By Research Associate and Visiting Fellow at Observer Research Foundation, Mr Tushar Joshi.
In early October 2025, at the launch of India’s quarterly Trade Watch report, NITI Aayog CEO B. V. R. Subrahmanyam made a remark that cut through years of debate: “If you are not able to sell much to China, it is pointless, because it’s an 18 trillion-dollar economy.” That single sentence captured the core of India’s China dilemma. The problem is not that India imports heavily from China; it is that India has not yet learned how to insert its own industrial output into the Chinese market at scale. Unless India finds a way to sell competitively into the world’s second-largest economy, it will remain the structurally weaker side of the economic relationship, which inevitably shapes political behaviour as well. This is the strategic trap that defines the post-Galwan phase.
The Galwan clash did not create this economic imbalance, but it hardened the political lens through which India began viewing an already-existing dependency. Limited trust evaporated, and New Delhi responded with a series of policy filters: FDI approvals by the government for land-border countries (introduced two months before the Galwan clash), suspension of flights, exclusion of Chinese firms from 5G trials, tighter import licensing for drones, app bans, and the acceleration of production-linked incentives (PLI). These measures diluted Chinese economic presence, but they did not alter the underlying structural asymmetry.
India’s services surplus with China has been only US$0.2–0.5 billion annually over the past decade — negligible when compared to China’s US$99.2 billion goods surplus with India in FY 2024–25, as shown above. The services engine that normally neutralises deficits simply does not generate enough China-linked earnings to counterbalance the scale or structure of this gap.
The data, as outlined below, show that both total trade volumes and the deficit with China reached record highs in the past decade. In 2019–20, India imported goods worth around US$65.3 billion from China and exported about US$16.6 billion. By FY 2024–25, imports had risen to roughly US$113.5 billion while exports fell to US$14.3 billion, pushing the trade deficit to US$99.2 billion — the highest ever recorded.
It is true, as economists often note, that a trade deficit is not inherently harmful. Large deficits can be sustained when a country has strong services exports, steady capital inflows, or imports that enhance productivity. India fits parts of this description. Its services surplus reached US$162 billion in 2023–24, driven by IT, business services and finance, and FDI inflows averaged US$70–75 billion between 2020 and 2024. However, these cushions do not offset India’s China-specific imbalance. India’s services surplus with China has been only US$0.2–0.5 billion annually over the past decade — negligible when compared to China’s US$99.2 billion goods surplus with India in FY 2024–25, as shown above. The services engine that normally neutralises deficits simply does not generate enough China-linked earnings to counterbalance the scale or structure of this gap.
Nor are all imports equal. Many Chinese imports are productivity-enhancing components that feed India’s own export engines. Nearly half of India’s electronics imports from China consist of intermediate components essential for smartphone and IT hardware production.
Chinese market access is not symmetrical. India’s competitive sectors — generic pharma, engineering goods, specialty chemicals, food & agri-value products — do not get frictionless access in China.
Yet the problem is not the existence of the deficit itself but its nature. Dependence is overwhelmingly concentrated in sectors tied to pharmaceutical security, digital infrastructure, and energy transition. About 70 percent of India’s active pharmaceutical ingredient (API) inputs, more than 40 percent of electronics components, and over half of solar module components come from China. Diversification is underway, but Chinese suppliers remain deeply embedded in India’s supply chains.
Why, then, does India struggle to sell to China? Three structural issues stand out.
First, Chinese market access is not symmetrical. India’s competitive sectors — generic pharma, engineering goods, specialty chemicals, food & agri-value products — do not get frictionless access in China. Indian generic pharma faces non-transparent trial approvals. For agri products, China imposes annual re-registration of Indian mango and grape exporters by its own customs, even after prior certification by Indian authorities. This results in delays and higher transaction costs. There is also a language barrier. China issues many trade-related notices only in Chinese, even though WTO norms require English, French, or Spanish for clarity. All these small barriers accumulate, creating friction. Meanwhile, China sells intermediate goods in India with ease.
Second, India cannot yet match China on cost or scale. Even when firms purchase similar machinery, smaller batch sizes push up unit costs. MSMEs rely on Chinese inputs because they ease working-capital pressures: importing a moulding die or an electronic subcomponent often reduces capital expenditure and shortens inventory cycles. That said, China’s low-cost exports have damaged India’s domestic industries — the plastic-machinery sector being a case in point, prompting India to impose anti-dumping duties. Domestic policy compounds this disadvantage. For instance, India levies about 10 percent tariffs on key inputs such as plastics and vulcanised rubber used in footwear manufacturing, while Vietnam keeps comparable duties near zero. This single difference significantly weakens India’s competitiveness in a US$110-billion market. The pattern repeats across sectors. Even under PLI, scale remains modest: electronics production rose from INR2.13 lakh crore in FY 2020–21 to INR5.25 lakh crore in FY 2024–25, but PLI-linked output forms only a part of the overall expansion.
