#350 Of Delays and Denials

Insights on current policy issues in India

—Pranay Kotasthane

Earlier this week, Bloomberg reported that India is about to approve a $370 million investment from Horse Powertrain, a joint venture backed by China’s Geely. Most news outlets view this development as a bellwether for a new modus vivendi between Delhi and Beijing. They are right but for the wrong reasons.

While most observers are closely tracking the policy positions of India, they are missing out on recent developments in China. A new Chinese law—Decree 837, the State Council Regulations on Overseas Investment—takes effect on July 1, 2026, and it gives China sweeping new powers to block, restrict, or review outbound investments. Whether Geely’s India deal survives is less an Indian regulatory question and more a stress test of China’s outward investment controls.

Horse Powertrain Ltd. is a London-headquartered company created in 2024 as an equal joint venture between Zhejiang Geely Holding Group and Renault SA. Saudi Aramco subsequently took a 10 per cent stake, leaving Geely and Renault each at 45 per cent.

The plan is a phased $370 million investment in Renault’s existing manufacturing plant in Chennai to build strong-hybrid powertrains, which pair a conventional internal combustion engine with high-capacity electric motors and a battery. These would go into Nissan and Renault vehicles sold in India, with preliminary talks underway to supply other automakers too.

From India’s perspective, this would be one of the first major Chinese-linked manufacturing investments cleared since New Delhi changed its border-country investment restrictions earlier this year. India’s willingness to approve Horse Powertrain is being read as a signal that the bilateral thaw with China is real.

But on June 2, 2026, China published Decree No. 837, adopted by the State Council in April and signed by Premier Li Qiang. It comes into force on July 1, 2026.

The law creates a comprehensive framework for regulating how Chinese companies invest abroad. Its scope is broad. Article 2 defines “outward investment” as any activity in which investors within China “directly or indirectly acquire ownership, control, management rights, and other related rights of enterprises or assets in other countries.” The word “indirectly” means Beijing can look through intermediary structures, such as this London-headquartered joint venture in question.

Several provisions bear directly on the Horse Powertrain deal. Article 11 empowers the State Council to classify outward investments as “encouraged, restricted and prohibited” based on national economic needs and the “investment environment and risk levels of relevant countries.”

The implementing rules, which will specify what falls where, haven’t been published yet. Article 13 prohibits investors from exporting or transferring restricted technologies through outward investment, including through “sending technical personnel across borders” or “arranging cross-border training.” Building a hybrid powertrain factory in Chennai inherently involves transferring manufacturing know-how. Article 15 establishes a national security review for overseas investments that “affect or may affect national security.” And Article 5 contains a broad catch-all that investors “shall not endanger China’s national security, or harm national interests and the public interest.”

The penalties under Article 27 are quite serious, and include forced divestiture, confiscation of profits, fines, and bans of one to three years on future outward investment.

China maintains a separate, older regime for controlling technology exports: the Catalogue of Technologies Prohibited or Restricted from Export, jointly administered by the Ministry of Commerce and the Ministry of Science and Technology. This catalogue was last revised in December 2023 and updated again in July 2025. It currently lists 23 completely prohibited and 109 restricted technology items.

Here’s what matters for the Geely deal: hybrid powertrain technology does not appear on these lists. Conventional automotive powertrain know-how is, as of today, freely exportable from China.

But there are many grey areas too. The December 2023 revision added LiDAR systems as a restricted technology, but only above specific technical thresholds, targeting autonomous-driving sensors rather than powertrains. The July 2025 update added export restrictions on EV battery technologies, including lithium iron phosphate (LFP) and lithium manganese iron phosphate (LMFP) cathode manufacturing processes, as well as five lithium extraction techniques. Rare earth extraction, processing, and utilisation technology remains outright prohibited from export. For example, “Preparation technology of samarium cobalt, neodymium, and cerium magnets” is outrightly prohibited.

