Opinion | Why economic ties are the missing ingredient for China-India detente

Indian think tank NITI Aayog recently made a striking recommendation to ease the near-total restrictions on Chinese investment imposed during the 2020 border crisis. It suggested that Chinese companies be allowed to acquire up to a 24 per cent stake in Indian firms without any vetting. If implemented, it would represent a significant U-turn on New Delhi’s part.

Since 2020, India has required screening for all investments from neighbouring countries, effectively targeting China. With the backing of the trade ministry’s industries department, the proposal is being studied by various ministries and the prime minister’s office, signalling improved ties between the two Asian giants. The proposal reflects the growing realisation that restrictions may be harming India’s economic interests more than protecting them.

The rethink is driven by a decline in foreign direct investment (FDI). Major deals, including a US$1 billion plan by China’s electric vehicle (EV) maker BYD, have been derailed by security rules.

Net FDI into India plunged to just US$353 million last year, from US$43.9 billion during the financial year ending in March 2021. Although global investment has slowed since the Ukraine war, India sees barriers to Chinese capital as a key factor in this collapse. By proposing a partial rollback, India aims to restore investor confidence without fully abandoning its caution towards China.

India’s most immediate goal should be addressing its investment slump. Chinese FDI has long been underwhelming, even before the Galwan Valley clash. It also suffered after the People’s Bank of China acquired a stake in the Housing Development Finance Corporation, India’s largest mortgage lender. The move triggered concerns over opportunistic takeovers, prompting tighter investment rules.