by Ajit Ranade, Nitin Pai, Ajay Shah.
The relationship between India and China is at its most difficult point in decades. A foundation of political and military hostility, marked by violent border clashes and a strategic rivalry across Asia, makes any notion of a simple partnership untenable. China’s authoritarian state, its ambition for regional dominance, and its use of economic power as a tool of statecraft present clear and present dangers to India’s national interest. In this environment, a policy of naive engagement is not optimal.
Yet, a policy of complete economic decoupling is equally problematic. China is central to the global economy, an important force in manufacturing, technology, and trade. There is a shared border with India, and with the two countries adding up to 40% of humanity, there are natural opportunities for many kinds of partnerships between Chinese persons and Indian persons. A self-imposed isolation from the world’s second-largest economy carries an opportunity cost for us in India. We need capital to fuel our growth and build infrastructure. The current policy framework reflects this unresolved tension. Measures such as Press Note 3, which mandate government screening for all investment from bordering countries, have hindered new streams of Chinese capital. As of April 2024, 200 of the 526 FDI proposals received under PN3 were awaiting approval. This has its merits, but we do need to find some unfreezing as part of long-term strategy.
The policy question is not whether to engage, but how. How can India interact with a hostile neighbour in a way that captures economic benefits without incurring unacceptable security risks? The debate has been trapped in a false binary between total engagement and total isolation. The intellectual challenge is to design a third way: a policy of "quarantined engagement," where economic inputs like capital can be accepted while the associated strategic risks are neutralized at the point of entry. As Adam Smith said, Trade with barbarous nations requires forts, trade with other nations requires ambassadors.
This article resurrects old ideas that help find this path. We argue in favour of a highly constrained, de-risked channel for Chinese capital into Indian infrastructure. This is not a call for a broad reopening or a return to a more optimistic era. It is a pragmatic, narrow, and carefully controlled mechanism designed for an adversarial relationship. The core proposition is that it is possible to surgically separate Chinese capital from the control, technology, and geopolitical leverage that usually accompany it. Under a strict framework of safeguards, Chinese investment can be transformed from a strategic threat into a simple financial commodity, one that can serve India’s developmental needs while building, over the long term, a small but tangible stake in a stable peace. Such an arrangement would be win-win for both sides: This is good for China also.
Any credible proposal for engagement must begin with a clear-eyed assessment of the risks. The case for a narrow channel of economic contact is not born of optimism, but of a sober understanding of the multifaceted threat China poses. These threats are not discrete; they form an integrated strategy where economic, technological, and military actions are mutually reinforcing. Any Indian counter-policy must therefore be equally integrated.
Strategic and military hostility
The foundation of distrust is geopolitical. The 2020 Galwan Valley clash was the most violent manifestation of a pattern of Chinese military aggression along the Line of Actual Control. This hostility is not confined to the Himalayas. Beijing’s strategic support for Pakistan, its expanding military and economic footprint in nations across South Asia -- from Sri Lanka to Bangladesh and the Maldives -- and its explicit of achieving uni-polarity in Asia are all inimical to Indian interests. This sustained pattern of behaviour demonstrates that China is not a benign competitor but a strategic adversary.
The weaponisation of economic interdependence
China has repeatedly demonstrated its willingness to use economic interdependence as a coercive tool. India’s reliance on Chinese supply chains for critical goods, from active pharmaceutical ingredients (APIs) to electronic components, creates a significant vulnerability. Beijing has the ability to "pull the plug" on these supplies, as it has done with certain restricted exports, weaponizing trade to exert political pressure.
This risk is compounded by China’s internal economic troubles. A structural problem of overproduction, rooted in weak domestic demand and a collapsing real estate sector, has led Beijing to manage its economy by exporting its unemployment. A flood of cheap, often subsidized, Chinese goods—from solar panels to electric vehicles—threatens to overwhelm and destroy nascent Indian industries. This is not merely market competition; it is a strategic economic offensive that requires a defensive response.
The technological trojan horse
The third vector of threat is technological. There are well-documented security hazards associated with Chinese electronics and software. Global security agencies have long held concerns that telecommunications equipment and other hardware contain embedded spyware or backdoors, giving the Chinese state a potential lever for espionage or sabotage. Chinese manufacturers often do not provide full specifications of algorithms, making it nearly impossible to screen for malicious code. This creates an unacceptable risk, particularly in critical infrastructure. The recent weaponisation of social media platforms like TikTok to conduct influence operations in Taiwan serves as a stark reminder of how apparently civilian Chinese technology is deployed to achieve Chinese state objectives.
