India and China reset? After about six years of friction, deregulation allows Chinese government to invest in India

India is relaxing rules allowing Chinese investment in the country, a move that signals New Delhi’s efforts to reset economic relations with China after nearly six years of friction.

India’s government said in an announcement on Tuesday that it has approved changes to its foreign direct investment policy that will allow investments from “land-linked countries” in the manufacturing of electronic components, capital goods and solar cells.

India shares borders with China, Pakistan, Nepal, Bhutan, Bangladesh and Myanmar, and the restrictions were primarily aimed at restricting investment from China, the only major economy that shares a border with India.

Relations between Beijing and New Delhi soured in 2020 following deadly border skirmishes in the Galwan Valley, and India tightened investment controls in the same year.

Under the new rules, Chinese investments in Indian companies will be expedited and processed within 60 days, as long as the company’s ownership remains with Indian shareholders, the document said.

The rules also allow Chinese companies to acquire up to 10% stake in Indian companies without New Delhi’s approval.

“Allowing limited Chinese participation in India’s manufacturing ecosystem could make it easier for (multinational) companies to move final assembly to India while maintaining access to inputs from China,” said Arpit Chaturvedi, South Asia advisor at Teneo.

He added that this will strengthen the “attractiveness of India in China-plus-one strategies” for multinational companies looking to diversify their supply chains from China.

For the past six years, attempts by Chinese companies to invest in India have been thwarted by a web of security clearances from India’s foreign and home ministries.

The Indian government said in a note that these restrictions are “adversely impacting investment flows from investors, including global funds such as PE/VC funds,” especially when investors hold “non-strategic, non-controlling interests.”

India also hopes the changes will improve ease of doing business and increase investment inflows from global funds into startups and deep tech companies.

“I interpret this as a pragmatic realignment rather than a structural reset of India-China relations,” said Reema Bhattacharya, head of Asia risk insights, enterprise risk and sustainability at Singapore-based business advisory firm Verisk Maplecroft.

But with border tensions between India and China still unresolved and broader geopolitical competition between the two countries continuing, some experts are skeptical about the impact New Delhi’s regulatory changes will have on investment.

“We don’t expect Chinese capital to flow into India,” said Verisk Maplecroft’s Bhattacharyya.

While the policy signals easing, Bhattacharyya said Chinese companies are still pricing in the risk that investment controls will be tightened again if bilateral tensions escalate.

“The easing reflects economic pragmatism as both countries navigate a more fragmented world order, but deep-seated strategic mistrust persists,” he said.

The world’s two largest economies have been slowly working towards improving relations since last year. After the United States imposed 50% tariffs on India in August last year, Indian Prime Minister Narendra Modi visited China for the first time in seven years to attend the Shanghai Cooperation Organization summit.

Since then, the two countries have taken several steps to normalize relations, including resuming flights and withdrawing troops from their borders.

Chinese Foreign Minister Wang Yi said on Sunday that New Delhi and Beijing should “support each other in the BRICS chairmanship over the next two years” to “bring new hope to the Global South.”