To match China’s economy, India must accept its investment

Although President Xi Jinping and Indian Prime Minister Narendra Modi shared a brief exchange last week at the Shanghai Cooperation Organisation summit in Bishkek, Kyrgyzstan, the real action will unfold later this week at the Brics summit when Xi arrives in New Delhi with an expected delegation of 400 officials.

China is one of India’s top trading partners, yet it remains unclear whether Chinese companies are welcome as investors in India. The two countries’ trade and investment relationship has diverged starkly. Between 2016 and 2025-26, bilateral trade between China and India more than doubled from US$71.5 billion to US$151.1 billion. However, China’s investments in India have fallen from a height of US$705 million in 2015 to a mere trickle of US$6.5 million last year.

The two trends are related. Fuelled by its growing economy, India buys more from China, particularly capital goods. These expanding imports are driven by a lack of domestic alternatives which could have been established by Chinese investments. Restricting Chinese investments has only exacerbated the growing trade deficit with China.

The pathway towards greater economic sovereignty for India lies not with restricting but expanding foreign direct investment from China. After all, FDI is how China became the manufacturing powerhouse it is today.

The subdued level of Chinese FDI into India is a result of India’s choices. In the wake of their border dispute, India curtailed the level of investment from China, a chill that has only recently begun to thaw. However, even lifting all of India’s investment restrictions will not suddenly turn the country into an attractive destination for manufacturing. While software and services are the dominant targets for FDI into India, the pharmaceuticals sector – one of India’s most competitive exports – receives only about 4 per cent of inbound investment.

Potential investment in India’s manufacturing sector is hampered by a range of structural shortcomings, from regulations to infrastructure. China offers useful lessons.