India Eases Curbs on FDI from Neighbouring Countries, Balancing Security With Manufacturing Push

The Union Cabinet’s decision on Tuesday to relax foreign direct investment restrictions for countries sharing land borders with India marks a calibrated shift in policy, seeking to balance national security concerns with the need to accelerate manufacturing investment and technology inflows.

The changes modify the framework introduced in 2020, which required prior government approval for any investment from entities based in countries sharing land borders with India. The rule was brought in during the early months of the pandemic amid concerns about opportunistic takeovers of Indian companies, particularly by Chinese investors. The measure effectively tightened scrutiny of investments from China, as well as Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan.

Nearly six years later, the government has amended the framework to improve ease of doing business while retaining oversight. Under the revised regime, proposals from these countries in select manufacturing-linked sectors--such as electronic components, electronic capital goods, capital goods manufacturing, polysilicon and ingot wafers--will be processed within a defined timeline of 60 days.

The focus on electronics and capital goods reflects India’s broader industrial strategy. These sectors are central to the government’s ambition to deepen domestic manufacturing capabilities, reduce import dependence and integrate more strongly into global supply chains. Faster approvals could help attract investment into upstream electronics components and semiconductor-related inputs, areas where India still relies heavily on imports.

The amended policy also introduces a key structural change by aligning the definition of beneficial ownership in FDI rules with that under the Prevention of Money Laundering Act.

The government clarified that the beneficial ownership test will be applied only at the level of the investor entity. Additionally, investments in which entities from land-bordering countries hold less than 10% beneficial ownership will now qualify for the automatic route, subject to sectoral caps.

These changes could significantly reduce procedural uncertainty for investors, particularly in complex global investment structures where minority stakes from Chinese or other neighbouring-country investors often triggered approval requirements.

Despite China’s economic scale, its share in India’s cumulative FDI equity inflows remains extremely small. From April 2000 to December 2025, China accounted for only about 0.3% of total inflows, placing it around the 23rd position among investor countries. Yet economic linkages between the two nations remain substantial through trade.

China is India’s second-largest trading partner. In the current fiscal year up to January, exports to China have rebounded strongly, though the trade imbalance remains large.

Against this backdrop, the government appear to be shifting toward a strategy that allows controlled investment flows while maintaining safeguards against strategic vulnerabilities. The requirement that Indian residents hold majority ownership in companies seeking expedited approval ensures that management control remains domestic.

The government has also retained flexibility to modify the list of sectors eligible for faster approvals, suggesting that the policy will evolve in line with industrial priorities and geopolitical considerations.