KEY TAKEAWAYS
KEY TAKEAWAYS
By: Sushant Singh
While India-China tensions began to thaw last year, the bilateral relationship has mostly been on the decline in recent years. In response, New Delhi has taken two distinct approaches to its relations with Beijing — a more confrontational security stance on the one hand and a cooperative economic posture on the other. The 2020 clashes between India and China on the disputed border, which resulted in the first deaths on the Line of Actual Control (LAC) in decades, and the subsequent deterioration in diplomatic ties, only further highlighted this divergence over the past five years. After the clash, the Indian government heightened anti-China rhetoric, banned Chinese apps and argued that a “normal” India-China relationship required peace on the border. Yet trade with China continued to reach record highs.
The two countries have taken steps toward normalized ties after an October 2024 border agreement, but the experience of the preceding four years has showcased the depth and scope of India’s economic vulnerability to China. China is India’s top trading partner — with bilateral trade significantly skewed in China’s favor — and New Delhi relies on Beijing for imports in industries critical for India’s growth including electronics, solar power and pharmaceuticals. China’s recent restrictions on high-tech manufacturing to prevent Chinese companies from moving manufacturing away from Beijing has already demonstrated how disruptive restrictions could be for Indian industries.
The May 2025 India-Pakistan crisis, sparked by a terrorist attack in Kashmir, saw intense military exchanges and highlighted China’s overt support for Pakistan — including military assistance. This deepened India’s concerns about a “two-front” threat, reinforcing its view of China as a direct, interconnected security challenge.
In the future, Beijing could leverage its dominant position in key supply chains to disrupt or limit exports of critical components to India, potentially crippling sectors like electronics manufacturing or pharmaceutical production. China could also impose targeted trade restrictions on specific Indian exports, as it has done with other countries like Australia and Lithuania. Additionally, China could exploit its position as a major investor in Indian startups and technology companies to exert pressure on the Indian economy. For India, the impact of any such coercive measures would be amplified by the sheer scale of the trade imbalance and its dependence on Chinese imports for its manufacturing ambitions.
If the U.S. is serious about cultivating India as an effective counterweight to China in Asia, it’s in Washington’s own interest to aid India’s de-risking efforts.
Because the relationship continues to face the potential for confrontation and disruption, India must find ways to de-risk its economic ties with China, including stricter checks on Chinese investments and re-examining investments from third-country jurisdictions. If the U.S. is serious about cultivating India as a powerful strategic partner and effective counterweight to China in Asia, it’s in Washington’s own interest to aid India’s de-risking efforts, which the United States can support through capital, technological know-how and helping to create supply chain alternatives in friendly countries to lessen Beijing’s potential economic leverage.
Despite being neighbors, India-China trade was minimal until the end of the Cold War and then accelerated after China joined the World Trade Organization in 2001. In 2000-2001, India was China's 12th-largest trading partner, and China had become India's top trading partner a decade later, a position it has held frequently. In 2023, bilateral trade reached $136.22 billion, up 1.5% from the previous year.
India's significant trade imbalance is a concern because it exacerbates India's dependency on China for certain items. Official Chinese data shows that India had a trade surplus with China from 2003 to 2005, but this reversed thereafter. In 2005, India exported $10 billion worth of goods to China, which has only increased to $14.9 billion in 2024, while imports from China have grown tenfold from $10 billion to over $100 billion during the same period. Over the past 15 years, India's imports from China grew 2.3 times faster than India's total imports from all other countries. In FY2024, China made up 15% of India’s total merchandise imports — a significant portion considering that India does not import crude or liquid natural gas from China, commodities which form a quarter of India’s overall import bill.
The trade imbalance is so high that it stands out even among China’s trading partners. Only the United States, Hong Kong and the Netherlands provide a greater trade surplus for China than India. India’s overall trade with the United States is comparable to its trade with China but India enjoys a substantial $36.7 billion trade surplus with the United States. From 2020-2024, the trade imbalance in China’s favor has doubled. Evidently, campaigns boycotting made-in-China goods or targeting Chinese firms have had negligible impact on Sino-India trade.
