Govt considers reviewing FDI restrictions in border countries after industry pleads for open policies: What experts say

The Centre is considering reviewing its restrictions on foreign direct investment (FDI) from neighbouring countries, including China, after industry demanded more open policies. Amid heightened tensions with China in 2020, the Indian government had made prior approval mandatory for investments from countries sharing a land border with India. However, industry leaders are arguing for a relaxation of these rules to attract vital investments.

The industry, however, wants the government to relax the norms. CNBC-TV18 learns from close sources that two ministries are opposing the government taking a more favourable stance towards Chinese investments.

Ajay Dua, former commerce secretary, advocates for a nuanced approach to foreign direct investment from neighboring countries, including China. He suggests evaluating potential investments based on their strategic value rather than accepting or rejecting them based on geopolitical considerations.

“If these investments can integrate us into global value chains, bring cutting-edge technology or support critical sectors like electronics, microchips or renewable energy, we should be open to them,” Dua says.

The World Bank released a report yesterday saying that India is not benefiting from the China+1 strategy. Aurelien Kruse, a senior economist at the World Bank, said: “What we mean is that India is very good at attracting activities that tend to be skill-intensive and capital-intensive, but relatively less good at attracting labor-intensive manufacturing activities.”

Kruse cites low-tech sectors like textiles, apparel and footwear, where India once had a competitive advantage but has been overtaken by countries like Bangladesh. He points out that focusing on labor-intensive activities could be a powerful source of job creation, including for women, and serve as a springboard for broader industrial development.

Kruse’s observations suggest that India needs to refocus on sectors where it can leverage its strengths in the China Plus One strategy, particularly to maximize job creation and strengthen its industrial base.

Amita Batra, Senior Fellow, CSEP India, said, “When it comes to the China + 1 strategy of multinationals, I think it is important to understand that we are not necessarily an alternative to China. What we need to understand is that the plus 1 is many other countries that we are competing with.”

According to Batra, India is just one of many countries competing to attract additional investment from multinationals that are diversifying their manufacturing sites beyond China. These companies, including those from the United States, Japan, Europe and even China, typically maintain operations in China to serve their domestic market while looking elsewhere to expand their portfolios.

Batra points out that India’s competitiveness depends on improving its openness indicators, which include both trade and investment policies. While India has made progress in areas such as logistics, thanks to the National Logistics Policy, there are still significant gaps, particularly in customs clearance processes, which require further reforms.

Batra stresses the importance of accelerating these reforms to enhance India’s attractiveness.