India's Indigenisation Dilemma: Chinese Imports or Investments?
When the Make in India initiative was launched in 2014, it promised to transform India into a global manufacturing hub. More than a decade later, the reality is sobering. Manufacturing's share of India's GDP has fallen below 14% in 2025, lower than at the initiative’s inception. Far from reducing reliance on China, India's dependence has merely shifted – from downstream finished goods to upstream industrial inputs. This paradox highlights the structural dilemma facing India's indigenisation project: whether to continue relying on Chinese imports or allow Chinese investments into the country.
China remains India's largest trading partner, with bilateral trade crossing US $113.5 billion in 2024-25. Imports from China are concentrated in critical sectors: electronics, machinery, chemicals and increasingly, components for electric vehicles and telecommunications.
Over 60% of global electronics manufacturing is based in China, making collaboration with Chinese firms almost unavoidable if India is to scale its domestic electronics ecosystem. The growing demand for Chinese technology and intermediate goods reflects the depth of economic ties, even as India seeks to diversify supply chains.
While trade has grown robustly, Chinese investment in India has plummeted. From a peak of US $705 million in 2015, inflows fell below US $100 million in 2023. According to Statista, Foreign Direct Investment (FDI) from China dropped from US $534.6 million in 2019 to US $279.4 million in 2021, reflecting the impact of India's revised FDI policy.
The Indian government's Press Note 3 (PN3), issued in April 2020 amid border tensions and the COVID-19 pandemic, requires government approval for FDI from countries sharing land borders with India. Designed to prevent "opportunistic takeovers", the measure has had unintended consequences: net FDI in India fell to a record low of US $353 million in 2024-25, compared to US $43.9 billion in 2020-21.
Deals such as BYD's US $1 billion electric car venture were shelved, depriving India of capital and technology at a time when private investment has been weak.
Talks between India and China during the 2020 tensions. Photo: Ministry of Defence, GODL-India, via Wikimedia Commons.
The collapse of Chinese FDI has coincided with sluggish private capital expenditure, leaving government spending to drive most of India's investment. As economist Sajjid Chinoy has argued, the current policy is "counterproductive". Rather than allowing Chinese imports to flood the market, he suggests India should encourage Chinese investment to create jobs and embed value addition domestically. His view reflects a growing consensus among policymakers and industry leaders: indigenisation cannot be achieved by imports alone; investment must also play a role.
Recent diplomatic overtures have begun to stabilise bilateral expectations. In October 2024, the 31st round of border affairs consultations led to partial troop withdrawals and initiatives to revive cross-border trade. External Affairs Minister S. Jaishankar's visit to Beijing in July 2025, followed by Prime Minister Narendra Modi's participation in the Shanghai Cooperation Organisation Summit, signalled cautious normalisation.
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China agreed to facilitate supplies of rare earth magnets and fertilisers, while India relaxed visa restrictions for Chinese tourists. These developments suggest a willingness on both sides to reset ties, even as politically sensitive issues remain unresolved.
Policy institutions have also begun to rethink restrictions. The Economic Survey of 2023-24 proposed a more liberal treatment of Chinese investments. Subsequently, the NITI Aayog suggested allowing up to 24% equity participation without additional clearances. Reports about draft Cabinet notes indicate possible exemptions up to 49% in electronics and capital goods, aligning beneficial ownership definitions with the Prevention of Money Laundering Act.
Earlier this year, the government announced that Chinese companies would be eligible for Production-Linked Incentives (PLI) when forming a joint venture with an Indian company. These proposals reflect a pragmatic recognition: India's industrial ambitions require foreign capital and technology, and Chinese firms remain indispensable players.
India's indigenisation project faces a strategic dilemma. Reliance solely on imports entrenches dependence on Chinese upstream goods, leaving domestic industries vulnerable to supply shocks and geopolitical tensions. Allowing Chinese investments, by contrast, could localise production, create jobs and embed technology within India's borders, even if it does not immediately eliminate import dependency.
Investments in electronics, renewable energy and capital goods could strengthen domestic capacities, while safeguards in defense and strategic sectors could mitigate risks.
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Recently, licenses were granted to three Indian firms – Jay Ushin, Continental Automotive, and Hitachi India – to import rare earth magnets, selected from among more than two dozen applicants. The approval, pragmatic and welcome, underscores a critical reality: without access to Chinese inputs, India's automotive and electronics industries cannot operate at scale.
To realise the indigenisation dream, India must decisively tilt away from imports that sustain consumption toward investment that builds capacity. Liberalising Chinese FDI in selected sectors could catalyse domestic growth, while continued reliance on imports alone risks perpetuating external dependence and undermining indigenisation. The widely discussed "China+1" strategy promotes supply chain diversification but not full disengagement from China. Even as countries like Vietnam, Taiwan and South Korea gain from United States trade diversion, Chinese FDI into their economies has increased.
Last month, the Ministry of Commerce convened a high-level meeting with industry representatives and key stakeholders to recalibrate India's investment regime, with particular emphasis on reviewing PN3. Senior officials from the Reserve Bank of India, the Securities and Exchange Board of India and other financial-sector regulators participated, focusing on streamlining approvals, expediting regulatory clearances and reducing frictions faced by foreign investors.
The deliberations underscore a strategic choice between continued reliance on Chinese imports, which perpetuates dependence, or permitting controlled Chinese investments that embed value creation within the domestic economy. Outright exclusion of Chinese capital is economically unsustainable, given the realities of global supply chains in sectors such as electronics and rare earths.
A calibrated engagement, inviting import-substituting investments while balancing national security concerns, offers the most pragmatic path to advancing India's long-term industrial interests.
Vaishali Basu Sharma is a strategic and economic affairs analyst.
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