From Strategic Curbs to Strategic Openings: India’s FDI Reset with Land-Bordering Countries

Introduction:

India’s Foreign Direct Investment Policy (FDI) towards countries sharing land borders namely China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan has undergone various shifts since 2020. India’s FDI relations with China have deteriorated following the Galwan border clashes in June 2020, leading to tighter scrutiny in investment and technology. These restrictions were relaxed in March 2026, all of which were tightened amid pandemic and geopolitical tensions. These restrictions have been relaxed to balance security with economic needs, especially helping the manufacturing sector and growth of Indian startups. 

Imposition of Curbs:

On April 17, 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) issued Press Note 3 (PN3), making prior government approval for all FDI from entities in land-bordering countries (LBCs) compulsory. This was mandated for all sectors uniformly, overturning the automatic route that existed in prior. This measure stemmed from two triggers: the COVID’19 crisis and the border tensions.

While Indian firms were facing failing businesses and distress, the fear of opportunistic takeovers by foreign competitors took over and depreciated valuations and weeks later on June 15, 2020, 20 Indian soldiers were killed in the Galwan Valley clash, escalating India-China tensions. Both security and business based concerns were raised over Chinese capital in technological, telecommunication and startup sectors. Press Note 3 now extended scrutiny targeting China, which was previously limited to Pakistan and Bangladesh among all Land-bordering countries. 

Consequences: Immediate and Medium-term (2020-2024):

Press note 3 drastically curbed inflow of goods and services. Chinese FDI crashed from US$163.8 million in FY2020 to US$42.3 million in FY2024, and reached a mere US$2.7 million in FY2025, even when the total Indian FDI reached US$50billion in FY2025. From 2020 to April 2024, out of the 526 Press Note 3 proposals that were received, only 124 were approved, 201 were rejected and the remaining ones are pending.

It can be noted that Chinese-linked electronics were denied, for instance BYD's $1 billion bid in 2023. Positive security outcomes like reduced risks of economic coercion in critical sectors like finance and telecommunication and reduced Chinese influence in startups were noticed. While positive outcomes were appreciated, negatives loomed large too. Delays hampered supply chains, which led to slowing projects and sectors like renewables and electronics faced capital shortages.

India’s China+1 appeal gained prominence, but self-reliance suffered without technological transfers. Apart from China, other land-bordering countries faced minimal impact. While Nepal, Bhutan, Myanmar, and Afghanistan contributed very little to Indian FDI overall, Bangladesh and Pakistan’s inflows were already negligible due to  existing curbs. China faced app bans namely TikTok, gaming app PubG and around 200 more applications. This compounded FDI and led to freezing of bilateral investment ties until October 2024 patrolling pact. 

Policy Review:

Chinese FDI, already limited in scale, reached almost near zero. Till date, only around $4 billion in Chinese FDI has entered India in about two decades and this is comparatively low considering the size and growth of both economies. This collapse in FDI has triggered a wide debate to assess investment restrictions among government circles.

Niti Aayog recently proposed permitting Chinese investors to acquire up to 24% stake in Indian companies and this was a move proposed to increase investment without triggering security clearance requirements. Tapping into the Chinese supply chain and capital, both selectively and strategically can help India move up the ladder.  

Recent Relaxations: 

On March 10, 2026, The Union Cabinet approved changes in guidelines on investment from countries sharing land border with India via PIB. The key changes that were mentioned are:

Beneficial Ownership Clarity (BO): Under the Prevention of Money Laundering Rules, 2005, LBC BO with less than controlling stakes and up to 10% equity is eligible under the automatic route, provided it does not exceed sectoral limits. The investor is required to report to DPIIT after investment, and this provides an opportunity for venture capital to flow into startups and private equity.

60-day Manufacturing Fast-Track: FDI in priority sectors like capital goods, electronic components, polysilicon, ingot-wafer, solar modules are approved within 60 days, but only if majority control is held by Indian residents.

This shift looks to balance economic momentum with National security, moving beyond 2020’s security shield. These proposed changes are effective immediately and they target deep-tech funding and for revival of the manufacturing sector. 

China in focus:

China was pre-PN3, Land Bordering countries FDI market leader, holding over 90% market share, driving apps, e-commerce like Paytm stakes, EVs, and solar. Post-curbs scrutiny has halted expansions; only Indian JV companies, e.g., Micromax-Huaqin, have received approval. The negative impact on India has allowed security gains but has harmed integration as India has missed out on China’s manufacturing capabilities, thereby delaying GVCs. Minority stakes and VC investments from Chinese funds are likely to revive, benefiting electronics, solar, and investments under the 60-day route. Controls are still in place; without approval, there are no majority stakes, thereby preventing coercion. The trade imbalance with import value of US$108.2 billion still exists, however, revival of FDI can help imports. 

Consequences and Implications:

The March 2026 PN3 relaxation is a harbinger of far-reaching ripple effects for India’s FDI regime, which will now encompass both opportunities and measured risks. 

Economic Catalysts: The automatic granting of minority stakes up to 10 percent will inject vigor into startups and VC/PE sectors, whereas the 60-day fast-track will propel PLI-scheme-aligned manufacturing sectors like electronics, solar, and capital goods, which will create jobs, boost exports, and integrate GVCs. The overall FDI inflows are set to increase, complementing FY2025’s US $81 billion gross figure, which will aid self-reliance.

Security Equilibrium: The Indian majority control and BO reporting requirement will negate coercion risks in sensitive sectors, a nod to lessons learned from the Galwan Valley confrontation. Land Bordering Countries from non-China nations like Nepal and Bangladesh will not be impacted much, as their FDI was low to begin with. 

China-Centric Nuances: The revival of minority investments will revive tech JV activity, which will partially offset the pre-PN3 FDI decline from China. 

Conclusion:

From the Galwan-induced clampdown of 2020 to the revival in March 2026, India’s FDI journey with its bordering countries, particularly China, is a story of maturing its balance of security and aspiration.

From being a defensive bulwark against opportunistic acquisitions to being an intelligent gateway for free flow of minority stakes and accelerating manufacturing joint ventures with control in Indian hands, the payoff is renewed infusions of technology, employment-generating supply chains, and a stronger Atmanirbhar Bharat without compromising vigilance. As trade surges and tensions subside, this realistic shift in approach only reinforces India’s global competitive advantage, proving that geopolitics is not destiny. The journey forward calls for sharp execution; however, the direction appears to be correct.