INDIA’S TRADE DEFICIT WITH CHINA
| Year | Imports from China | Exports to China | Trade Deficit with China | India's Total Trade Deficit |
| 2014-15 | 60.41 | 11.93 | -48.48 | -137.69 |
| 2015-16 | 61.71 | 9.01 | -52.70 | -118.72 |
| 2016-17 | 61.28 | 10.17 | -51.11 | -108.50 |
| 2017-18 | 76.38 | 13.33 | -63.05 | -162.05 |
| 2018-19 | 70.32 | 16.75 | -53.37 | -184.00 |
| 2019-20 | 65.26 | 16.61 | -48.65 | -161.35 |
| 2020-21 | 65.21 | 21.19 | -44.03 | -102.63 |
| 2021-22 | 94.57 | 21.26 | -73.31 | -191.05 |
| 2022-23 | 98.50 | 15.31 | -83.20 | -264.90 |
| 2023-24 | 101.75 | 16.66 | -85.09 | -238.32 |
(Source: Indian Embassy in Beijing)
The Indian embassy in China explains the trade deficit with two main points. First, India exports a narrow range of mostly primary commodities to China. Second, China imposes market access barriers on many of India's competitive sectors like agriculture, pharmaceuticals and IT services. The Indian embassy in China concedes that India’s predominant exports have only consisted of iron ore, cotton, copper, aluminum, and diamonds and other natural gems. These commodities have been overshadowed by Chinese exports of machinery, power-related equipment, telecom equipment, organic chemicals and fertilizers.
While this trade has been attributed to India’s economic rise over the past several decades, the heavy reliance began to emerge as a more significant strategic concern during a 2017 military standoff in Doklam between the two.
Yet, moving away from Chinese goods has proven difficult. A study by Sunita Raju from the Indian Institute of Foreign Trade found that China was the cheapest supplier for over 30% of 32 product subcategories and the sole supplier for 16 products. Even when cheaper alternatives are available, Indian manufacturers often preferred Chinese products. These imports are critical to India’s manufacturing sector and often aren’t made domestically.
CHINA AS INDIA’S TOP IMPORT SOURCE (IN 2022)
| Category | China’s share | Other’s share |
| Electronics, Telecom and Electrical Products | 43.9% | Hong Kong – 12.1% Republic of Korea – 6.3% |
| Machinery | 39.7% | Germany – 7.7% United States – 7.0% |
| Chemicals and Pharmaceuticals | 26.8% | Saudi Arabia -7.1% United States – 6.4% |
| Products of Iron, Steel and Base Metals | 16.9% | Republic of Korea – 10.1% Japan – 7.2% |
| Plastics | 23.9% | Republic of Korea – 10.3% UAE – 6.7% |
| Textile and Clothing | 38.2% | Bangladesh – 10.9% United States – 6.8% |
| Automobiles | 26% | Republic of Korea – 13.4% Germany – 13.4% |
(Global Trade Research Initiative)
Even as India-China security tensions rise, India’s dependency on Chinese goods remains strong and even defies overall trade patterns. In FY2024, while India's overall imports fell by 5.6%, imports from China grew by 3.3%. Chinese goods are seen as irreplaceable due to the lack of viable alternatives or the economic infeasibility of other options. This has created a structural reliance on China.
India’s economic vulnerability vis-à-vis China is particularly pronounced due to its significant trade imbalance with China and its heavy reliance on Chinese imports in critical sectors.
Data from India’s commerce ministry shows that the main imports from China have remained consistent over the years, including electronics, telecom products, electrical machinery, nuclear reactors, heavy machinery, organic chemicals, pharmaceuticals, textiles, automobiles and metal products. These major industrial products accounted for $100 billion or 98% of India’s total imports from China last year. China contributes 30% of India’s global imports of these industrial products. This dependency has grown over time — in the past 15 years India’s imports of these products from China has grown by 215% while imports from the rest of the world grew by only 94.5%.
Economic vulnerability can be defined as an economy’s exposure to exogenous shocks, arising out of economic relationship with another country or a set of countries. In India's case, this vulnerability vis-à-vis China is particularly pronounced due to its significant trade imbalance with China and its heavy reliance on Chinese imports in critical sectors.
Running a trade deficit isn't inherently negative — imports can bridge gaps in domestic supply, enhance competitiveness, and keep inflation low — and India’s economic rise since the 1990s has in many ways been on the back of a liberal trade environment. As a former Indian ambassador told the author, India’s dependency on Beijing was justified in the name of “importing efficiency,” fueled by cheap Chinese loans in sectors such as thermal power and extensive private investment in Indian start-ups.
