Press Note 3 Amendment Unlikely to Attract Significant Chinese FDI in Manufacturing

In 2017, Shanghai Fosun Pharmaceutical Group struck a deal to buy a majority stake in India’s Gland Pharma, the biggest buy of a Chinese firm in India. By 2019, 17 of India’s 24 startup unicorns were backed by Chinese investors, with the value of investments multiplying 12 times in 4 years across sectors such as fintech, edtech and retail. In early 2020, red flags were raised as the People’s Bank of China appeared in the list of investors holding more than 1% stake in India’s storied HDFC Bank. As Covid restrictions started impacting Indian corporates, anxieties arose on possible hostile Chinese takeovers of leading Indian companies, including data-rich tech enterprises.

This sequence of events serves as the backdrop to the introduction of Press Note 3 of 2020 on April 17, 2020, which brought foreign direct investments in Indian companies by land-bordering countries under the prior government approval route. PN3 aimed to curb ‘opportunistic takeovers’ by foreign firms which were ‘beneficially owned’ by citizens of or entities present in land-bordering countries.

In June 2020, a serious border clash took place between Indian and Chinese troops along the Line of Actual Control in the Galwan Valley, resulting in 20 valiant Indian soldiers being killed while an unacknowledged number of Chinese troops suffered casualties. This was the first such instance along the LAC in 45 years and automatically led to near-complete halt of approvals under PN3, along with many other Indian restrictions on overall bilateral relations. Chinese FDI was simply not welcome in an India shocked by repeated border incursions and Covid sufferings.

Murmurs regarding the relaxation of PN3 commenced shortly after Covid restrictions began to be scaled down. Indian industry cited the need for Chinese inputs, funds and technicians for its growth. Analysts made the case for attracting FDI from China as it is one of the world’s top three outward investing countries and could contribute to India’s goals of raising manufacturing value, technology acquisition and supply chain integration. Yet the government remained adamant on close scrutiny of Chinese FDI proposals.

This stance appeared to shift somewhat when the Economic Survey 2023-24 of July 2024 questioned India’s rationale of permitting rising imports from China while restricting FDI. “India faces two choices to benefit from China plus one strategy: it can integrate into China’s supply chain or promote FDI from China. Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past,” said the Survey.

In March 2026, the government announced relaxation of PN3 and introduced Press Note 2 of 2026. PN2 clarifies that foreign investors with non-controlling beneficial ownership — with a ceiling of 10% holding from land-bordering countries — can invest under the automatic route. Two, investment proposals for specific manufacturing sectors such as electronic capital goods, polysilicon and ingot-wafers would be considered within 60 days. PN2 marks a beginning towards attracting investments from Chinese (or other land-bordering country) investor entities under the automatic route, adding to ease of doing business.

At the same time, careful scrutiny of Chinese investments continues to be warranted. China’s total overseas direct investment was around $175 billion in 2025. However, its cumulative investments in India between April 2000 and December 2025 stood at just $ 2.5 billion, as per official data. This reflects its lack of interest in India as an investment destination, particularly since India has stayed away from its Belt and Road Initiative.

Further, there is little evidence that China would help build India’s footprint in global supply chains. In fact, China has taken steps that hinder India’s manufacturing growth such as curbs on export of critical minerals and rare earths over 2023-2025, informal delays in exports of electronics and solar manufacturing equipment, pressure on companies to avoid sending personnel to India, and so on.

The experience of rising Chinese FDI in ASEAN countries also reveals weak linkage on the trade balance dimension. Higher Chinese capital inflows contributed to a larger trade deficit and did not support enhanced productivity or technology transfers in ASEAN nations. India’s huge trade deficit with China of $ 116 billion in 2025 may further suffer if enhanced Chinese FDI leads to Chinese overcapacity being offloaded into the Indian manufacturing sector.

China is expected continue to dominate global manufacturing value addition with its share rising from 27% to 40% in the next few years, and given its excess manufacturing capacity, its exports would continue to grow, displacing India’s manufacturing and jobs.

India’s previous experience with Chinese companies operating in India has had its share of issues as well. The presence of Chinese shell companies, possible financial crimes, GST evasion, cyber fraud schemes, and other fraudulent activities in pre-Covid times call for vigilance in permitting Chinese investments. Such investments in startups and technology companies also bear the risk of Indian data transfer to China as well as control of user access.

The cautious approach outlined in PN2 is likely to benefit India in two key ways: first, by encouraging overseas investors with minor Chinese stakes to invest in India; and second, by accelerating foreign investments into Indian companies in strategically important sectors. However, it would be naïve to expect the new policy to attract significant Chinese FDI into Indian manufacturing, catalyse technology transfers from China, or help integrate India into China-led global supply chains. Given the persistent geopolitical tensions in India-China relations, a prudent and calibrated approach to permitting Chinese FDI remains the right strategy for India.