Rebalancing trade ties: India's path to reduced Chinese import dependence

Economic Times

4 days ago

Synopsis
Despite escalating geopolitical frictions and diplomatic tensions, India's merchandise trade with China has shown significant resilience, increasing by 81% to $128 billion in FY 2024-25 from $71 billion in FY2015-16.
iStock India's top imports from China in 2024 were concentrated in machinery and electronics, such as electronic integrated circuits, telephone sets and parts, automatic data processing machines, and photovoltaic cells. Over the past decade, India's merchandise trade with China has shown significant resilience, increasing by 81% from $71 billion in FY 2015-16 to $128 billion in FY 2024-25 (Figure 1), despite escalating geopolitical frictions and diplomatic tensions. However, this growth masks a significant imbalance for India. Although total trade has grown, this expansion has been largely driven by an 84% surge in imports. In 2024-25, imports from China accounted for about 16% of India's total import basket, totalling around $114 billion. This made China India's largest source of imports. The economic asymmetry has been further aggravated by the relatively sluggish growth in India's exports to China, leading to a widening trade deficit over the years. In 2024-25, this deficit reached a record high of $99.2 billion. China now accounts for nearly 35% of India's overall trade deficit, making it the country's biggest trade imbalance with another country. India's top imports from China in 2024 were concentrated in machinery and electronics, such as electronic integrated circuits, telephone sets and parts, automatic data processing machines, and photovoltaic cells. These items together accounted for 56% of total imports from China (Figure 2). Significant import volumes were also concentrated in critical sectors, such as chemical products (15%), which include pharmaceuticals, organic and inorganic chemicals, and fertilisers. Base metals, plastics, and rubber followed at 8% and 6%, respectively.Strikingly, 75% of India's imports from China comprised high- and medium-technology manufactures in 2024 (Figure 3). In terms of the industrial use, intermediate and capital goods accounted for 55%.China's dominance is further underscored by its overwhelming share in India's global imports in several products. In 2024, India imported 560 different products from China, with at least 80% of its total global imports originating from China alone. The combined value of these imports was approximately $19.5 billion.Such heavy dependence on Chinese imports raises critical concerns about India's industrial reliance and strategic autonomy. However, as highlighted in the Economic Survey 2023-24 and echoed by several prominent economists, a complete decoupling from Chinese supply chains may not be a viable option for India due to China's deep integration into global supply chains, particularly the large share of intermediate and capital goods sourced from China that are vital for sustaining India's manufacturing capacity. Hence, a more pragmatic approach would be to reduce overdependence on imports by encouraging greater Chinese foreign direct investment (FDI) in India's manufacturing sector, especially through the Production Linked Incentive (PLI) scheme. This approach holds particular promise for India's electronics and automobile sectors—areas where import dependence on China is high. Another key concern regarding the long-term sustainability of India's trade balance with China is the dominance of uncompetitive imports in India's import basket. A product imported from China can be considered uncompetitive when its per-unit import price is higher than that offered by at least one of India's top three alternative supplier countries for the same product. In 2024, of India's top 50 imported products from China at the HS-6-digit level, 23 were uncompetitive. For instance, penicillin, which India imports from China, is available from Hong Kong at a 15% lower price, and from the UAE, it is about 36% cheaper.
These uncompetitive products alone made up nearly $30 billion in imports, which is about two-thirds (64%) of the total value of India's top 50 imports from China, dominated primarily by machinery and electronics, followed by chemical goods, which include pharmaceuticals as well (Figure 4).The persistence of such uncompetitive imports despite available cheaper alternatives can, in part, be attributed to China's strategic export promotion practices. These include offering deferred payment options, low-interest financing, and technical cooperation arrangements for its exporters to make its exports more attractive to importing countries. Thus, the China Export and Credit Insurance Corporation—Sinosure, the country's official export credit agency (ECA), provides credit insurance to Chinese companies engaged in international trade, safeguarding them against the risk of non-payment. This protection encourages exporters to offer deferred payment terms to foreign buyers, enhancing trade turnover and benefiting both parties. Hence, these mechanisms significantly reduce payment risk, encourage higher trade turnover, and make Chinese products competitive.Nevertheless, reducing India's dependence on uncompetitive imports from China should remain a key strategic priority. This can be achieved by gradually diversifying towards more price-competitive suppliers and by seeking new source countries for imports. Simultaneously, India should make concerted efforts to encourage Chinese FDI into non-strategic sectors where the country faces high import dependence, as this could strengthen domestic manufacturing capacity along with paving the way for a more sustainable trade relationship with China.
The writers Nisha Taneja is Professor at ICRIER, and Vasudha Upreti is Research Assistant at ICRIER.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)