But trade deficits can also destabilize a domestic economy. Excessive reliance on imports can displace local industries, lead to deindustrialization and create high unemployment. More critically, when the reliance on imports is in specific sectors, as is the case between India and China, it can create structural dependencies that adversaries can exploit as strategic vulnerabilities. Beijing can impose significant costs on India while Delhi can do little to retaliate. India placing limits on Chinese exports in a military conflict may satisfy domestic political demands but would inflict little damage on the Chinese economy.
Conversely, Chinese economic retaliation could severely impact sectors of the Indian economy, particularly those relevant for Indian exports. China has used trade as a geopolitical weapon in the past, as seen in its disputes with Norway and Australia, and could do the same against India. While Chinese companies could find other markets, India would struggle to find affordable alternatives. For instance, India relies heavily on China for active pharmaceutical ingredients (APIs), with 90-100% of certain APIs sourced from China between 2018-2020. During the COVID-19 pandemic, China temporarily restricted API exports to India, forcing New Delhi to limit its pharmaceutical exports to ensure domestic supply. A deliberate move by China to restrict API exports could severely constrain India, forcing it to seek expensive alternatives or import finished pharmaceuticals at higher costs, disrupting its export commitments.
India’s EV sector faces acute vulnerability due to 93% dependence on Chinese rare earth magnets, critical for motors and batteries. Beijing’s April 2025 export controls (requiring licenses and delaying shipments by 45 days or more) threaten production halts, with stocks lasting weeks. This exposes economic risks: stalled EV output, inflated costs and disrupted localization targets for Delhi’s Production Linked Incentives (PLI) scheme. Strategically, China’s near-monopoly (90% global processing) grants geopolitical leverage, forcing India to seek emergency imports while accelerating domestic mining and magnet-free tech, solutions that are years from fruition. It is a vulnerability India could be faced to confront in other sectors, too.
Chinese economic coercion against India could take several forms. Beijing might leverage its dominance in key supply chains to disrupt or limit exports of critical components to India, potentially crippling sectors like electronics manufacturing or pharmaceutical production. China could also impose targeted trade restrictions on specific Indian exports, as it has done with other countries like Australia and Lithuania. Additionally, China might exploit its position as a major investor in Indian startups and technology companies to exert pressure on the Indian economy.
Unlike some previous targets of Chinese economic coercion, India's large market size and strategic importance in the Indo-Pacific might make it a more significant test case for Beijing's coercive tactics, potentially leading to more sustained and multifaceted Chinese pressure.
China’s economic coercion has often fallen short of its aims, as seen in the limited impact of trade restrictions on Australia and Norway. There are always third-party workarounds for Indian importers, particularly after the free trade agreement with the UAE or through countries in the Association of Southeast Asian Nations (ASEAN). Moreover, Beijing has never invoked the threat of strangulating India, even when diplomatic and security ties have been rather tense. However, India’s far greater dependency on Chinese inputs, especially in critical sectors, means the threat of Chinese trade disruption is significantly more potent and credible in the Indian context.
China’s ability to hurt India economically has already been on display with recent moves to prevent high-tech manufacturing to move from China to India. Officials in Beijing have encouraged regulatory agencies and local governments to curb technology transfers and equipment exports to India and other Asian countries. Apple’s main assembly partner, Foxconn Technology Group, has been unable to bring Chinese staff to India or receive additional specialized machinery from China. Meanwhile, Chinese workers in Indian iPhone factories have reportedly been asked to return home. In the fiscal year ending March 2024, approximately one in seven iPhones in India ($14 billion worth) were assembled in India. The restrictions on tech equipment have also disrupted the Indian unit of Chinese electric vehicle (EV) maker BYD and Waaree Energies, India’s largest solar-panel maker.
China has also imposed other export controls that have caused problems for India in critical sectors. In the summer of 2023, China imposed strict controls on minerals including gallium and germanium — critical to solar power, transit and semiconductor industries— to countries including India, the United States, Japan and the Netherlands. For India, these minerals are vital for its solar cell and module production. Tunnel-boring machines, which are widely used for transportation and energy transition projects, from the German company Herrenknecht have also reportedly faced “extraordinary circumstances” in the customs clearance leading to substantial delays when transiting between China and India. Indian importers have tried to bypass China's export restrictions by rerouting it by traders based in the United Arab Emirates, a loophole that can be easily shut down by Beijing in case it decides to impose a total ban.
