Centre Relaxes FDI Norms, Simplifies Investment Rules For Neighbouring Nations, Including China

The Cabinet Committee on Economic Affairs, led by PM Modi, eased parts of India's FDI policy for neighbouring countries on Tuesday, according to sources. The change affected investors from nations sharing land borders with India, including China, and marked a shift from stricter rules introduced during the COVID-19 period.

The earlier FDI policy tightening started with Press Note 3 of 2020, which sought to prevent opportunistic takeovers of Indian firms during the pandemic. That note was operationalised through the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020, issued on 22 April 2020, and covered all countries adjoining India by land.

FDI policy changes and rules for border-sharing countries

A notification dated 23 March 2022 later clarified that any entity from a country sharing a land border with India, or any investment where the beneficial owner was based in such a country or held that citizenship, could invest only using the government approval route. This applied across sectors and required mandatory screening by Indian authorities.

Under that framework, foreign companies with shareholders from China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, or Afghanistan needed prior government permission before putting money into any Indian venture. Those conditions still defined the FDI policy approach for these nations, even though China's contribution to India's total FDI equity inflows remained relatively small.

FDI policy backdrop and China's investment share

From April 2000 to December 2021, China ranked 20th among India's FDI equity sources. The share stood at just 0.43 per cent, amounting to US$ 2.45 billion during that period. Despite strict FDI policy rules for land-border countries, India's investment exposure to China stayed limited in absolute terms.

The political and security context also shaped the FDI policy stance. Relations between India and China deteriorated after the Galwan Valley clash in June 2020, the most serious military confrontation in decades. Afterwards, New Delhi banned more than 200 Chinese mobile applications, including TikTok, WeChat and Alibaba's UC Browser, alongside the tighter screening of investments.

While Chinese FDI inflows stayed modest, bilateral trade between the two countries expanded sharply. China became India's second-largest trading partner. However, the trade balance was heavily skewed towards China, and the gap widened further over recent financial years despite policy concerns and security tensions.

The trade figures showed both rising imports and changing export trends. In 2024-25, India's exports to China fell 14.5 per cent to $14.25 billion, from $16.66 billion in 2023-24. Imports increased 11.52 per cent in 2024-25 to $113.45 billion, compared with $101.73 billion in 2023-24, pushing up the annual deficit.

During April-January 2025-26, exports from India to China grew 38.37 per cent to $15.88 billion, while imports rose 13.82 per cent to $108.18 billion. The trade deficit for that ten-month period stood at $92.3 billion, after touching $99.2 billion in FY24, higher than $85 billion in the previous financial year.

Alongside the FDI policy relaxation for border-sharing countries, the Cabinet cleared legal changes aimed at economic processes. It approved amendments to the IBC Bill 2025, based on recommendations of a Select Committee, with the objective of ensuring smoother insolvency procedures. The Cabinet also passed the Corporate Laws Amendment Bill, continuing broader reforms in India's corporate and financial framework.