To compete with China, India may need China

The Ministry of Finance is set to scrap curbs on Chinese firms bidding for government contracts, which were introduced in 2020. The curbs were imposed following a deadly clash between the countries’ troops in the Galwan Valley. They required Chinese bidders to register with an Indian government committee and obtain political and security clearances. According to Reuters, this resulted in China losing out on contracts worth $700-750 billion.

Notably, even during periods when India had a more favourable stance, direct Chinese investment remained low. China directly contributed less than 1% of India FDI equity inflows from 2000 to 2021, showing that recent curbs only add pressure.

The chart below shows China’s share and rank in India’s total FDI equity inflows from 2000 to 2025. The figure for 2000-2021 is cumulative

However, China’s cumulative (direct and indirect) FDI inflows before 2020 into India are difficult to calculate as they were mostly routed through tax havens, according to Santosh Pai, Partner at Denton’s Link Legal and Honorary Fellow, Institute of Chinese Studies. “Chinese investments almost never go directly into a country,” he told The Hindu.

These means of investments were wholly altered when the Indian government issued ‘Press Note 3’ in April 2020, which specifically stated that an entity of a country, which shares a land border with India, or where the beneficial owner is a citizen of any such country, requires mandatory approval from the Government of India before for an investment can be executed. Pai estimated that this dented any indirect investments that Chinese companies had slated for India.

A few years after this policy amendment, India’s Ministry of Finance, in its annual Economic Survey for 2023-24, suggested that increased FDI inflows from China can help increase India’s global supply chain participation and push exports. The Ministry took note of the U.S.’ and Europe’s shift away from sourcing imports directly from China. The U.S.’ total trade with China reduced in 2023 and remained stagnant in 2024 . The European Union also saw a similar dip in trade with China in 2023 (Chart 2B).

The chart below shows the U.S.’s total trade (including imports and exports) with China over the years (in $ bn)

The Survey stated that FDI from China could boost India’s exports to the U.S., “similar to how East Asian economies did in the past.” Pai elaborated on India’s change of heart. “Due to China’s dominance in most markets, India cannot attract global supply chains which want to diversify from China without including Chinese companies in the mix,” he said.

The chart below shows the U.S.’s total trade (including imports and exports) with China over the years. The figures were sourced from Eurostat data, wherein exports and imports are indexed at 100 each, with 2013 as the starting year. Using this method, EU’s total trade in 2013, which includes imports and exports, is represented as 200. In 2019, the index had increased to 239.

India has proven to be a ready alternative for the U.S. to replace China in at least one of the major items. Due to its dominance in the manufacturing of components, China made up more than 60% of the U.S.’s imports of smartphones in 2016. However, 10 years later, China’s share has dwindled to about 22% of the U.S.’s smartphone imports, majorly due to higher tariffs.

The chart below shows the U.S.’s overall smartphone imports in $ bn over the years

Meanwhile, countries such as Vietnam, Thailand, and India have shown upticks in their shares of U.S.’s smartphone imports. However, the possibility of replicating this success, without China’s help, in other items as well is slim as of now.

The chart below shows select countries’ share in the U.S.’s import of smartphones over the years

While China’s FDI stock (or cumulative FDI inflows) to most of its staple investment destinations have increased over the years, its stock with India has declined over the past decade. The table below shows that when Chinese FDI stock is ranked, India fell by 19 ranks between 2014 and 2024.

Pai stated that although China was eager to invest in Indian companies, the curbs that were set in 2020 may have projected an unpredictable environment for investment.

Published – January 22, 2026 08:00 am IST