The government is considering a proposal to ease foreign direct investment norms for downstream investments to boost overseas fund inflows and create jobs, according to sources. As reported by Business Standard, the proposal is currently under inter-ministerial discussions and represents part of India's ongoing efforts to maintain its investor-friendly reputation. In a significant policy shift, India made its most revealing China policy adjustment in March 2026 by partially easing the Press Note 3 regime that had required government approval for investments from land-bordering countries. Notified as Press Note 2 (2026 series) and operational since May 1, 2026, the change allows investors with up to 10 per cent Chinese ownership to invest through the 'automatic route' within applicable sectoral caps, marking a shift towards calibrated risk management rather than complete reversal of post-2020 blanket restrictions.
India has implemented an investor-friendly policy with most sectors open to 100 per cent overseas investments under the automatic route, except for strategically important sectors. According to Business Standard, more than 90 per cent of FDI inflows are received under the automatic route, demonstrating the effectiveness of this streamlined approach. However, India's trade relationship with China presents significant challenges, with the trade deficit reaching a record US$112.2 billion in the 2025-26 financial year, as reported by The Hindu BusinessLine. Imports from China totaled US$131.6 billion while exports to China were just US$19.5 billion, making China India's largest trading partner. The imbalance is concentrated in upstream inputs such as electronic components, electric batteries, solar cells, machinery, pharmaceutical intermediates and specialty chemicals, creating strategic vulnerabilities for India's manufacturing sectors.
India's FDI performance presents a concerning picture, with FDI inflows as a share of GDP falling to less than 1 per cent, significantly below the 5.7 per cent average for ASEAN economies such as Vietnam and Malaysia, as reported by Business Standard. While India has attracted cumulative FDI inflows of USD 843 billion between 2014-15 and 2025-26, registering a 169 per cent increase over the preceding 12-year period, much of this investment flows into services rather than manufacturing, thereby limiting its impact on job creation. The country has largely missed out on the China+1 shift despite being a bigger economy, with European firms earning higher returns in India than in mature US and UK markets yet maintaining investment levels well below potential. India's Production Linked Incentive schemes, launched in 2020 and covering 14 sectors with an outlay of over US$24 billion, have sought to raise domestic capacity in product categories where Chinese inputs remain difficult to replace, but the relationship remains one-sided in important ways with India's production system depending more immediately on Chinese inputs than China depends on Indian demand.
A critical challenge facing India's FDI attraction is the termination of bilateral investment treaties (BITs) with 77 countries between 2016-2024, including 22 EU member states, which were replaced with the narrower 2015 Model BIT, according to Business Standard. This shift has reduced foreign investor certainty about investing in India, as new investments from these countries no longer enjoy the safeguards against arbitrary state action, discriminatory treatment, and unpredictable dispute resolution that BITs typically provide. Additionally, India continues to impose average import tariffs of nearly 16 per cent, well above ASEAN economies, while the growing use of quality control orders (QCOs) has further increased costs by restricting access to imported inputs. The securitisation of India's economic policy was triggered by the June 2020 Galwan Valley clash, which saw the introduction of emergency measures including 59 Chinese-linked mobile applications banned and the Press Note 3 approval requirement for investments from countries sharing a land border with India.
To attract substantial manufacturing FDI, policymakers must address the factors that have made India less attractive over the past decade, as noted by experts from IGIDR and Natixis. The recommended policy initiatives include concluding an Investment Protection Agreement (IPA) with the EU to complement the recently concluded India-EU FTA, reforming the 2015 Model BIT to align with international norms, lowering tariffs on intermediate inputs, progressively dismantling QCOs, and joining the WTO's Investment Facilitation for Development Agreement (IFDA). India's selective derisking doctrine accepts that dependence on China cannot be eliminated but seeks to reduce the vulnerabilities it creates through asymmetric derisking strategies. The March 2026 modification of Press Note 3 allows proposals in capital goods, electronic components, polysilicon and ingot-wafer manufacturing to be decided within 60 days, provided majority ownership and control stays with Indian residents, while India continues to build alternatives in critical sectors like rare-earth processing where China dominates. These reforms would not only attract FDI from the EU but also from other interested countries, positioning India to capitalize on the next phase of China+1 opportunities and address its biggest economic challenge of creating productive jobs for its growing workforce.
