Chinese investment plays a critical role in shaping India’s economic ambitions, underscoring a complex relationship marked by both rivalry and interdependence. Despite ongoing border tensions between the two countries, economic engagement remains significant, with China standing as one of India’s top trading partners. Bilateral trade between the nations has more than doubled over the last decade, rising from approximately $71.5 billion in 2016 to $151.1 billion by 2025-26. However, this increase in trade has not been matched by Chinese investment in India, which has sharply declined from a peak of $705 million in 2015 to just $5 million last year.
The disparity between soaring imports from China and the decline in Chinese foreign direct investment (FDI) in India highlights the tensions underlying the bilateral economic relationship. India’s growing demand for capital goods is largely met through imports from China due to insufficient domestic manufacturing capacity—a gap that Chinese investment could help fill. Restrictive policies on Chinese investments, influenced by the broader geopolitical friction and border disputes, have contributed to the widening trade deficit.
India’s approach to Chinese FDI reflects its broader strategic concerns but has also limited opportunities for deeper industrial cooperation. While the border conflict has cooled bilateral investment flows, recent signs suggest a cautious thaw. Nevertheless, even a complete removal of investment restrictions would not instantly transform India into a major manufacturing hub. Structural challenges, including regulatory hurdles and inadequate infrastructure, continue to limit attraction for manufacturing-related FDI. For instance, the pharmaceuticals sector, one of India’s key export industries, receives a relatively modest 4 percent of total inbound investment, despite its global competitiveness.
China’s own experience in harnessing FDI for economic growth may offer valuable lessons. The introduction of special economic zones and partnerships such as the China-Singapore Suzhou Industrial Park played a crucial role in drawing foreign investment and boosting manufacturing output. India could explore similar collaborative frameworks, potentially engaging regional partners including Singapore and China, to stimulate technology-driven industrial zones.
Moreover, China’s infrastructural advancements, especially in green energy and high-speed rail, represent potential areas for partnership. Leveraging Chinese expertise could accelerate India’s infrastructure development, which remains a critical bottleneck for manufacturing expansion. Such cooperation, however, requires navigating political sensitivities rooted in historical and territorial disputes.
Historical precedents in East Asia illustrate how countries overcame past conflicts to foster economic growth through FDI. Post-war Japan’s rapid industrialization was heavily supported by American investment, despite severe wartime losses. Similarly, South Korea and Taiwan benefited from Japanese capital and technology, setting aside historical grievances to boost their own development. China, despite its own painful history with Japan, embraced Japanese investment as part of its economic rise. These examples demonstrate the pragmatic considerations that often underpin successful economic partnerships.
China continues to lead globally in several advanced manufacturing sectors, including electric vehicles and robotics. While the United States and Japan remain key investors in India, their levels of investment have not matched the scale they once invested in China. For India, balancing geopolitical concerns with the imperative of broad-based economic development requires a nuanced approach to foreign investment.
Analysts suggest that India’s path to achieving industrialization and enhanced export competitiveness may benefit from selectively opening up to Chinese FDI. Achieving long-term economic sovereignty and lifting large segments of the population out of poverty may depend on embracing the proven East Asian model of leveraging foreign capital while advancing domestic capabilities. As India seeks to solidify its place in a multipolar world, its economic future will likely be shaped by how effectively it can manage the complexities of its relationship with China and other regional partners.