Strong manufacturing as crucial as Chinese FDI inflows

The Union Government is reportedly contemplating a revision of its stance on Chinese capital flow into India. It is reviewing press note 3 that was introduced in April 2020, which called for prior government approval for foreign direct investment from a clutch of countries, but indirectly targeting China. Thinking among policy makers seems to be veering towards a de minimis threshold, or negligible restrictions on flows from China. There is no plan to rescind press note 3, even though the government is okay with the idea that low-value or low-stakes investments be put on the approval route.

There will be strong guardrails only from a critical or strategic angle. The contemplated policy shift seems mandatory rather than volitional; our economy—indeed the entire world’s economy—is so woefully dependent upon the supply chains dominated by China that willy-nilly, we must augment our economic engagement with it, notwithstanding our antipathy towards the Communist rule in Beijing. A de minimis threshold is almost a fait accompli. We depend a great deal on China, with which our trade deficit is highest, which was over $116 billion in 2025. This is primarily because we import a lot of electronics, machinery, and industrial components.

The long-term solution is a strong manufacturing sector—and it is here where the shoe pinches. A zillion policy statements and revisions, innumerable schemes and programmes like the production-linked incentives (PLIs) have failed to make this sector sturdier. The cherished dreams of policy makers of lifting manufacturing’s contribution to GDP from the 15-17 range to 25 per cent remains just that-a dream. To be fair to the Narendra Modi government, it cannot be accused of inaction. From the Make in India and PLI schemes to slashing corporate tax rates and revamping the GST regime, it has adopted a variety of measures to boost factory output. And now it is on an FTA spree, finalising trade deals with nations across the world. Unfortunately, to little avail.

The failure, however, shouldn’t result in despondency or defeatism, for failure is not an option; we must lift manufacturing. Maybe policy makers should think outside the box; perhaps and continue to do whatever they have been doing but in a better manner or perhaps both. Instead of dispersing incentives thinly across numerous sectors, there may be merit in concentrating resources on a handful of globally competitive clusters-electronics, semiconductors, green energy equipment, defence manufacturing and pharmaceuticals, while ensuring deep backward linkages.

Cluster-based development, supported by plug-and-play industrial parks, world-class logistics, and simplified compliance, could generate network effects. Second, they should ensure regulatory certainty. Introduction of a de minimis threshold for Chinese investments, if executed with clarity and consistency, could itself signal maturity: that India can balance security concerns with economic pragmatism.

Thirdly, integration into global value chains must be pursued strategically. While, FTAs should be leveraged, trade, industrial and foreign policies must operate in concert rather than in silos. Fourthly, skill development must move from rhetoric to results. Finally, governance reform is a sine qua non for manufacturing. Competitive federalism can be harnessed more effectively by benchmarking states on ease of doing business outcomes rather than merely procedural reforms. In short, the need of the hour is not just the recalibration of press note 3 but of the entire ecosystem in which manufacturing operates.