India cannot yet match China on cost or scale. Even when firms purchase similar machinery, smaller batch sizes push up unit costs. MSMEs rely on Chinese inputs because they ease working-capital pressures.
Third, India lacks a substantial firm-level and provincial footprint in China. Selling at scale requires Mandarin-language distribution networks, after-sales support, local partners, and targeted commercial strategies in provinces such as Guangdong, Zhejiang, and Chongqing. Without this ecosystem, competitive products struggle to convert opportunities into enduring market share.
Overlaying all this is a structural shift in New Delhi’s risk calculus since Galwan. Economic risk and political risk have fused. Any deep Chinese presence is now viewed as risk stacking, even if cheaper inputs might offer short-term gains. Diversification is being encouraged despite higher costs, but without domestic scale, diversification will remain expensive rather than profitable.
India’s experience is not unique. The United States runs a persistent goods deficit with China, which totalled US$295.5 billion in 2024. Even major European economies such as Germany, France, and Italy face trade deficits with China, contributing to the European Union’s overall deficit of €305.8 billion in 2024. ASEAN countries such as the Philippines, Thailand, and Malaysia face similar dependencies in electronics components, machinery and chemicals.
Many of these countries are responding by diversifying supply chains to Vietnam, Malaysia, and Mexico; reshoring or “friend-shoring” critical nodes in semiconductors, batteries, and medical supplies; and tightening screening for sensitive inputs. The global trading system is adjusting to the same structural challenge.
India lacks a substantial firm-level and provincial footprint in China. Selling at scale requires Mandarin-language distribution networks, after-sales support, local partners, and targeted commercial strategies in provinces such as Guangdong, Zhejiang, and Chongqing. Without this ecosystem, competitive products struggle to convert opportunities into enduring market share.
India has tried to manage its dependence on Chinese imports through a mix of tariff and industrial policies. The Production-Linked Incentive (PLI) scheme is at the core of this strategy. With an outlay of INR1.97 lakh crore across 14 sectors, it has attracted approved investments of around INR1.61 lakh crore as of late 2024 and generated production of roughly INR14 lakh crore. Additionally, diversification is becoming operational beyond PLI. Apple and Foxconn are localising more components. For example, Foxconn’s Yuzhan Technology secured INR13,180 crore in Tamil Nadu to build a display (including camera-module) assembly unit. Further, in solar, India is gradually moving from module assembly toward cell production and upstream integration. Tata Power’s integrated Tirunelveli plant, for instance, has produced 4,049 MW of modules and 1,441 MW of cells as of May 2025. Trade agreements with the UAE and Australia are also being used to create alternative sourcing corridors. District export hubs and e-commerce export facilitation for MSMEs are addressing local bottlenecks and expanding export participation.
These measures are promising steps towards reducing some exposure in sensitive nodes, but they do not alter the fundamental imbalance: India is still not able to sell enough to China.
The solution to India’s China problem, therefore, cannot be limited to shrinking imports. A structural shift will emerge only when India becomes a competitive seller. To move in that direction, India needs a practical policy package: rationalise input tariffs in export-heavy clusters so firms can reach competitive unit costs; establish mutual recognition and fast-track regulatory pathways for Indian pharma, along with predictable Sanitary and Phytosanitary (SPS) windows for agriculture; and allow joint ventures with Chinese firms only in non-sensitive sectors to reduce future security risks.
India needs a practical policy package: rationalise input tariffs in export-heavy clusters so firms can reach competitive unit costs; establish mutual recognition and fast-track regulatory pathways for Indian pharma, along with predictable Sanitary and Phytosanitary (SPS) windows for agriculture; and allow joint ventures with Chinese firms only in non-sensitive sectors to reduce future security risks.
India must also operationalise a “China-plus-two alternates” rule for critical inputs in APIs, electronics, and solar manufacturing, and invest in firm-level capabilities inside key Chinese provinces, including distribution, language support and after-sales networks.
Taken together, these measures would expand India’s economic presence within China rather than simply constrain China’s presence inside India. Eventually, India will exit the post-Galwan trade trap not by shrinking its economic horizon, but by building the scale, access, and firm capabilities to sell competitively into China, just as many other economies are now attempting to do.
This piece was originally published for the Observer Research Foundation.