India seeks trade balance amidst economic pressure

The Indian government officially announced in March the revision of foreign direct investment (FDI) rules, relaxing restrictions on Chinese investment in fields such as electronic components and solar cells, while allowing Chinese investors with a shareholding ratio of no more than 10% to complete their investments through an automatic approval process. This is the first time since 2020 that India has systematically relaxed its investment restrictions on China, reflecting India's balanced and pragmatic trade orientation in the current international situation and trade pattern.

In recent years, although India's economic growth rate still ranks among the top in the world, it has slowed down. In the fiscal year 2024-2025 (April 2024 to March 2025), India's economic growth rate is 6.5%, the lowest in four years. Currently, structural contradictions in the Indian economy are becoming increasingly prominent, and capital shortages have become the core bottleneck restricting India's industrialization. According to data released by the Reserve Bank of India (RBI) in February, India's current account deficit as a percentage of gross domestic product (GDP) will rise to 2.1% in 2025, with the rupee depreciating by over 4.8% against the US dollar. The total amount of foreign direct inflows for the year will decrease by 12.7% year-on-year, and the investment gap in the manufacturing sector will reach nearly $20 billion.

In addition to its own economic contradictions, the increasingly severe situation in the surrounding areas is also an important external factor that puts pressure on India's economy. Recently, the ongoing US Israel Iran conflict has hindered shipping in the Strait of Hormuz and severely impacted the global energy supply chain. In this situation, multiple industries in India are facing a natural gas supply crisis, prompting the Indian government to implement emergency measures to prioritize the protection of key industries and daily household gas consumption, further increasing the pressure on economic development. Industry insiders have pointed out that the relaxation of restrictions on Chinese investment this time is mainly a policy adjustment made by India to alleviate capital shortages and make up for the shortcomings in the industrial chain. The Indian government hopes to boost the current economy and seize global trade advantages in the increasingly complex international situation. Taking the solar energy industry as an example, India has previously imposed comprehensive restrictions on Chinese investment. Local production capacity in India's solar cell sector can only meet 30% of domestic demand, and upstream component costs in the electronics manufacturing industry have risen by more than 15% due to investment restrictions, directly pushing up the prices of India's exported goods and weakening its global competitiveness. In fact, after 2020, investment exchanges between China and India have been sluggish for a long time, and investment exchanges have become a weakness in China India economic and trade relations. It can be said that relaxing restrictions on Chinese investment is imperative for India's economic development in the new fiscal year.

Focusing on the specific items of India's relaxation of investment restrictions this time, it is not difficult to see that India has expressed a "limited welcome" to Chinese investment. On the one hand, India has opened up investment areas that urgently require capital replenishment, and has made it clear that as long as Indian residents maintain a majority stake, Chinese investment applications can be approved in a short period of time. Compliance investments with less than 10% shareholding can directly go through the automatic approval channel, simplifying the process and significantly reducing the institutional cost of Chinese investment entry; On the other hand, India still retains many cautious fallback clauses and has not relaxed much on security checks, Indian control, and other aspects, which is also for the consideration of domestic political sentiment in India.

India's relaxation of restrictions on Chinese investment is naturally beneficial for both China and India, but India's restrictions on Chinese investment still exist. Previously, India has also made multiple changes to its rules and initiated compliance reviews for Chinese enterprises, which still face policy change risks in their investments. It is worth noting that from a geopolitical perspective, this adjustment is actually a manifestation of India's implementation of the strategy of balancing major powers: on the one hand, it undertakes the transfer of production capacity from the United States and enjoys the dividends of US India cooperation, while on the other hand, it introduces Chinese capital and technology to stabilize its own supply chain and maximize its own economic interests. In recent times, although the atmosphere of the US India trade negotiations has significantly eased, the differences have not dissipated. The Indian government may still use the release of goodwill signals towards China as a bargaining chip to urge the United States to give more benefits, but this goodwill signal is not long-lasting and deserves vigilance.

Overall, this policy adjustment is a positive signal for the warming of economic and trade exchanges between China and India. In the future, India needs to properly respond to the short-term pressure brought by major power games and election politics, and implement its own economic policies with a more pragmatic attitude.