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By Dr. Badri Narayanan Gopalakrishnan, Fellow and Former Head-Trade, NITI Aayog.
The relationship between India and China is a complex tapestry of deep economic interdependence and persistent geopolitical friction. This dynamic requires a pragmatic, self-interested policy from New Delhi, one that leverages its strengths to manage challenges, reduce vulnerabilities, and seize opportunities. In the current global environment, often characterized as a “Cold War 2.0” with escalating US-China rivalry, India must deftly manoeuvre itself to ensure its rise aligns with its own national interests, rather than being dictated by external powers.
The geopolitical undercurrents: Beyond the diplomatic thaw
Recent diplomatic engagements have shown signs of a cautious reopening between India and China. Since the BRICS summit in Kazan in October 2024, confidence-building measures have included the easing of visa restrictions and discussions around direct flights and the resumption of religious pilgrimages. China has permitted Indian pilgrims to visit sites in Tibet, and India, in turn, has resumed issuing tourist visas to Chinese nationals after a five-year freeze. There are also discussions to reopen three border trading posts and implement “additional practical steps” to restore connectivity.
However, this apparent bonhomie may owe much to external factors. Relations between Washington and New Delhi have soured after the imposition of significant US tariffs on Indian goods. This rupture in US-India alignment, intended to check China, was clearly welcomed by Beijing, which perceived a “breakdown of political trust between New Delhi and Washington” as advantageous to its own strategic interests. This suggests that the recent diplomatic easing from Beijing’s side might be a strategic opportunism, rather than a fundamental shift towards long-term reconciliation. Chinese Foreign Minister Wang Yi’s support to India against the US tariffs is noteworthy. Despite the diplomatic overtures, a truly favorable sentiment remains elusive due to China’s persistent assertive posture. India’s policy must therefore remain proactive and rooted in its own strategic interests.
The economic reality: Addressing the widening trade deficit
Economically, India faces its largest single trade deficit with any country, reaching an alarming USD 99.21 billion in the fiscal year 2024-25. This imbalance has not only been substantial but has also continuously widened year after year, highlighting a deep structural issue in the bilateral economic relationship.
The composition of this trade imbalance is particularly concerning. India’s predominant exports to China over the last five years have largely consisted of raw materials and intermediate goods such as iron ore, shrimps, and castor oil. In stark contrast, Chinese exports to India are overwhelmingly dominated by high-value manufactured goods, including machinery, electronics, personal computers, and lithium-ion components. This trade pattern, where India supplies basic commodities while importing finished products, resembles a classic colonial-era dynamic that hinders India’s industrialization efforts and its ambition to move up the global value chain.
This widening deficit signifies a significant strategic dependence on Chinese imports, especially in critical sectors like telecom, electronics, and energy storage. Such over-reliance makes India highly vulnerable to supply disruptions during geopolitical tensions, a risk that directly impacts national security. Moreover, the influx of cheap Chinese goods undermines domestic manufacturing and small and medium enterprises (MSMEs), inhibiting the development of indigenous capacity. This structural disparity transforms the trade deficit from a purely economic problem into a national security concern, demanding urgent, targeted policy interventions to de-risk supply chains and foster indigenous capabilities in these strategic sectors. Even more interestingly, India’s exports to China, which stood at 3.3% of India’s global exports in 2024, is way more important than for India than the China’s exports to India, which stood at 1.9% of China’s global exports. Therefore, the rhetoric to stop dependence on imports from China is not only realistic but also can hurt India more than China in the context of a potential retaliation from China.
Growth in bilateral investment has not kept pace with the expansion in trading volumes. Chinese cumulative investments to India stood at USD 3.2 billion till 2023 due to India’s restrictions since Covid-19, while India’s cumulative Foreign Direct Investment into China was USD 2.5 billion till March 2025. Institutional dialogue mechanisms like the Strategic Economic Dialogue (SED) have been limited in their effectiveness in addressing the fundamental structural imbalances.
Strategic Pillars for India’s Resilient Engagement
To navigate this complex landscape and rebalance the economic relationship, India must implement a multi-pronged strategy rooted in bolstering its domestic economic strength and diversifying its global engagements.
Firstly, boosting domestic manufacturing and import substitution is paramount. India must aggressively expand policy levers such as the Production Linked Incentive (PLI) schemes, set time-bound import substitution targets, and provide capital subsidies for domestic R&D. The objective is to significantly reduce strategic dependence on Chinese imports. In this context, we may even consider more investments from China, as alluded to in the Economic Survey last year.
Secondly, diversifying supply chains, often termed the “China-Plus-One” strategy, is crucial. This aligns with India’s broader ambition to diversify its export markets to a wider array of partners, including BRICS nations, the EU, ASEAN, and African countries.
Thirdly, targeted export promotion and enhanced market access are vital. Despite the current import dominance, India’s export potential to China remains underutilized. Focus areas should include agricultural commodities such as rice and marine products, along with pharmaceuticals, software/IT services, and niche industrial machinery. The robust performance of India’s services sector, which recorded a surplus of USD 52.3 billion in Q3 FY25, offers a partial offset to the merchandise imbalance and represents a significant area for further leveraging.
Fourthly, leveraging trade remedies and strategic tariffs offers a dual benefit. The Ministry of Commerce should strategically pursue anti-dumping and safeguard duties to protect domestic industries from unfair trade practices, without affecting the supply chain in India. Simultaneously, India can implement unilateral reductions in tariffs on certain inputs (e.g., electronic components) and high-value capital goods to flatten inverted duty structures and promote competitiveness in Indian exports.
Ultimately, India needs a clear-eyed China policy that prioritizes its own interests. This means moving beyond being a reactive player in larger geopolitical games and actively shaping its own destiny. The concept of “turning insult into inspiration” serves as a guiding principle for India’s approach. External pressures or challenges, such as the recent US tariffs, can be leveraged as catalysts for bold national reforms and economic strengthening. This transforms a potential setback into an opportunity to diversify export markets and reduce dependency on single countries, thereby enhancing India’s strategic autonomy.
Strategic autonomy of India, in this context, is inextricably linked to economic resilience. India’s engagement with China must be characterized by a multi-pronged, pragmatic approach. This involves a delicate balance of continued diplomatic engagement where mutually beneficial, aggressive domestic economic strengthening, strategic diversification of trade and supply chains, and a firm, unwavering stance on national security interests. The goal is not isolation but a calculated rebalancing that serves India’s long-term aspirations.
