India Relaxes FDI Rules for Neighbouring Nations, Including China, in Key Policy Shift

• Union Cabinet eased FDI norms for countries sharing land borders with India by amending Press Note 3 of 2020.

• Prior government approval for such investments has been relaxed.

• Policy applies to China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

• China’s FDI share remains low at 0.32% (USD 2.51 billion).

• Trade deficit with China widened to USD 99.2 billion in 2024–25.

In a significant recalibration of India’s foreign investment policy, the Union Cabinet on Tuesday approved amendments to the foreign direct investment (FDI) framework governing countries that share land borders with India. The decision modifies provisions introduced under Press Note 3 (PN3) of 2020, which had mandated prior government approval for all investments from such nations.

Chaired by Prime Minister Narendra Modi, the cabinet cleared changes that ease the blanket approval requirement imposed six years ago. Under the revised norms, investments from entities with less than 10% non-controlling beneficial ownership linked to border countries will now be allowed through the automatic route, subject to applicable sectoral caps. Majority ownership and control, however, must remain with resident Indians in all cases.

Additionally, proposals in specified manufacturing sectors will be processed within a 60-day time-bound approval window. These sectors include capital goods, electronic capital goods, electronic components, polysilicon, and ingot wafers. The government said the changes aim to strengthen India’s manufacturing base—particularly in electronics and solar components—by enabling joint ventures, facilitating technology access, and improving integration into global supply chains.

Press Note 3 was introduced in 2020 amid heightened geopolitical tensions and concerns over opportunistic takeovers during the COVID-19 pandemic. It required prior government approval for investments from companies based in, or having beneficial ownership links to, neighbouring countries including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan. The policy, primarily aimed at Chinese investments, significantly slowed inflows from China and was seen as impacting India’s “Make in India” ambitions.

Relations between New Delhi and Beijing had deteriorated sharply after the June 2020 military clash in the Galwan Valley, prompting India to ban more than 200 Chinese mobile applications, including TikTok, WeChat, and UC Browser, on national security grounds. Although political tensions persisted for years, ties have shown signs of improvement more recently.

Despite broader economic engagement, China’s direct investment footprint in India has remained modest. Between April 2000 and December 2025, China accounted for just 0.32% of total FDI equity inflows into India—approximately USD 2.51 billion—ranking 23rd among foreign investors. In FY25, India received only USD 2.7 million in FDI from China, compared with USD 42.3 million in FY24 and USD 163.8 million in FY20. Overall FDI inflows into India stood at USD 50 billion in FY25, up from USD 44.4 billion the previous year.

The latest relaxations are widely expected to revive Chinese investment flows, particularly in manufacturing. Industry experts anticipate a surge in brownfield projects, as Indian companies may find it easier to induct minority Chinese partners for technology and scale, potentially boosting export competitiveness under the Make in India 3.0 framework.

Trade ties between the two countries, meanwhile, have continued to expand despite political strains. China is currently India’s second-largest trading partner. However, trade imbalances have widened significantly. In FY 2024–25, India’s exports to China declined 14.5% to USD 14.25 billion, while imports rose 11.52% to USD 113.45 billion, pushing the trade deficit to USD 99.2 billion, up from USD 85 billion in FY 2023–24.

More recent data for April–January FY 2025–26 shows renewed export momentum, with shipments to China rising 38.4% year-on-year to about USD 15.9 billion. Imports during the same period increased 13.8% to roughly USD 108.2 billion, resulting in a trade gap of around USD 92.3 billion.

Alongside the FDI reforms, the cabinet also cleared amendments to the Insolvency and Bankruptcy Code (IBC). The government plans to introduce the IBC (Amendment) Bill, 2025, during the ongoing Budget Session of Parliament. The proposed changes incorporate recommendations from a select committee, including stricter timelines for appellate disposal of bankruptcy cases, frameworks for cross-border and group insolvency, and the decriminalisation of certain offences to expedite resolution of stressed assets.

Separately, Prime Minister Modi reviewed developments in West Asia and directed ministers to closely monitor the evolving situation and coordinate responses to emerging challenges. The ongoing conflict in the region has disrupted global oil and gas supplies and heightened maritime risks, leading to increased freight charges and posing potential economic implications for India.

Taken together, the easing of FDI restrictions, proposed insolvency reforms, and close monitoring of global geopolitical risks reflect a calibrated strategy by the government—balancing strategic sensitivities with economic imperatives as India seeks to boost manufacturing, attract capital, and strengthen its position in global supply chains.