India's dependency on China also affects the United States. In 2023, around 9% of U.S. solar imports were from India. China, however, dominates the global production of polysilicon, essential for solar panels, and controls about 98% of ingot and wafer production, and most of the U.S. imports from India came from Waaree Energies, which uses components from a Chinese company previously barred from the U.S. market over forced labor concerns. This highlights the interconnectedness of global supply chains and the strategic risks of dependency on Chinese imports.
India’s dependency on China undermines the Indo-Pacific strategy of the United States, which relies on India as a counterbalance to China.
India's ongoing trade negotiations with Washington aim to secure tariff exemptions and market access, strengthening its economic shield against China. A potential interim deal before July 9 would avert 26% U.S. tariffs on Indian exports while enhancing competitiveness against Chinese goods facing lower U.S. duties (55% vs. prior 145%). However, India resists U.S. demands to open agricultural markets and seeks steel tariff relief, balancing protectionism with strategic concessions on almonds and defense imports. Success would bolster India’s position in global supply chains amid China’s redirected exports post-U.S.-China tariff easing. Failure risks ceding ground to Chinese trade resurgences.
China benefits from India's increasing trade dependence, which poses a strategic risk for New Delhi and its Western allies. This dependency undermines the Indo-Pacific strategy of the United States, which relies on India as a counterbalance to China. The Quad (made up of U.S., India, Japan and Australia) or other alliances may struggle to provide a viable alternative if India remains economically tethered to China. This economic dependence could undermine the Indo-Pacific Strategy in several ways:
These factors could collectively weaken India's role as a counterbalance to China in the Indo-Pacific, potentially undermining the strategy's effectiveness in maintaining regional stability and a rules-based order.
SKEWED DEPENDENCY
| Year | India’s exports to China as % of its total exports | India’s imports from China as % of its total imports |
| 2017-18 | 4.39% | 16.41% |
| 2018-19 | 5.07% | 13.68% |
| 2019-20 | 5.30% | 13.75% |
| 2020-21 | 7.26% | 16.53% |
| 2021-22 | 5.04% | 15.43% |
| 2022-23 | 3.39% | 13.76% |
| 2023-24 | 3.81% | 15.06% |
(Source: Author’s own from trade data)
In April 2020, just weeks before the Galwan clash, the Indian government mandated scrutiny of all Chinese investments, regardless of sector or amount, which required government approval for any investment from countries sharing a land border with India. The policy was triggered by fears of opportunistic acquisitions during the pandemic, especially after the People’s Bank of China acquired a 1.01% stake in HDFC, India’s largest mortgage lender, when its share price was declining. This raised concerns about high-performing Indian companies becoming easy targets for acquisitions.
New Delhi's strategy to protect Indian companies aligned with global trends, as the United States and European Union also implemented rules to prevent opportunistic foreign takeovers. Reports of Chinese companies aggressively seeking investment opportunities in India heightened these concerns. In early 2020, India saw 161 Chinese investment transactions, the highest in two decades. The commercial concerns took on geopolitical dimensions after the Galwan clash, leading to stringent controls on Chinese investments. Approvals for new Chinese investments became rare, causing companies like BYD and Great Wall Motor to shelve their $1 billion investment plans in India due to regulatory hurdles.
Simultaneously, Chinese mobile companies, which dominate 80% of India’s cell phone market, faced scrutiny from Indian tax and regulatory authorities. India’s federal financial crime agency froze $670 million of Chinese cell phone manufacturer Xiaomi's bank assets, alleging illegal remittances. Oppo and Vivo, other top Chinese cell phone manufacturers, were also targeted. Despite setting up or planning manufacturing units, these companies are still negotiating with Indian firms for manufacturing and distribution partnerships, following the government's “Make in India” initiative. However, major Indian conglomerates prefer to establish their own manufacturing operations rather than partner with Chinese firms.
The Indian government wants to encourage Chinese-owned companies to have Indian equity partners, local leadership and distribution networks. However, Indian corporations are reluctant to own brands with Chinese origins and prefer partnerships where they can benefit from sales without brand ownership. These partnerships can be mutually beneficial, allowing Indian companies to manufacture devices for Chinese brands without being associated with them. This trend is evident in industries such as fast fashion. This model allows Indian companies to leverage their market presence without the negative connotations of Chinese brand ownership.
