India's decision to ease foreign direct investment (FDI) restrictions for neighboring countries marks a calibrated shift in policy that could reshape its electronics and semiconductor supply chains, even as geopolitical sensitivities remain intact.
The move, which relaxes aspects of the 2020 Press Note 3 (PN3) framework, is being interpreted by analysts as less of a policy reversal and more of a strategic recalibration, particularly in how India engages with China in critical technology sectors.
According to Dr. Danish Faruqui, CEO of Fab Economics, a US-based Semiconductor Greenfield Fab/ATP projects consultancy, the policy reflects a broader balancing act across competing global supply chain alignments.
"We rate PN3 focused on recalibration with China as a master stroke immediately after signing PAX Silica with US and allies, a strategic balancing act across the Western and Eastern semiconductor and electronics ecosystem," said Faruqui, who also co-chairs the Global Semiconductor Policy Council (GSPC), a think tank focused on the geopolitics and geoeconomics of semiconductors across global regions.
Unlocking minority Chinese capital and technology
At the core of the policy shift is a structural change allowing global entities with limited exposure to neighbouring countries, primarily China, to invest through the automatic route.
"PN3 enactment is a significant recalibration in India's economic engagement with China, which enables Global entities with up to 10% non-controlling beneficial ownership from land-bordering countries (primarily China) to now invest through the automatic route, provided they adhere to sectoral caps," Faruqui said.
India is also steering such investments toward technology collaboration rather than ownership control.
"In addition, to solve two problems with one policy, i.e., Capex and MGT, India has pegged fast-track approval of FDI for technology collaborations and joint venture (JV) structures, rather than for the acquisition of control by foreign entities," Faruqui said.
This reflects a clear policy priority around access to manufacturing know-how.
"'Manufacturing Grade Technology (MGT)' is the highest peak to conquer by Indian conglomerates with the vision to establish semiconductor components and an ancillary ecosystem in India," Faruqui said.
Addressing a US$100 billion vulnerability
The urgency behind the policy is underscored by India's continued dependence on Chinese imports across electronics and semiconductor inputs.
"Per Fab Economics and GSPC, India's trade deficit with China hit a record US$100 billion in fiscal year 2025, within which the electronics and semiconductor components represent the lion's share and pose a significant vulnerability for India," Faruqui said.
The PN3 relaxation is explicitly aligned with bridging this gap by enabling domestic production of key upstream components.
"PN3 relaxation can certainly help leapfrog India in the below-mentioned critical sub-components that support the semiconductor and electronics ecosystem developing in the country," Faruqui said.
He pointed to areas such as active and passive components, electronic capital goods, and high-density interconnect PCBs as priority segments.
The scope also extends into upstream materials and adjacent supply chains, including polysilicon, ingot and wafer production, rare earth processing, and advanced battery components.
Restarting stalled capital flows into chip startups
Beyond manufacturing, the policy shift could have significant implications for capital flows into India's semiconductor design ecosystem.
"Previously, even a single share held by a Chinese Limited Partner (LP) could force a fund into a month-long government approval process, causing many to avoid Indian deals," Faruqui said.
With the new framework, a significant pool of capital could be unlocked.
"Per Fab Economics and GSPC estimates, the PN3 move could revive previously stalled capital in the range of US$15–20 billion that was previously 'stalled' or in regulatory limbo," Faruqui said.
This comes as India continues to expand its Design Linked Incentive scheme and support semiconductor startups in areas such as AI, edge computing, and RISC-V architectures.
Reinforcing China-plus-one strategy
A key question for global supply chain players is whether easing restrictions on Chinese-linked investments weakens India's positioning as a China-plus-one manufacturing destination.
Faruqui argues that the policy strengthens it.
"Rather than undermining its alternative-to-China status, PN3 actually strengthens it by building local depth in the semiconductor and electronics segment," Faruqui said.
By enabling Chinese firms to localize component manufacturing in India, the policy could help the country move beyond assembly into deeper value chain participation.
"Joint ventures (JVs) with Chinese technical partners, like the Dixon Technologies-Longcheer JV, provide Indian firms with the manufacturing 'know-how' that China has perfected over decades," Faruqui said.
Strategic safeguards remain
India is also maintaining clear boundaries to manage geopolitical risks and reassure Western partners, "for maintaining strategic positions with Western partners (US/EU) who are 'de-risking' from China, India has kept strict boundaries," Faruqui said.
The policy favors Chinese participation in supply chain roles rather than consumer-facing dominance.
"PN3 explicitly favors Chinese supply chain companies (contract manufacturers) over Chinese consumer brands to prevent them from dominating the local market," Faruqui said.
Calibrated opening for semiconductor ambitions
For semiconductor industry stakeholders, the policy signals a pragmatic shift. India is selectively opening access to Chinese-linked capital and technology where it supports domestic manufacturing goals, while retaining guardrails on control and market dominance.
For global semiconductor firms and electronics manufacturers, the easing of FDI norms could improve visibility on partnerships, joint ventures, and supply chain investments in India, particularly in upstream components and manufacturing technologies that remain critical gaps in the country's semiconductor ambitions.
Article edited by Jack Wu
