In a move highlighting India’s cautious stance on foreign investments, Finance Minister Nirmala Sitharaman confirmed that India will continue to impose restrictions on investments from countries it shares land borders with, including China. The statement came shortly after India and China reached a pivotal agreement aimed at improving relations along their contested Himalayan frontier, where a military standoff has persisted since 2020.
India-China Border Agreement
The recent agreement between India and China to ease tensions along their disputed Himalayan border marks a significant step toward ending a four-year military standoff. This conflict, which reached a deadly peak in 2020, not only strained diplomatic relations but also created economic roadblocks, particularly in areas such as capital flow, technology exchanges, and talent mobility between the two Asian giants.
Despite this promising development, India remains cautious about foreign investments from China. Sitharaman emphasized the need for scrutiny, stating, “I cannot blindly receive foreign direct investment because I want money for investment, forgetful or unmindful of where it is coming from.” Her comments were made during an event at the Wharton Business School in the United States, underscoring India’s strategic approach to economic partnerships with neighboring countries.
Tightening of Investment Rules
India’s decision to retain these curbs is rooted in the 2020 border clash that severely impacted ties between the two nations. In response, India tightened its foreign direct investment (FDI) policies, increasing the vetting process for companies from bordering countries. Although the policy did not explicitly name China, it was widely interpreted as a measure aimed at preventing takeovers and substantial investments by Chinese firms.
These stringent regulations have since deterred major Chinese companies from investing in India. Automakers like BYD and Great Wall Motor were forced to rethink their investment strategies, as red tape and additional scrutiny complicated the process. Even Indian companies with Chinese stakeholders found themselves ensnared in bureaucratic delays, further slowing investment flows from China.
Growing Trade Despite Tensions
While FDI from China has been curtailed, India’s trade with China has paradoxically increased since the border standoff. Imports of Chinese goods surged by 56% over the past four years, nearly doubling India’s trade deficit with China to $85 billion. Despite their political and military differences, China remains India’s largest supplier of industrial goods and a crucial trading partner.
China’s dominance in sectors like electronics, machinery, and chemicals continues to fuel India’s economic needs. However, this reliance on Chinese imports poses a challenge for New Delhi, as it tries to balance economic pragmatism with national security concerns. The rising trade deficit also raises questions about India’s ability to reduce its dependency on Chinese goods in the long run.
Strategic Focus on Emerging Sectors
The standoff with China comes at a time of immense global demand for electric vehicles, semiconductors, and artificial intelligence—key areas for potential cooperation between the two countries. Both India and China are racing to become leaders in these sectors, which are critical to their future economic growth. Yet, the unresolved political tensions make collaboration difficult.
India’s decision to continue its investment curbs suggests that while it is open to improving diplomatic ties with China, economic engagement remains fraught with caution. Sitharaman’s remarks reflect India’s broader strategy to prioritize security and national interest over short-term economic gains. “I cannot overlook where the investments are coming from,” she reiterated, pointing to the need for vigilance in receiving foreign capital from neighboring nations.
Impact on Future Investments
The Indian government’s position on foreign investments from neighboring countries like China is likely to continue shaping its economic landscape. The curbs, while aimed at protecting national interests, have raised concerns about India’s ability to attract much-needed foreign capital, especially in fast-growing sectors like technology and manufacturing.
Meanwhile, Indian businesses that rely on Chinese investments or partnerships face ongoing uncertainty. The government’s focus on security concerns, particularly in the wake of the border conflict, suggests that Chinese investments in sensitive sectors will remain under strict scrutiny for the foreseeable future.
