One of the gaping holes in our security framework is the inability to combine national security goals with economic concerns. The key beneficiary of this lapse is China.
Contrary to popular belief driven by “free markets advocates”, India is absolutely right in preventing China’s electric vehicle major BYD from making significant investments into the country. Indian commerce minister Piyush Goyal has recently said that despite pressure from within and outside, the Indian government would not allow BYD’s proposed $1 billion investment. Investment proposals from both BYD and Great Wall Motors, both China-based automobile companies, were rejected in 2023.
Foreign Direct Investment (FDI) plays a critical role in the economic growth and development of nations, including India. It brings capital, technology, and expertise, fostering innovation and creating jobs. However, FDI can also pose significant risks to national security if foreign entities gain control over sensitive sectors or critical infrastructure. For India, which is a rapidly growing economy with strategic vulnerabilities, implementing robust national security screening mechanisms for FDI is essential.
Indian analysts within and outside government gravely misunderstand—if some of them can understand at all—the threat posed by China. It is important for India to understand that China has never been technologically stronger, and the Chinese Communist Party and the People’s Liberation Army are absolutely resolute is their great power ambition to be the preeminent force in the world, and they are also, as has been reported for years, completely unscrupulous in the use of stealth methods via disruptive technology and trade to ensure their dominance. To open India’s vital sectors to such a player without deep checks and balances is against every sensible understanding of a nation’s defence of its sovereignty.
There should not be any mistake. China can, and will, weaponise every aspect of its linkages with India if these could be weaponised.
Challenges in India’s Current FDI Framework
India’s approach to FDI has evolved over the years, but it lacks a comprehensive legislative framework specifically addressing national security concerns. The Foreign Exchange Management Act (FEMA), which governs FDI inflows, does not explicitly include provisions for screening investments on national security grounds. This creates legal ambiguity and limits India’s ability to justify restrictive measures in international arbitration or diplomatic disputes.
In April 2020, India introduced Press Note 3 (PN3), requiring government approval for investments from countries sharing land borders with India, primarily targeting Chinese investments. While this was a significant step toward addressing national security concerns, it remains limited in scope and does not constitute a holistic mechanism for screening all foreign investments. The absence of a transparent and predictable framework diminishes investor confidence and creates uncertainty for foreign entities looking to invest in India.
Such screening mechanisms are absolutely critical for India which has already seen the impact of Chinese infiltration of its infrastructure in a mass blackout caused by Chinese hackers. There have been reports of Chinese infiltration in some of India’s naval assets too. FDI can lead to foreign control over essential sectors such as telecommunications, energy, transportation, and defence. Without proper screening mechanisms, these sectors could become vulnerable to sabotage or espionage. Foreign investments often facilitate the transfer of sensitive technologies. For example, adversarial nations (read specifically China, but there could be others as well) could exploit partnerships to access advanced technologies in areas like aerospace or semiconductors. Heavy reliance on foreign investments can create vulnerabilities that adversaries might exploit for political leverage or economic coercion. This could undermine India’s sovereignty and decision-making autonomy. Foreign entities can use investments as tools to influence domestic policies or public opinion. For instance, investments in media or social platforms could enable the dissemination of propaganda or misinformation. A well-defined national security framework would help India avoid legal challenges at international forums like the World Trade Organization (WTO) by clearly distinguishing between economic measures and security-driven interventions.
Several countries have implemented robust mechanisms to screen FDI based on national security considerations. These frameworks provide valuable insights that India can adapt:
UNITED STATES: The U.S. operates one of the most advanced systems through the Committee on Foreign Investment in the United States (CFIUS). CFIUS reviews foreign investments that may threaten national security, focusing on sectors like defence, critical technologies, and infrastructure. It has blocked several high-profile transactions involving Chinese companies due
EUROPEAN UNION: The EU established Regulation EU 2019/425 in 2020 to coordinate investment screening across member states. This framework allows countries to share information and tighten controls on sensitive sectors such as data infrastructure and biotechnology. France and Germany have further strengthened their screening mechanisms by lowering ownership thresholds for scrutiny and expanding the list of sensitive sectors.
UNITED KINGDOM: The UK introduced the National Security and Investment Act in 2022, identifying 17 sensitive areas ranging from computing hardware to synthetic biology. This act expanded screening beyond mergers and acquisitions to include minority investments and intellectual property acquisitions.
CANADA: Canada has tightened its investment screening mechanisms multiple times since 2021. It extended coverage to critical minerals and sensitive personal data while scrutinizing both state-owned enterprises and private firms with ties to adversarial nations.
To address its strategic vulnerabilities while maintaining investor confidence, India should consider the following steps: develop a dedicated law for FDI screening based on national security criteria rather than relying on FEMA or sector-specific regulations, include minority investments, intellectual property acquisitions, and partnerships in sensitive sectors under scrutiny, establish clear guidelines for investors regarding approval procedures to enhance predictability, set up specialized committees similar to CFIUS for evaluating high-risk transactions.
Therefore, India must proactively collaborate with international partners to understand the depth of the Chinese threat (and similar threats from others) and engage with other countries to adopt best practices and ensure alignment with global standards.
As India continues its journey toward becoming an economic powerhouse, balancing economic growth with national security is imperative. A robust FDI screening mechanism will not only protect India’s strategic interests but also foster a secure environment for foreign investors by providing clarity and transparency. Drawing lessons from global leaders like the U.S., EU, UK, and Canada can help India craft an effective framework that safeguards its sovereignty while promoting sustainable development.
* Hindol Sengupta is a historian and professor of international relations at the O. P. Jindal Global University.