China FDI, The Door Opens, But the Great Wall Stays – India’s Muddled Thinking on Economics and Security
The Indian government has finally taken a step, however small, towards rationalizing its policy on foreign direct investment from China. Press Note 3, the executive order issued in April 2020 that effectively blocked all investment from India’s neighbours (a euphemism aimed squarely at China), has been liberalized. The new rules mandate a 60-day timeline for clearing investment proposals in certain critical sectors and allow companies with less than 10% Chinese investment to enter through the automatic route. On the surface, this seems like a welcome recognition of the economic folly of shutting out the world’s greatest pool of savings and a leader in several cutting-edge technologies. But a closer look reveals that the liberalization is half-hearted, hedged with strong constraints that will keep Chinese FDI at a trickle. It exposes a fundamental and persistent muddled thinking in New Delhi, where economic logic is held hostage to a poorly defined and inconsistently applied concept of national security.
Let us be clear about what India is excluding. China today possesses the greatest pool of savings in the world, capital that is desperately needed for India’s infrastructure and industrial development. It also possesses the best technology in several areas that are critical to India’s own economic and environmental goals, including solar energy, wind energy, electric vehicles, and batteries. To keep out investment from such an important source, as India has done for the past six years, is, in the words of economist Swaminathan S. Anklesaria Aiyar, an “economic self-goal.” It is a policy of cutting off one’s nose to spite one’s face.
The origins of this policy lie in the panic and political opportunism of 2020. Press Note 3 was issued in April of that year, supposedly to prevent India’s neighbours from taking over Indian companies during the Covid-induced economic turmoil. No such takeover was ever attempted or even credibly threatened. Then, in June, came the Galwan Valley clash, a brutal and tragic military confrontation that killed several Indian soldiers. An enraged Indian public and a hyper-nationalist political class demanded measures to punish China. Two hundred Chinese apps, including the hugely popular TikTok, were banned. Press Note 3, which had been a dormant weapon, was now wielded as a cudgel to stop any and all Chinese investment. Every proposal, no matter how benign or economically beneficial, was tagged as a “security threat.”
This blanket approach never made strategic sense. When faced with the challenge of balancing economic engagement with a strategic rival, the Biden administration in the United States opted for a policy of “high fence, small yard.” This means identifying a limited set of areas with legitimate security concerns—such as critical infrastructure, advanced semiconductors, and military technology—and protecting them with high fences. But all other areas are kept free of constraints, recognizing that trade and investment with China yield great mutual benefits. India, tragically, chose the opposite approach. Press Note 3 became, in effect, “high fence, every yard.” Every sector, from automobiles to solar panels, was treated as if it were a national security risk.
The consequences were predictable and damaging. Great Wall Motor (GWM), a major Chinese auto firm, made a billion-dollar investment proposal that would have created thousands of jobs and boosted India’s manufacturing sector. In any other country, it would have been welcomed with open arms. In India, it was nixed. The same fate befell BYD, the world’s biggest electric vehicle producer and the second-biggest battery producer. Its proposal for a billion-dollar investment in electric autos and batteries, a sector India desperately needs to develop, was also killed. India, in its zeal to punish China, was punishing itself.
Even the government’s own economic advisors recognized the absurdity of this position. Two years ago, Chief Economic Advisor V. Anantha Nageswaran pointed out the obvious: India runs a huge trade deficit with China, partly due to Chinese manufacturing overcapacity. Instead of simply buying finished products from China, he argued, India should encourage Chinese firms to set up factories in India, to produce here, create jobs here, and transfer technology here. The liberalized Press Note 3 is, on the surface, a response to that logic.
But the liberalization is deeply flawed. The most significant constraint is that all Chinese investment will have to be routed through joint ventures in which Indians have the controlling interest and the Chinese hold a minority stake. Ask any Indian company if they would be willing to invest abroad on such terms—where they are forced to cede control to a local partner—and their replies would be unprintable. There is no reason to expect the Chinese to think any differently. No major multinational corporation, Chinese or otherwise, wants to pour billions of dollars into a project where they are a junior partner, unable to make key decisions or protect their proprietary technology. The result of this constraint is that very limited investment will actually materialize.
