India’s Mounting Trade Deficit with China- Issues and Concerns
India’s merchandise trade deficit with China widened to almost $100 billion, driven by heavy import dependence on electronics, telecom equipment, pharmaceutical APIs, solar modules, and capital goods. This imbalance stems from an asymmetric trade basket – India primarily exporting lower-value goods while importing high-value finished products – combined with supply chain lock-ins created by China’s scale, low costs, and reliability.
Such an economically weighty and strategically sensitive relationship exposes India to supply shocks, weakens its bargaining power, and undermines initiatives like Atmanirbhar Bharat and Make in India. The challenge is compounded by geopolitical rivalry and security risks linked to dependence in sensitive sectors, such as telecom (Huawei, ZTE), power equipment, solar energy, and dual-use technologies with both civilian and military implications.
Full-scale decoupling is unrealistic given China’s cost competitiveness, with alternatives from Japan, South Korea, the EU, or the US proving far more expensive. The path forward lies in diversifying trade by strengthening partnerships with Vietnam, ASEAN, South Korea, Japan, and Latin America; accelerating domestic manufacturing capacity; and deepening collaboration with Quad nations and the EU to reduce high-tech dependence, while maintaining a calibrated and balanced engagement with China.
Can China offset the impact of 50% US tariffs?
India is unlikely to counterbalance the impact of the 50% U.S. tariffs through trade with China in the near term. The U.S., with imports worth $80 billion (an 18% share), remains India’s most critical export market, particularly for sectors like gems and jewellery, pharmaceuticals, engineering goods, and apparel. In contrast, trade with China faces hurdles of a widening trade deficit, policy constraints, and political tensions. While expanding commerce with China could help cushion the blow, it cannot fully offset the immediate tariff shock.
The China-US trade-off- How Desirable?
This poses a cognizable dilemma: aligning too closely with China risks straining India’s partnership with the US. The trade-off is complex: while US tariff pressures, established trade flows, and regional supply chain dynamics create immediate challenges, the risks of strategic rivalry, geopolitical fallout, and diminished leverage are important. Such a shift could weaken India’s technology and investment ties with the US, as well as shared strategic goals and diversification opportunities. In the long run, India’s more sustainable path lies in deepening integration with the US, EU, Japan, and other democratic partners, even if it entails short-term costs.
India’s Closer Chinese Economic Engagement – Balancing Global Supply Chains Strategically
India’s approach of “selective strategic engagement” and “managed interdependence” requires diversification rather than dependence. This means fostering cooperation with China in areas like green energy, EVs, and semiconductors, while simultaneously employing tariff and non-tariff safeguards, investment screening, and production-linked incentives (PLIs) to shield critical industries. A triangulated supply chain strategy could then emerge, leveraging China for inputs, the West for markets, and the global South for scale.
Strategic Options or Choices- the US or China?
There are no permanent friends in international relations, only permanent interests. Strategic autonomy is the “new normal”. India must leverage U.S. partnerships where they offer clear security and technology advantages, while simultaneously but cautiously expanding economic engagement with China. Above all, India must remain vigilant to avoid slipping into risky dependencies.
Note: Some parts of this analysis have been published by India Today in its story entitled Can India rely on China to counter Trump’s 50 % tariff shock?
ABOUT THE AUTHOR
Dr. Manoranjan Sharma is Chief Economist, Infomerics, India. With a brilliant academic record, he has over 250 publications and six books. His views have been cited in the Associated Press, New York; Dow Jones, New York; International Herald Tribune, New York; Wall Street Journal, New York.
