From Dependence To Disruption: The Urgent Case For India-China Trade Reset

India’s trade deficit with China has surged to an all-time high of $99.2 billion in FY24, up 12% from the previous year, according to official data from the Ministry of Commerce and Industry (Reuters, April 2025). Despite geopolitical tensions, bilateral trade touched $118.4 billion, with imports from China far outstripping exports.

The economic implications of this widening gap are profound—not just for India’s trade policy but for its industrial ambitions, national security, and long-term economic resilience.

What’s Driving the India-China Trade Deficit?

1. India’s Dependence on Chinese Manufacturing

Despite the push for self-reliance under the Atmanirbhar Bharat initiative, India remains heavily reliant on Chinese imports for critical inputs across various industries, including electronics, telecom, pharmaceuticals, chemicals, and machinery. For instance, over 75% of India’s active pharmaceutical ingredient (API) needs are met by China (Statista).

2. Low Export Penetration in China

India’s exports to China have not kept pace with its imports from China. Even as China remains a top trading partner, India lacks a competitive edge in sectors that matter to Beijing’s supply chains. Primary exports, such as iron ore and cotton, face diminishing returns as China diversifies its suppliers.

3. Dumping Concerns

Indian manufacturers have raised concerns about Chinese firms “dumping” goods at below-cost prices, particularly in the sectors of steel, chemicals, and electronics. This erodes domestic production and makes Indian alternatives uncompetitive.

• The Directorate General of Trade Remedies (DGTR) has over 100 ongoing anti-dumping investigations, many of which target Chinese imports (ET Prime).
  

4. China’s Cost Advantage

China’s economies of scale, advanced logistics, and centralized industrial policy give it a structural cost advantage. India’s fragmented production ecosystem and higher logistics costs (14% of GDP, compared to China’s 8%) widen the competitiveness gap. 

Strategic and Economic Implications for India

1. Strain on Foreign Exchange and Trade Balance

The massive outflow of dollars to fund imports from China increases pressure on India’s current account deficit (CAD). In FY24, the CAD was estimated at 1.5% of GDP, with the Chinese deficit making a significant contribution.

2. Impact on Domestic Manufacturing

Cheap imports suppress local manufacturing, particularly for micro and small enterprises (MSMEs). This contradicts India’s ambition of becoming a global manufacturing hub and undermines employment generation in key sectors.

3. National Security Risks

Dependence on a geopolitical rival for strategic sectors, such as semiconductors, telecommunications equipment, and application programming interfaces (APIs), poses national security concerns, particularly given the unresolved border tensions in Ladakh.

What Can India Do?

India cannot afford to close its doors to China, but it must close the capability gap. The approach needs to be multi-layered, involving trade strategy, industrial policy, and diplomatic recalibration.

1. Precision Tariff Strategy, Not Blanket Bans

• Blanket bans or large-scale tariffs could harm Indian industries that rely on Chinese inputs.
• Instead, India should adopt precision tariffs in sectors where:
• Domestic players have the capacity. 
• Chinese goods are being dumped. 
• Strategic autonomy is essential, particularly in sectors such as telecom and defense components. 

Example: Anti-dumping duties on Chinese aluminum and solar modules have already helped revive domestic competition in those sectors.

2. Turbocharge the PLI Scheme

India has launched ₹2 lakh crore worth of Production Linked Incentive (PLI) schemes across 14 sectors, ranging from electronics and semiconductors to pharmaceuticals and textiles. These need:

• Faster disbursement of incentives. 
• Focus on R&D-driven manufacturing, not just assembly. 
• Supportive ecosystem: power, logistics, labor laws. 

India’s mobile exports surpassed $15 billion in FY24, primarily driven by the production of Apple and Samsung devices under the Production Linked Incentive (PLI) scheme. (Source: Invest India)

3. Invest in Critical Supply Chains

• India should prioritize API parks, semiconductor fabs, and EV battery ecosystems to plug critical input dependencies.
• ₹18,000 crore has been allocated for semiconductors, but global giants like TSMC or Intel haven’t committed yet. India must offer better ease of doing business, as well as land and capital assistance.
  

4. Trade Diplomacy and FTAs

India’s trade strategy should focus on:

• Securing duty-free access for Indian goods in markets like the UAE, UK, EU, and Australia. 
• Leveraging the IPEF (Indo-Pacific Economic Framework) to access alternate suppliers. 
• Building regional value chains via QUAD or BIMSTEC. 

India’s trade with ASEAN reached $131 billion in FY24, showing potential to replace some Chinese imports.

Policy Response: What Needs Urgent Focus 

Policy Area	Current Status	Recommendations
Tariff & Anti-Dumping	Over 100 anti-dumping probes are ongoing	Fast-track DGTR enforcement, auto-renewal for chronic sectors
PLI Schemes	Approved but facing implementation delays	Simplify compliance, incentivize capex-linked R&D
Logistics	Costs at 14% of GDP	Target 8% by 2030 via PM Gati Shakti, rail+port digitization
FTAs & Trade Diplomacy	Signed with UAE, ongoing with EU, UK	Prioritize market access in sectors like textiles, pharma, and agri
Skill + Innovation	Skill India, Startup India underway	Link ITIs with local MSMEs, incentivize tech transfer via JV models

Is It Time to Shift from Reactive to Strategic Trade Policy?

India’s record $99.2 billion trade deficit with China is not an isolated failure—it’s a reflection of policy inertia, delayed reforms, and lopsided integration with global trade networks. A mix of targeted protectionism, aggressive domestic industrialization, and trade diversification is needed to reverse the trend.

Rather than wait for another shock, India must act now. The tools exist—execution will decide the outcome.

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