest sources of FDI, accounting for FDI stocks of US$70.6 billion (S$91 billion) and US$44.4 billion (S$57 billion) respectively, amounting to 9.7 per cent and 6.1 per cent of India’s total inward FDI, Chinese investments lag far behind. Low Chinese investments in India are not just due to the high scrutiny of the last four years. These investments have been historically low. There are specific reasons for these being much less in India compared with other developing countries.

Chinese investments in most developing countries have been noticeably high in infrastructure. The latter includes investments in shipping, ports, aviation, roads and highways. A lot of these investments are part of the Belt and Road Initiative (BRI). India has stayed away from the BRI and, therefore, has not received these investments. Other than physical infrastructure, globally, Chinese investments have also been high in telecommunications and extraction and refining of critical minerals. For India again, these are sectors where Chinese investments have raised concerns over security.

A liberal attitude to Chinese investments by allowing 24 per cent equity acquisition through the automatic route will bring in funds for several Indian companies. With most domestic Indian companies looking for fresh funds to expand capacities, the prospect of Chinese capital inclusion will be alluring. However, the policy is unlikely to result in outcomes that will reduce India’s import dependencies on China by ensuring the imported items are made locally by Chinese producers.

In critical sectors of India’s import-dependency on China, such as solar photovoltaic modules, telecom equipment, information technology hardware, active pharmaceutical ingredients, advanced batteries and speciality steel, inviting import-substituting investments from China will require balancing of security issues with economic necessities. It is noteworthy that all these sectors, along with a few more, currently offer production-linked incentives (PLIs). Offering PLIs to interested Chinese investors in these sectors could be a politically sensitive issue.

The larger economic aims of creating jobs, bringing in advanced technology and reducing some imports can be pursued through new Chinese investments in electric vehicles and parts of chip assembling. These are scale-intensive industries requiring not only large investments but also expertise for managing the scales. Chinese investments in these industries can be particularly useful in generating local capacities. Electric vehicles and chipmaking are complementary industries and can be linked through common supply chains, making them attractive for investors.

Encouraging Chinese investments in India requires a fresh start and a renewed mindset. Facilitating such investments in strategic sectors like electric vehicles and chip assembly –critical to India’s long-term economic security – would signal India’s strong purpose and willingness to work with China to fulfil mutual interests. Such a signal will be the best enabler for Chinese investments. Otherwise, a strategic reset is unlikely to bring in investments.

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Dr Amitendu Palit is a Senior Research Fellow and Research Lead (Trade and Economics) at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore (NUS). He can be contacted at isasap@nus.edu.sg. The author bears full responsibility for the facts cited and opinions expressed in this paper.

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