India’s relaxation of investment rules is a smart, careful, welcome reset

India's relaxation of rules for investments made by Chinese companies in select industries such as electronics, capital goods and solar panels is a pragmatic re-assessment of trade imbalances and restrictions on capital inflows. India runs up its largest deficit in the goods trade with China. It is also beginning to see traction in exports of mobile handsets made in the country by companies like Apple that are diversifying their supply chains out of China. It helps global manufacturers to seed the Indian ecosystem if their Chinese vendors are allowed to invest as well.

India's easing of investment rules follows a series of moves to resume flights to China, issue visas to Chinese nationals to end factory floor technician scarcity, and permission granted to power companies to import Chinese equipment to avoid project delays. The latest set of policy easing can be expected to revive plans by Chinese EV-makers like BYD, whose proposed investment in an Indian venture was rejected for security concerns. A richer investment harvest is likely from medium-sized Chinese vendors that play a key role in supply chains. These can contribute to development of India's SMEs through capital and technology transfers.

Reset in ties with China has been driven partly by US protectionism. Punitive US tariffs, technology export controls and immigration restrictions are nudging the two Asian economies to seek common ground over globalisation. Technologies like autonomous vehicles provide the countries a broad canvas for cooperation. This allows India to hedge its bets in the 'US vs China' AI race. The country's large pool of technical talent can add considerable value to both AI models. Normalisation of relations between India and China is a necessary first step to achieve the economic potential presented by two large economies growing in proximity. Handled with economic and strategic protections in place, Chinese trade and investment can speed up India's ambitions of becoming a global manufacturing hub.