India-China trade: India and China, as neighbouring economic giants, share a relationship marked by both rivalry and interdependence. While geopolitical tensions and trade imbalances have strained ties, China’s rise as a global economic superpower presents India with opportunities to leverage its own economic growth. However, realising this potential requires India to address significant trade deficits, build resilient domestic industries, and strategically navigate diplomatic and economic challenges.
China remains India’s largest trading partner, with bilateral trade reaching $101.73 billion in FY24. However, this relationship is highly asymmetric, with India importing nearly six times as much as it exports to China. India’s trade deficit with China surged to a record $85.06 billion in FY24, fuelled by imports of electronics, renewable energy components, and machinery.
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Despite these challenges, the two economies are intertwined through global supply chains. For instance, India’s burgeoning electronics manufacturing sector, led by companies like Tata Electronics and Foxconn, depends heavily on Chinese inputs and machinery. This paradox reflects India’s growing participation in global supply chains, even as it strives to reduce reliance on Chinese imports.
The impact of China’s export restrictions
Recent export restrictions imposed by China on critical minerals like gallium and germanium have disrupted India’s electronics, solar, and electric vehicle (EV) sectors. These measures, part of China’s broader strategy to counter Western sanctions, highlight the vulnerabilities in India’s supply chains. Key players like BYD and Tata Electronics have faced production delays, underscoring the urgent need for India to build self-reliance in these critical industries.
While China’s restrictions aim to safeguard its strategic interests, they have also exposed its own dependency on global demand. If extended to broader markets, these curbs could weaken global supply chains and hurt China’s exports, creating an opening for India to strengthen its manufacturing base.
Leveraging China’s economic challenges
China’s economy faces mounting pressures, including a property market slump, declining consumer demand, and trade restrictions from the United States. These challenges have forced Beijing to seek new markets for its excess industrial capacity. India, with its growing consumer base and economic potential, could benefit from this realignment.
To do so, India must strategically position itself as a viable alternative in global supply chains. This involves integrating into supply networks that China currently dominates, fostering partnerships with Chinese businesses, and encouraging investments that enhance India’s domestic capabilities without compromising security.
The case for strategic engagement
India’s geopolitical and economic strategies should balance firmness against Chinese actions with pragmatic engagement. Diplomatic efforts, such as the recent thaw in relations following meetings between Indian and Chinese leaders, signal the potential for a reset. Resuming direct flights, easing visa restrictions, and selectively allowing Chinese investments could rebuild trust and facilitate economic collaboration.
However, this engagement must align with India’s long-term goals. Policies like Press Note 3, which restrict Chinese investments in strategic sectors, should remain in place to safeguard national security. At the same time, India could explore targeted collaborations in non-sensitive areas, such as renewable energy and EVs, where Chinese expertise and capital can accelerate domestic growth.
Building resilience through domestic reforms
Reducing dependence on Chinese imports requires a multipronged approach:
Boosting Manufacturing Competitiveness: Expanding the Production-Linked Incentive (PLI) scheme to more sectors, including semiconductors and battery manufacturing, can strengthen India’s industrial base. Enhanced focus on land, labour, and infrastructure reforms will also improve ease of doing business.
Investing in Research and Development: Allocating resources to R&D in high-tech industries, such as EV batteries and solar technologies, will reduce reliance on Chinese components and foster innovation.
Diversifying Supply Chains: Strengthening trade partnerships with countries like Japan, South Korea, and ASEAN members can provide alternatives to Chinese imports. Free Trade Agreements (FTAs) with nations such as the UK can further diversify India’s supply sources.
Encouraging Local Value Addition: Policies that promote local manufacturing of intermediate goods will help India move up the value chain and reduce import dependency.
India-China trade: Balancing diplomacy and economic interests
India’s economic ties with China must be navigated within the broader context of its geopolitical alliances. As tensions between the U.S. and China escalate, India must carefully balance its relationships with both powers. Aligning with the U.S. on strategic issues while maintaining economic cooperation with China can enhance India’s position as a global player.
India’s economic engagement with China is both a challenge and an opportunity. While trade imbalances and geopolitical tensions persist, China’s economic rise offers India a chance to integrate into global supply chains, attract investments, and build domestic resilience. Achieving this balance will require India to adopt a nuanced approach, combining assertive diplomacy with robust domestic policy reforms.
As India prepares for the Union Budget 2025, policymakers must prioritise measures to reduce reliance on Chinese imports, attract strategic investments, and foster sustainable growth. By leveraging China’s strengths while safeguarding its own interests, India can turn its complex relationship with its northern neighbour into a driver of economic transformation.