India's FDI Approval Policy Eases, Boosts Capital Formation

India’s strict regulatory firewall on investments from neighboring nations has reduced Chinese Foreign Direct Investment (FDI) in the country to a trickle, with just a single proposal worth Rs 1 crore ($0.11 million) receiving government approval in 2025–26. This signals how important the recent relaxations in FDI approval policy for countries sharing land borders with India are to boost FDI inflows into the country and capital formation. According to data released by the Department for Promotion of Industry and Internal Trade (DPIIT), the lone FDI clearance for a Chinese firm was part of 63 proposals cleared under the government approval route in FY26, which together accounted for Rs 10,292 crore ($1.17 billion) in foreign capital. The low approval rate for Chinese FDI in FY26 was even worse than the situation in 2024–25, when only one Chinese FDI proposal – valued at Rs 28.72 crore ($3.44 million)—was cleared out of 82 total government-route approvals worth Rs 39,758 crore ($4.72 billion). India relies hugely on China for critical raw materials, intermediates and finished goods. In FY26, Beijing enjoyed a trade surplus of $112 billion with New Delhi. It is believed that India’s market size could be leveraged to attract FDI and technology transfer from the neighbour. The proposals coming through the Hong Kong route fared better. In the last financial year 13 FDI proposals from Hong Kong involving investment of Rs 610 crore ($ 69.62 million) were approved. For 2024-25 the number of proposals from Hong Kong that were approved was 11 involving investment of Rs 1225 crore ($146.5 million). The persistent freeze stems from Press Note 3, enacted in April 2020 following military standoffs along the India-China border and fears of hostile corporate takeovers during market slumps. The rule mandated prior government clearance for all FDI originating from, or beneficially owned by entities in countries sharing a land border with India. While Hong Kong does not share a physical border with India , regulators treat entities incorporated or controlled out of the Special Administrative Region (SAR) under the same tight scrutiny due to Beijing’s political jurisdiction. Most of the FDI in India is on the automatic route, barring sectors considered strategic or sensitive. FDI proposals from countries sharing land borders with India like China , Pakistan, Bangladesh, Bhutan, Nepal and Afghanistan also need to go through an elaborate government approval process. For both FY25 and FY26, Singapore emerged as the leading source of capital cleared under the approval route—dominating both total volume and deal count—followed by the United Kingdom. In May this year the government eased the rules framed under PN3. Foreign companies with a Chinese or Hong Kong shareholding of up to 10% can now invest in India through the automatic route without prior government approval, provided they do not hold “control” It also put in place a fast-track system to clear FDI from land border countries in sectors like manufacturing in capital goods, electronic capital goods, electronic components, polysilicon and ingot-wafer. However in such ventures majority stake and control must remain with Indian entities. In 2025-26 total FDI equity inflows were at $ 58.8 billion of which $ 43.1 billion was under automatic route, $ 13.7 billion was for acquisition of existing shares or brownfield investment and $ 1.8 billion required government approval.