India’s Easing of Border FDI Curbs May Only Gradually Deepen Manufacturing

India’s decision to ease foreign direct investment restrictions for countries sharing land borders with it could reopen the door to cross-border investment, but the extent to which it leads to meaningful manufacturing expansion will depend on broader improvements in India’s competitiveness, according to trade policy expert Ajay Srivastava.

The government, on March 10, revised its foreign direct investment policy to allow non-controlling investments of up to 10% beneficial ownership from investors in neighbouring countries through the automatic route. The change modifies the framework introduced through Press Note 3 in April 2020, which had required prior government approval for all investments from countries sharing a land border with India.

Under the revised rules, investors from China, among other neighbouring countries, will be allowed to make limited investments without prior approval, subject to sectoral caps and disclosure requirements. Larger investments or those involving sensitive sectors will continue to require government scrutiny.

The policy also envisages a time-bound approval process of around 60 days for FDI in selected strategic manufacturing sectors such as electronic components, capital goods and solar manufacturing.

Srivastava, founder of the Global Trade Research Initiative(GTRI), said the policy shift should be viewed as an opening rather than a guarantee of large-scale manufacturing relocation into India.

In several global markets, Chinese companies have tended to retain high-value manufacturing at home while exporting intermediate components to other countries where final assembly takes place before products are sold locally or exported.

A similar pattern could initially emerge in India, where overseas firms may use the country primarily as an assembly base rather than shifting deeper parts of the manufacturing value chain.

Available data suggest that Chinese investment in India’s core manufacturing sector had remained modest even before the Press Note 3 restrictions were introduced in April 2020, indicating that the policy change alone may not immediately transform the structure of foreign investment.

In that sense, Srivastava argues, the relaxation should be seen as creating an opportunity rather than delivering an immediate surge in manufacturing investment.

For that opportunity to translate into deeper industrial activity, India will need to improve the economics of manufacturing. Lower logistics costs, more affordable and reliable power supply, simpler regulatory processes and stronger domestic supply chains will be critical to attracting technology-intensive production.

Without such improvements, the risk remains that India attracts only limited assembly operations while higher-value manufacturing continues to remain concentrated elsewhere in global supply chains.

The policy easing, therefore, marks a cautious recalibration of India’s post-2020 investment stance, but its long-term impact on manufacturing will depend less on the policy change itself and more on whether India can make production within its borders more globally competitive.