An old idea for a harsher time
The three problems described above are not separate challenges. A state that exerts military pressure on the border is the same state that will use economic supply chains and technological dependencies as levers of power. A policy that addresses only the trade deficit or only military preparedness is incomplete. A sound strategy must be holistic, designed to neutralize all three threat vectors simultaneously. We think there is a clear possibility in infrastructure financing.
The proposal to channel Chinese capital into Indian infrastructure is not new. Its intellectual foundations were laid over a decade ago, in a very different geopolitical climate. In 2013, one of us (Ajit Ranade) first articulated the synergy that exists between China’s problem of a chronic current account surplus, and India’s infrastructure financing gap. At the time, China’s reserves stood at around \$3 trillion, much of it earning low yields in US treasury bonds. India, meanwhile, needed over \$1 trillion to fund its infrastructure development. A direct investment alliance was proposed, suggesting that even a small fraction of China’s capital -- just 1% annually -- could make a material difference to Indian infrastructure investment.
This economic logic was developed by one of us (Nitin Pai), with the idea that such investments should be directed towards specific, low-risk assets. The insight was that "concrete infrastructure, such as highways and bridges," would be in both countries' interests, providing China with decent long-term returns and India with low-cost financing. Crucially, such assets "do not undermine national security, nor do they lock us into Chinese technology." The key insight was that while India should be open to such investment, it must never be treated as an "ordinary economic relationship".
These ideas were conceived in an era of cautious optimism, a time when some observers still spoke of an "evolving maturity" in the relationship. The reality of the subsequent decade, with enhanced nationalism and militarism in China, with the journey from Doklam to Galwan to Operation Sindoor on the Indian relationship, makes us more cautious. However, the failure of that optimism does not invalidate the underlying economic logic. If anything, the fundamental asymmetry has grown more pronounced. China’s internal economic model has produced an even greater capital surplus in search of stable returns, while India’s infrastructure needs have expanded on its path to becoming a \$5 trillion economy.
The logic of the transaction is stronger than ever. What has changed is the risk assessment. Therefore, the task today is not to discard this old idea but to harden it. It must be adapted for the present moment of hostility by encasing it in a robust framework of security protocols, transforming it from a tool of hopeful engagement into a mechanism for de-risked, pragmatic co-existence.
A framework for safe capital: The three locks
For Chinese capital to be acceptable, it must be rendered strategically inert. This requires a framework of safeguards -- a system of "three locks" -- designed to strip the investment of any potential for geopolitical leverage, espionage, or strategic entrapment. This transforms the nature of the transaction from a potential vector of hostile influence into a simple commodity purchase, where India is procuring capital under tight conditions.
The first and most critical safeguard is the separation of ownership from control. Under this rule, Chinese entities may act as pure financial investors -- either as equity holders or debt providers -- but they should be explicitly and legally denied any role in the management, operation, or maintenance of the infrastructure asset. Their role should be purely passive and financial.
The rationale for this lock is to prevent the weaponization of critical infrastructure. A cautionary tale comes from Europe’s recent experience with Russia. Gazprom, the Russian state-owned energy giant, was not just a supplier of gas to Germany; it also owned and operated critical gas storage facilities on German soil. In the months leading up to the 2022 invasion of Ukraine, Gazprom strategically ensured these storage tanks were left empty, deliberately manufacturing an energy scarcity within Germany that amplified Russia’s blackmail potential and left Germany more exposed. Allowing a strategic adversary operational control over critical infrastructure is an invitation to disaster. The operational lock is designed to prevent such a scenario from occurring in India.
The second safeguard is a ban on Chinese-origin technology within the funded asset. This means no Chinese-made hardware, software, sensors, control systems, or any other networked components. All procurement for technology, from surveillance cameras on a bridge to the software running a water treatment plant, should be sourced from approved, non-hostile jurisdictions.
This lock neutralizes the threat of technological Trojan horses. The global security establishment has consistently raised alarms about the risk of embedded spyware and hidden backdoors in Chinese-made equipment, from telecom networks to military sub-assemblies. Given the opacity of the technology and the near impossibility of conducting foolproof screening, the only truly secure approach is a blanket prohibition. The technology lock ensures that an infrastructure asset funded by Chinese capital cannot become a listening post or a vector for cyber-attacks.
