As the Iran conflict threatens global energy supplies, New Delhi’s recalibration reveals the difficult strategic balancing act confronting the Modi government.
The geopolitical landscape of 2026 has grown increasingly volatile. The war in Iran triggered by the joint military campaign of the United States and Israel has rapidly evolved into a crisis with global consequences. With energy markets rattled, shipping routes under threat, and diplomatic alliances under strain, governments around the world are scrambling to protect their economic interests. Amid this turmoil, India has taken a quietly consequential decision: easing restrictions on investments from neighbouring countries, effectively reopening the door to capital from China.
At first glance, the policy shift may appear technical or bureaucratic. Yet its timing and strategic implications tell a deeper story. It signals that the government led by Narendra Modi finds itself navigating a far more complicated geopolitical environment than anticipated when the Iran conflict erupted on February 28. Facing an impending energy crisis and economic pressures at home, New Delhi has chosen pragmatism over rigid posturing.
A War That Reshaped the Global Energy Equation
The conflict involving Iran has already triggered tremors across global energy markets. Iran sits at the heart of the Persian Gulf energy ecosystem, and any instability in the region threatens the flow of oil and gas through critical maritime corridors such as the Strait of Hormuz. For a country like India one of the world’s largest energy importers this scenario is deeply alarming.
Nearly 85% of India’s crude oil requirements are met through imports, with a significant share originating from West Asia. As the conflict escalated, shipping insurance costs soared, tanker routes were disrupted, and fears of supply shortages intensified. Even the mere perception of instability in the region was enough to send global crude prices upward.
In such a scenario, economic policy cannot remain detached from geopolitical realities. India’s leadership understands that sustained high energy prices could slow economic growth, worsen inflation, and strain public finances. The government therefore appears to have concluded that it must mobilize every available economic lever to maintain stability including revisiting its policy toward Chinese investments.
Revisiting the Legacy of Press Note 3
The restrictions that India has now eased originated during the early months of the COVID-19 pandemic. In April 2020, New Delhi introduced the controversial Press Note 3 (PN3) amendments to its foreign investment policy. The measure required investments from countries sharing land borders with India to undergo additional government scrutiny instead of being processed through the automatic approval route.
Although the policy was framed as a safeguard against opportunistic takeovers of struggling Indian firms during the pandemic, it was widely understood to be directed primarily at China. The move came at a time when geopolitical mistrust between the two Asian giants was rising.
That mistrust soon escalated dramatically following the violent confrontation between Indian and Chinese soldiers in the Galwan Valley in June 2020 – the first deadly border clash between the two countries in 45 years. The incident hardened public opinion in India and reinforced the government’s decision to tighten economic and technological restrictions on Chinese companies.
The impact of PN3 on investment flows was immediate. Between 2016 and 2020, Chinese foreign direct investment into India had reached roughly $886 million. But after the restrictions were introduced, inflows collapsed dramatically, falling to around $68 million between 2021 and early 2025. What had once been a rapidly expanding investment corridor virtually dried up.
Over time, however, concerns began to emerge within India’s policy circles about the unintended economic consequences of the policy. A report published in August 2025 by the Indian Council for Research on International Economic Relations (ICRIER) argued that while security safeguards were necessary, the blanket restrictions had created an excessively hostile investment environment.
The study recommended a calibrated reassessment of PN3, suggesting that India could unlock economic opportunities by permitting Chinese investments in non-sensitive sectors while maintaining strict scrutiny in strategic industries.
The March 10 Decision
Against this backdrop, the Union Cabinet chaired by Prime Minister Modi moved on March 10 to ease the PN3 restrictions. Officially, the policy adjustment was framed as a broader relaxation for investments from “neighbouring countries.” In reality, the decision was widely interpreted as a signal that India is prepared to cautiously reopen its economy to Chinese capital.
The timing is particularly striking. The announcement came as the Iran war entered its second week and global markets were bracing for prolonged instability. At a moment when energy prices threaten to disrupt economic growth, attracting foreign investment becomes an urgent priority.
By allowing Chinese investment flows to resume, New Delhi hopes to stimulate manufacturing, technology development, and infrastructure expansion sectors critical for sustaining economic momentum during a global downturn.
Yet this move is not simply about economics. It also reflects the evolving dynamics of India’s foreign policy.
The West Asia Puzzle
India’s diplomatic posture during the Iran crisis has raised eyebrows in several quarters. New Delhi has signalled tacit support for the American and Israeli position while refraining from backing Iran in international forums.
This stance became especially evident when the United Nations Security Council adopted Resolution 2817 in March 2026 condemning Iranian attacks on Gulf Cooperation Council states. India joined more than 130 countries in supporting the measure.
Simultaneously, New Delhi declined to strongly condemn the assassination of Ali Khamenei, Iran’s long-time Supreme Leader a decision that placed India somewhat at odds with several members of the BRICS grouping.
Such diplomatic choices carry consequences. Relations between India and Iran have already been strained since India halted Iranian oil imports during the sanctions regime imposed by the United States under the administration of Donald Trump.
Further friction arose over the long-delayed development of the Farzad-B gas field, from which India’s state-owned ONGC Videsh Ltd was eventually excluded in 2021. The project was instead awarded to the Iranian firm Petropars Group.
In recent years, Iran has increasingly tilted toward China for economic and strategic partnerships. In this context, maintaining workable relations with Beijing may indirectly help New Delhi rebuild channels of communication with Tehran.
Trade Frictions with Washington
Complicating matters further are the evolving economic tensions between India and the United States. Although Washington remains one of India’s most important strategic partners, trade disputes have intensified under the renewed presidency of Donald Trump.
Tariff hikes and investigations under Section 301 of the US Trade Act have placed pressure on several Indian export sectors, particularly textiles, gems and jewellery, marine products, and chemicals. Even after a February 2026 trade agreement reduced certain tariffs, many small exporters continue to struggle.
For India’s vast network of micro, small, and medium enterprises, these developments represent a serious challenge. With thousands of exporters searching for alternative markets, the government has been forced to provide interest subsidies, credit guarantees, and policy support.
Against this backdrop, the reopening of Chinese investment channels offers another economic lifeline. Capital from Chinese firms could help expand manufacturing capacity, create jobs, and support India’s ambition to become a global production hub.
Strategic Pragmatism in an Uncertain World
India’s decision to ease restrictions on Chinese investments is therefore less a dramatic geopolitical pivot than an act of strategic pragmatism. Faced with a convergence of crises war in West Asia, volatile energy markets, trade tensions with Washington, and strained ties with Tehran New Delhi is attempting to maintain economic stability without abandoning its broader strategic goals.
The Modi government has built much of its diplomatic identity on the principle of “multi-alignment” maintaining constructive relationships with competing global powers while preserving strategic autonomy. The present moment may be the most severe test of that doctrine.
By quietly reopening the door to Chinese capital while simultaneously cooperating with the United States and Israel on the Iran issue, India is attempting to walk a narrow geopolitical tightrope.
Whether this balancing act succeeds remains uncertain. But one thing is clear: the emerging global order is forcing even the most confident governments to rethink their assumptions. In an era defined by wars, sanctions, and supply chain disruptions, economic survival increasingly demands flexibility.
India’s latest policy shift is a reminder that in geopolitics, ideology often yields to necessity.
Dr. Prosenjit Nath is a techie, political analyst, and author.
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