India is cautiously recalibrating its economic relationship with China, easing restrictions on trade and investment while balancing supply chain needs with strategic concerns, according to government documents and multiple media reports.
New Delhi has recently allowed select state-run firms to procure critical equipment from China, marking a shift from tighter controls imposed after the 2020 border clashes. At the same time, the government has relaxed parts of its foreign direct investment (FDI) framework to permit limited Chinese participation in key sectors, signaling a broader, calibrated reset in economic ties.
According to a Reuters report, state-owned companies, including Bharat Heavy Electricals and Steel Authority of India, have been authorized to source certain critical equipment from China. The move aims to address shortages and project delays in sectors such as power and steel, where domestic capacity has struggled to keep pace with demand.
The updated rules also exempt some Chinese bidders from prior political and security clearance requirements for state contracts, a notable departure from earlier restrictions. A government source cited by Reuters said similar flexibility has been extended to coal-related equipment procurement.
Trade deficit deepens the case for policy adjustment
The easing measures come as India's trade deficit with China continues to widen, highlighting a structural dependence on Chinese manufacturing. Data cited by Nikkei Asia shows India's deficit exceeded US$100 billion for the first time in the fiscal year ending March 2026, reaching about US$102 billion between April and February.
Imports from China totaled nearly US$120 billion during the period, far outpacing exports of around US$17.5 billion. Ajay Srivastava of the Global Trade Research Initiative told Nikkei Asia that the imbalance reflects India's reliance on Chinese inputs such as electronic components, machinery, and pharmaceutical intermediates, which are "not easily substituted at scale."
China has also remained India's largest trading partner, with bilateral trade reaching US$137 billion in the same period, according to statements from Chinese officials cited by EV Bharat.
Analysts say this dependence has practical policy implications. "Perhaps, we might allow the Chinese to produce within [our] economy rather than us importing from there," said N. R. Bhanumurthy of the Madras School of Economics, pointing to the rationale behind easing investment rules.
FDI opens a narrow door for Chinese capital
Alongside trade adjustments, in March, India modified its FDI policy to allow non-controlling investments of up to 10% from neighboring countries, including China, through an automatic approval route in certain sectors. The changes also introduce a fast-track approval process — within 60 days — for investments in areas such as electronic components, capital goods, and renewable energy materials.
According to Forbes, the reforms are designed to attract capital and technology while maintaining domestic control, requiring majority ownership to remain with Indian entities. The move partially reverses the strict screening rules introduced under Press Note 3 in 2020, which had sharply reduced Chinese investment inflows.
Chinese FDI had fallen to just US$67 million between 2021 and 2024, compared with US$2.4 billion in the two decades prior, underscoring the impact of earlier restrictions. Industry groups say the new policy could help revive funding for sectors including technology startups, manufacturing, and energy.
Rajat Tandon, president of the Indian Venture and Alternate Capital Association, said the changes would support capital flows and investor confidence, while Deloitte India's Neha Aggarwal noted that a "risk-calibrated and sector-specific approach" could help India integrate more deeply into global supply chains.
Pragmatism over principle: the limits of strategic caution
Despite the easing, Indian policymakers continue to emphasize safeguards. Government approval remains mandatory for larger or controlling investments, and screening mechanisms are still in place for sensitive sectors.
The policy shift reflects a broader challenge: reconciling economic realities with geopolitical tensions. While India has sought to diversify supply chains and reduce reliance on China, the scale and efficiency of Chinese manufacturing continue to make it a critical partner.
Analysts say the latest measures are less a full policy reversal than a pragmatic adjustment. As global trade realigns and domestic manufacturing ambitions grow, India appears to be positioning itself as both a competitor to and collaborator with China — seeking to attract investment and technology without ceding strategic control.
Article edited by Jerry Chen