This creates a patchwork of exposure for Horse Powertrain. The core hybrid engine and drivetrain are not restricted. But the battery pack in a strong-hybrid system likely uses LFP or a similar chemistry, and if Horse is transferring any cathode manufacturing IP to India, it now requires an MOFCOM export license. If the electric motors use rare-earth permanent magnets, and the manufacturing process involves proprietary rare-earth processing knowledge, that’s prohibited territory.

In other words, the technology export lists don’t block this deal, but they create tripwires, especially in the battery and motor components that distinguish a “strong hybrid” from a conventional engine.

Decree 837 does something the technology export lists cannot; it controls the investment itself, not just the technology inside it. Article 11’s classification system— encouraged, restricted, prohibited—operates on the destination and the strategic logic of the investment, not on whether any particular component crosses a technical threshold.

This means Beijing could, in principle, restrict Chinese outbound manufacturing investment in countries that restrict Chinese inbound investment, a reciprocity logic that would squarely catch India. It could designate “automotive manufacturing capacity building in geopolitically sensitive markets” as restricted. It could do this without amending the technology export catalogues at all.

Horse Powertrain’s corporate structure is clearly designed to reduce friction on the Indian side. But Article 2’s inclusion of “indirect” investments and Article 33’s coverage of the reinvestment of assets acquired through outward investment mean that Beijing can investigate on the basis of Geely’s 45 per cent ownership stake.

The practical question is whether Beijing wants to use these tools. The deal aligns with China’s stated interest in promoting international industrial cooperation, another goal prominently mentioned in this decree. It involves a joint venture with a major European automaker, not a unilateral Chinese play. And blocking it would undercut the broader diplomatic thaw that both sides have been carefully managing.

Nevertheless, Decree 837 establishes the principle that outward investment from China is now a regulated, reviewable, blockable activity, a counter to what the US, EU, and India have built on the inbound side. If Beijing lets this deal proceed quietly, Decree 837 remains a latent tool that keeps future investors guessing about the red lines. If it intervenes, even with a quiet delay or additional conditions, it signals that outbound investments from China in important technology segments will dry up. Keep watching because the days when China was perceived as a stable business environment are long over.

P.S.: My colleague Amit Kumar has created an excellent China Coercion Tracker. If you are a firm that does business with Chinese entities, it’s worth checking your exposure to three new Chinese decrees that have come into effect last quarter.

Insights on current policy issues in India

—RSJ

Every few years, policymakers and the central bank in India rediscover an old truth: currency exchange rates are prices, and nobody ever wins against them.

But that doesn’t stop them from trying.

The exchange rate problem that periodically comes up looks different in each iteration. In 2013, it was the taper tantrum. In 2018, it was crude at an all-time high. In 2022, it was the surge in the dollar and the aftershocks of the pandemic. Today, it is a combination of so many things: expensive oil because of a war and blockade, a resurgent dollar because investment in AI is driving the U.S. economy, higher-for-longer American interest rates despite Trump’s dislike for it and the lowest interest-rate differential between India and the United States for a long, long time. But underlying these shifting circumstances lies the same old question. How much should a central bank spend to resist a weakening currency?

The RBI has not held back on smoothing the rupee’s decline over the last couple of years. The exact number depends on how one adjusts for valuation effects, but it is safe to say that more than a hundred billion dollars have been deployed. The rupee has weakened anyway. The intervention has not prevented depreciation. It has only managed to slow the rate of decline.

The lesson learnt, once again,is important because it goes to the core of what foreign-exchange reserves are for. No central bank, not even one with vast reserves, can consistently resist economic fundamentals. If domestic inflation is higher, if oil prices stay high because there’s no real Iran deal for a while, if the interest-rate differential narrows further and if capital becomes more expensive, the Rupee will continue to depreciate. The purpose of the intervention seems, therefore, not to avoid the fall but to prevent it from becoming disorderly. Does it really help, except, maybe politically, to hold on to some psychological level of the currency?