Since Modi’s reduced electoral mandate in 2024, Indian corporations have been pushing for more concessions toward Beijing to reduce costs and enhance their own competitiveness and profits. The Confederation of Indian Industry, the country’s largest corporate lobbying group, urged the government to review the 2020 mandated scrutiny of Chinese investments and have advocated for a non-restrictive approach toward investments, component imports, technology transfer, skilled manpower movement and easing non-trade tariffs against China. The government was under pressure from the electronics industry, which claims that these restrictions have cost them $15 billion in production losses over the last four years.
The Indian government, initially reluctant to grant visas to Chinese workers, expedited visas for Chinese citizens involved in projects under its PLI scheme, which is meant to incentivize foreign manufacturers to manufacture in India. Major Indian corporations like the Adani group, seen as a favorite of the Modi government, were pressing for priority visas for Chinese workers to install new machinery in their plants. Even government ministries advocated for easing visa restrictions for Chinese technicians. Modi’s party, having suffered in the elections due to poor employment records, could no longer ignore the manufacturing sector's demands.
A shift was evident in the entry of Chinese brands into India, mostly through joint ventures with Indian firms. For instance, Chinese fashion giant Shein, banned in 2020, is returning via Reliance Retail. China’s SAIC Motor has announced a $1.5 billion partnership with Indian steelmaker JSW to build and sell MG-branded EVs in India. Previously, most imports were handled by Indian firms, but with Chinese firms entering the Indian market, industrial product imports will rise rapidly. Chinese firms operating in India will likely source most requirements from their parent companies, increasing imports from China. The SAIC Motor and JSW Group joint venture aims to sell over one million new energy vehicles by 2030. With each vehicle costing $15,000 and a 60% import dependence on China for components, the Global Trade Research Initiative estimates, the annual import bill for EVs alone could exceed $10 billion.
This trend is also evident in the solar power sector, where 70% of India’s solar power generation capacity relies on Chinese-made equipment. Despite several tariff barriers on Chinese solar imports over the last decade, the domestic market has not seen significant growth. Of the 12 winners of India’s PLI scheme for high-efficiency solar photovoltaic modules, 11 have listed Chinese supply chain partners and service providers, with some mentioning more than 20 Chinese vendors.
Since the October 2024 border agreement, there has been increasing domestic and geopolitical pressure for New Delhi to normalize ties with Beijing. High-level meetings between Xi and Modi have highlighted the shift in the public narrative toward one of normalcy and away from the question of strategic vulnerability created by close bilateral economic ties. Modi’s economic advisors, advocating for stronger economic ties with Beijing, have prevailed over the national security considerations in New Delhi. Even if India chooses to move forward a path of economic cooperation, it can look at certain options to secure its strategic interests.
To mitigate its geoeconomic vulnerability to China, India should undertake three efforts.
First, the United States should collaborate with India to identify critical products where New Delhi needs to reduce its dependency on China. Washington can help identify alternative suppliers in friendly countries that offer goods of matching quality at competitive prices. Providing India with capital and technological know-how will improve its industrial base for long-term manufacturing. Because of its global reach and influence, the United States can offer timely solutions and alleviate India's strategic vulnerability to Beijing. Without U.S. support, India will struggle to reduce dependency, leading to domestic pressures to re-engage with China.
Secondly, Washington should incentivize U.S. firms to diversify supply chains by relocating manufacturing from China to India and offer enhanced incentives for U.S. companies to invest in India, especially in critical industries. With India, the United States can co-develop a bilateral supply chain initiative to secure sources of clean energy technology and critical minerals. One option that would support this would be to pursue a limited free trade agreement with India focused on key technology areas, which would signal that trade and security are equally important in the geopolitical contest with China.
China benefits from India's increasing trade dependence, creating a strategic vulnerability for India and potentially harming its Western partners. India’s dependency also risks undermining the U.S. Indo-Pacific strategy, particularly if it were to constrain India’s support for U.S.-led initiatives due to concerns of economic retaliation from China. While New Delhi cannot fully eliminate its reliance on crucial imports from China, it is strategically essential for India to mitigate risks in its economic ties. This includes implementing stricter checks on Chinese investments in Indian firms and re-examining suspected Chinese investments from third-country jurisdictions. By taking these steps, India can strengthen its economic resilience and safeguard its strategic interests in the face of growing geopolitical challenges.
Sushant Singh is lecturer in South Asian studies at Yale University and a consulting editor with The Caravan magazine in New Delhi. A regular contributor to various global publications, he has earlier been a senior fellow at India’s Centre for Policy Research, deputy editor at the Indian Express newspaper, and an Indian army officer.