Some foreign policy experts will applaud this outcome. They see any Chinese investment, in any sector, as a fundamental security threat. This is a view that collapses under the slightest scrutiny. Look at the booming economies of Southeast Asia—Vietnam, Indonesia, Thailand—and Latin America. Chinese investment is welcomed there because it brings capital, technology, and, crucially, integration into global value chains. These countries, many of which have their own territorial disputes with China, have not allowed their security concerns to completely override the obvious economic benefits of Chinese trade and investment. They are part of the Regional Comprehensive Economic Partnership (RCEP), a free-trade pact dominated by China. Japan and Korea, two of China’s historical foes, are also in RCEP. Is India the only wise country in the world, and all these others a collection of fools? The question answers itself.
There is also a profound irony in the security argument. If India is genuinely worried about future border clashes with China, having a hundred major Chinese companies operating within its borders would be a strategic asset, not a liability. When the Galwan clash occurred, India banned 200 Chinese apps, but their economic significance was trivial. It was a symbolic gesture with no real cost to China. If, instead, a hundred of China’s most celebrated and profitable companies were operating in India, with billions of dollars in assets at risk, India would have far more potent leverage. It could threaten to freeze assets, impose punitive taxes, or restrict repatriation of profits. Having virtually no Chinese investment means having virtually no economic leverage. Far from being a security threat, a hundred Chinese investments would significantly improve India’s security by creating a web of interdependence that both sides would be loath to sever.
In sum, the liberalization of Press Note 3 is a small, timid, and inadequate step forward. It is a recognition that the previous policy was economically insane, but it is hedged with so many conditions that it will produce few tangible results. India must do better. It should clearly identify a small set of genuinely security-sensitive areas, such as telecommunications, defence, and sensitive data infrastructure, and prohibit Chinese (and all other foreign) entry there. But in the vast majority of non-security-related sectors, Chinese investment should be treated exactly like investment from the US, Europe, or Japan. It should be welcomed, encouraged, and facilitated. It is a dreadful indictment of India’s policy paralysis that Chinese firms can today more easily enter the United States, a country engaged in a high-tech cold war with Beijing, than they can enter India. This must change.
Questions and Answers
Q1: What was Press Note 3, and how did it affect Chinese investment in India?
A1: Press Note 3 was an executive order issued in April 2020 that effectively blocked investment from India’s neighbours, with the practical effect of targeting China. It was used to stop all Chinese investment proposals by subjecting them to endless, non-transparent security scrutiny, regardless of the sector. Major investments like those from Great Wall Motor and BYD were nixed.
Q2: What is the “high fence, small yard” policy, and how does it contrast with India’s approach?
A2: The “high fence, small yard” policy, adopted by the US, means identifying a limited set of legitimate security concerns and protecting them with high barriers (the fence), while leaving all other areas open for mutual economic benefit (the small yard). India’s approach under Press Note 3 became “high fence, every yard,” treating all sectors as security threats and blocking all Chinese investment, regardless of its economic merit.
Q3: What are the main constraints that remain in the liberalized Press Note 3, and why are they a problem?
A3: The main constraint is that all Chinese investment must be through joint ventures where Indians hold a controlling interest and the Chinese have a minority stake. The article argues this is a fatal flaw, as no major multinational would accept being a junior partner with no control. This will keep Chinese FDI at a “trickle” and prevent the benefits of capital and technology from flowing in.
Q4: How does the article argue that Chinese investment can actually improve India’s security?
A4: The article argues that if a hundred major Chinese companies operated in India, with billions in assets, India would gain significant economic leverage. In the event of a future border clash, India could threaten to freeze assets or impose other penalties, giving it a powerful, calibrated response. Having no Chinese investment means having no such leverage, making symbolic bans (like on apps) the only option.
Q5: What is the “dreadful indictment” the article makes about India’s current policy compared to the US?
A5: The article states that it is a “dreadful indictment” of India’s policy paralysis that Chinese firms can today more easily enter the United States—a country engaged in a high-tech cold war with China—than they can enter India. This highlights how India’s blanket restrictions are more extreme than those of its chief strategic rival’s primary adversary.