India’s external position today is not as comfortable as the headline reserve number suggests. The stock of reserves remains large in absolute terms, but relative measures are useful here. Reserves relative to imports, to broad money and to potential portfolio outflows no longer look as strong as they did a decade ago because the economy is not the same size as then. At the same time, the spread between Indian government bonds and US Treasuries has tightened to levels that are unprecedented for India. Investors are being asked to hold Rupee assets for a modest premium over assets that carry no currency risk and virtually no credit risk. Why will there be a demand for Rupee? This artificially low rate also diminishes India’s room for policy manoeuvre.

The math on this is uncomfortable. If inflation is projected to be around 5+ per cent (or more) and the repo rate stands at 5.25 per cent, the ex ante real policy rate is barely positive. For much of the inflation-targeting era, India has been accustomed to a real policy rate of around one to one and a half percentage points. By those standards, monetary policy is no longer obviously restrictive. It is the most accommodating among emerging market economies. The rate hikes that other EMs have undertaken in the past couple of quarters suggest there is a realisation about this elsewhere.

This matters because central banks have choices in how they defend currencies. One approach is to spend reserves, offer swap facilities, encourage foreign-currency deposits and support overseas borrowing. This entire playbook is at work now following the last MPC announcements. Another is to raise interest rates, make domestic assets more attractive and let Rupee and trade deficit find their level. India has chosen the first route so far for reasons that suggest it thinks the current scenario is temporary. There are obvious explanations being offered for this choice. Like, the economy might be slowing because of supply shocks and a clear sign of a bad monsoon. Investment still remains uneven and capex is muted. Policymakers fear that higher rates will choke off credit and damage growth. A sudden depreciation of the rupee would raise imported inflation, worsen the oil bill and create political discomfort. This all makes sense but then there will never be a good time to raise rates in a world as uncertain and an economy as linked to external shocks as India. .

Every policy choice creates second-order consequences. The measures now being employed help buy time. They improve financing conditions on the margin. They do not change the underlying drivers of currency weakness. The experience of the FCNR(B) scheme in 2013 illustrates the point. It was highly successful in stabilising markets during a period of panic. But it did not solve India’s external vulnerabilities in the long run. The assumption embedded in today’s policies is that the present pressures are similarly temporary while they are not.

India cannot spend reserves indefinitely to resist a structural repricing of its currency. Nor can it continually socialise currency risk through public institutions while keeping domestic interest rates artificially low.

At some point, the various policies begin to work against one another. The central bank intervenes in the foreign-exchange market because the currency is weak. It encourages dollar inflows because the reserve position is becoming less comfortable. It absorbs swap risk to attract foreign currency. Yet it maintains low real interest rates that themselves contribute to pressure on the exchange rate. The policies become circular. One intervention creates the need for another. This does not mean the RBI should abandon the rupee to market forces. But there is a difference between using reserves as insurance and using them as a substitute for price adjustment.

If the economy is entering a world of structurally higher oil prices, a stronger dollar and persistently elevated global interest rates, then some combination of rupee depreciation and higher domestic rates may simply be unavoidable. The cost of avoiding that adjustment can become larger than the adjustment itself.

The attempt to preserve growth through low interest rates can end up producing precisely the conditions that require more painful tightening later. Currencies have a way of exposing inconsistencies. They force policymakers to reveal what they truly value and what costs they are willing to bear.

The cheapest way to defend a currency is sometimes to let it fall and raise interest rates a little. Everything else done for too long can become a very expensive attempt to postpone the inevitable.

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Reading and listening recommendations on public policy matters

1. [Puliyabaazi] In our new episode, political scientists Niranjan Sahoo and Ambar Kumar Ghosh speak about the entry barriers created by the rising electoral costs in India. They take us through the entire supply chain of contesting elections in India.

2. [Article] Pooja Mehra and Arpita Mukherjee point out in their Mint article that shifting to paperless trade can reduce trade costs by nearly 25 per cent!