The third safeguard is a risk-based, incremental approach to implementation. Engagement must not begin with a broad opening, but with a carefully phased and probationary process. The initial phase should be strictly limited to what can be termed "dumb infrastructure" -- assets with minimal technological sophistication and low strategic vulnerability. This category includes projects like roads, bridges, irrigation canals, and water and sanitation plants. These are physical assets where compliance with the operational and technology locks is easiest to monitor and enforce.
Only after a decade or two, during which Chinese investors demonstrate consistent and verifiable compliance with the first two locks, could India consider expanding the scope to more complex areas. This phasing creates a crucial probationary period, allowing India to observe behaviour, build confidence in its regulatory capacity, and retain an off-ramp if Chinese entities fail to adhere to the rules. India’s existing FDI screening mechanism, institutionalized in Press Note 3, provides a legal and administrative precedent for managing such a structured, approval-based process. More work is required on the Indian side to achieve institutional quality in such screening.
A better bet for Beijing
A skeptical reader might ask: why would China agree to such restrictive terms? The answer lies in a rational assessment of its own self-interest. From a purely financial perspective, a de-risked, passive investment in Indian infrastructure is a far superior proposition to many of the high-risk ventures China is currently entangled in across the developing world. China has a big and structural current account surplus: the economic system suppresses consumption and lacks good investments at home, so capital must go out. Their choices for destinations for this capital -- from financial assets in the West to infrastructure assets in developing countries -- are all problematic.
China’s flagship Belt and Road Initiative (BRI) has a deeply troubled track record. Beijing is now navigating the uncomfortable role of being the world's largest official debt collector. An astonishing 80% of its overseas lending portfolio in the developing world is supporting countries already in financial distress. Overdue repayments are soaring, and many borrower nations, which have poor credit ratings and unstable political environments, are at high risk of default. The result is that for the next decade, China is set to be more of a debt collector than a banker to the developing world, facing a "tidal wave" of repayments from countries that simply cannot pay.
Investing in India under the proposed framework offers a different risk-return profile. India has maintained its investment-grade credit rating for nearly two decades, has a consistent history of honoring its sovereign and commercial commitments, and possesses a stable political system anchored by some rule of law. While returns might be more modest than the nominal rates on risky BRI loans, they would be predictable, secure, and denominated in a relatively stable currency. For Chinese state-owned banks and funds seeking to diversify their portfolios and secure safe, long-term yields, a passive financial stake in the growth of one of the world's fastest-growing major economies is a rational choice. The proposal is not a concession asked of Beijing; it is a superior financial opportunity offered to it.
Conclusion: Building a stake in stability
This proposal is not a policy of friendship. It is a strategy of pragmatic, self-interested, and de-risked engagement designed for a world of wary rivals. The immediate goal is to build Indian infrastructure with low-cost capital. But the long-term strategic objective is more subtle and more significant. It is to give China a tangible, financial stake in India's economic success and, by extension, in regional stability.
In international relations, particularly between rival powers, the creation of mutual interdependencies -- even highly constrained ones -- can act as a stabilising force. The current India-China relationship is almost entirely a zero-sum game, where a gain for one side is perceived as a loss for the other. This framework introduces a small but meaningful positive-sum element. By creating a channel where Chinese state-owned entities can profit directly from India’s continued economic growth, it adds a new variable to Beijing’s strategic calculus. It introduces a direct financial cost for actions that might destabilize India and the region. Chinese ownership of \$100B of bridges in the Indian Himalayas changes the logic of a next invasion.
This will not resolve the fundamental strategic conflict between the two nations. It will not end the border dispute or erase the deep-seated mistrust. What it can do, however, is build a small constituency within the Chinese state whose interests are aligned with a stable and prosperous India. Over a decade, as such a portfolio could potentially grow, the cost of conflict for Beijing would rise. This is the long-term payoff: not a chimerical peace, but a measure of calculated, self-interested restraint born from a tangible stake in the status quo. It is a modern, economic form of deterrence. To dream of a better peace over a ten-year or twenty-year horizon, we must lay the foundation through safe, feasible, and mutually beneficial steps today. This is one such step.
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