A thaw in diplomatic relations between India and China is running up against a harder truth: the more New Delhi tries to engage economically with Beijing, the more exposed its dependence becomes. Narendra Modi and Xi Jinping met last month in New Delhi, Xi's first visit to India in seven years, pledging to repair ties strained since deadly border clashes in 2020. Yet beneath the diplomatic gestures - resumed flights, expanded visas, warmer rhetoric - lies a trade and manufacturing relationship that remains overwhelmingly tilted in China's favour.
A Lopsided Industrial Relationship
China accounted for 28% of global value-added manufacturing in 2025, according to the World Bank, against just 3% for India. The gap is just as stark in trade: China's share of global merchandise exports stood at 16.3%, compared with India's 1.7%. India's goods trade deficit with China reached $116 billion in 2025, and had already hit $91 billion by August, putting it on pace to set a new record.
The deeper issue is not simply volume but composition. India's largest import categories from China - electrical and electronic equipment, machinery, and chemicals - are overwhelmingly intermediate goods that domestic manufacturers need to produce finished products. That creates a self-reinforcing cycle: the more India exports, the more components it must import from China to make those exports possible. Smartphone assembly and generic pharmaceutical production, two sectors India has promoted as manufacturing success stories, both still rely heavily on Chinese-sourced inputs.
Strategic Exposure Beyond Trade Numbers
This dependence carries consequences beyond balance-sheet arithmetic. When Beijing imposed export licensing requirements on seven heavy rare earths in April 2025, it exposed vulnerabilities running through India's automotive and defence manufacturing industries - sectors reliant on materials with few alternative suppliers.
Some of India's structural weakness is self-inflicted. Research and development spending stood at just 0.64% of GDP in 2024, according to the country's most recent Economic Survey, trailing well behind Asian peers, partly due to persistent underinvestment by the private sector. Skilled-labour shortages add another constraint: Foxconn's withdrawal of Chinese staff from its Indian iPhone factories in 2025 highlighted how dependent advanced manufacturing remains on foreign technical expertise that India has yet to cultivate at scale.
Policy Moves and Their Limits
New Delhi has responded with targeted liberalisation. It has eased restrictions on Chinese foreign direct investment, permitting stakes of up to 10% in Indian firms, and introduced fast-track clearance - within 60 days - for investment proposals in five high-technology sectors, provided they are structured as joint ventures with majority Indian ownership.
Indian exports to China rose 40% between April and August, driven by industrial machinery, automotive components, printed circuit boards and electronics. But that growth obscures a persistent dependency: smartphone manufacturing, India's flagship export sector, remains only 18-20% locally sourced. Even the apparent upside from Northeast Asia's AI-driven hardware boom - Indian firms picking up sub-component work from Chinese tech giants - ends up reinforcing reliance on Chinese supply chains rather than reducing it.
What India Can Actually Offer
For meaningful Chinese investment and technology transfer to materialise, India needs a credible answer to a basic question: what does it offer beyond a large market and cheap labour? Tax breaks, production-linked incentives and capital subsidies have so far failed to draw Beijing's most advanced technology. China has kept tight control over its leading firms' sharing of critical know-how in electric vehicles, batteries, solar energy and electronics - the very capabilities India most wants to acquire.
The unresolved 3,800-km Himalayan border dispute continues to limit how far the relationship can go. Diplomats meeting in Beijing in August spoke of pursuing a "fair, reasonable and mutually acceptable settlement," but no resolution appears close. Both governments seem content to let economic ties expand within these constraints for now. The real test for India is whether it can convert this engagement into genuine domestic capability - rather than a deeper, more complicated version of the same dependency.