PARADOX OF INDIA’S SELF-RELIANCE IN INDIA-CHINA TRADE

 Why In News?

 India's manufacturing expansion remains deeply dependent on China-centric supply chains, presenting a strategic paradox for the nation's self-reliance objectives.

What is the India-China Trade Paradox?

India Wants to Reduce Import Dependence

• National Policy: Under the Atmanirbhar Bharat Abhiyan and Make in India frameworks, India aims to reduce strategic exposure to external supply disruptions and curb bilateral trade deficit.

• Security & Sovereignty: Policy interventions like Press Note 3 (2020) and tariff adjustments were instituted to guard against opportunistic corporate takeovers and unchecked import surges.

Indian Manufacturing Still Depends on Chinese Inputs

• Industrial Reality: Exports to China remained broadly stagnant between 2021 and 2025, while imports rose sharply by about 71% from $87.5 billion to $149.5 billion in the same period.

• Production Dependence: Over 98% of imports from China consist of industrial goods, with 70% as intermediate inputs and 22% as capital machinery.

Self-Reliance and Global Supply Chains

• Redefining Autarky: Foreign Secretary noted that self-reliance does not mean domestic production of every input, but identifying sovereign capability imperatives while leveraging trusted global partnerships.

• Deep Value Chain Integration: Indian manufacturing expansion remains deeply engaged in China-centric supply chains, making structurally unviable in the near term.

The “Assembly Trap”

• Shallow Value Addition: While assembly capacity has scaled (e.g., domestic mobile phone production reaching 33 crore units in FY 2023–24), domestic value addition in electronics remains low at 18% to 22%.

• Upstream Exposure: Financial incentives have expanded final assembly while component imports (e.g., integrated circuits, displays, and camera modules) surged from 3.3% of the import basket in 2022 to 10.1% in 2025.

What is the Current India-China Trade Situation?

Bilateral Trade

• Total Merchandise Volume: Total trade expanded to $127.71 billion in FY 2024–25, reaching $151 billion in FY 2025–26 and $167.6 billion in calendar year 2025.

• H1 2026 Momentum: In the first half of 2026, two-way trade reached $91.72 billion, marking a 23.6% Year-on-Year (YoY) increase.

Indian Exports to China

• Stagnant Growth: Indian exports to China stood at $14.25 billion in FY 2024–25 and $19.75 billion in calendar year 2025, registering a 5-year Annual Compound Growth Rate (ACGR) of just 0.08%.

• Commodity Basket: Exports remain concentrated in low-value primary goods such as iron ore, raw materials, slag, ash ($1.94 billion), and organic chemicals. India ranks 34th among China’s import sources with a 0.7% market share.

Indian Imports from China

• Rapid Expansion: Imports from China rose from $65.26 billion in FY 2019–20 to $113.45 billion in FY 2024–25, reaching $131.6 billion in FY 2025–26, with an import ACGR of 11.74%.

• Technology Composition: 75% of Chinese imports into India consist of high- and medium-technology manufactured goods.

Growing Trade Deficit

• Record Imbalance: India’s trade deficit with China widened from $48.65 billion in FY 2019–20 to $99.2 billion in FY 2024–25 and $112.1 billion in FY 2025–26.

• Deficit Share: The bilateral deficit with China accounts for approximately 35% of India's total global merchandise trade deficit.

China’s Share in India’s Merchandise Imports

• Dominant Origin: China is India's largest import origin, supplying roughly 16% of India’s total global imports.

• Import Concentration: For 562 specific product lines at the HSN 8-digit level, China accounts for 80% or more of India's total global import volume.

Why Indian Manufacturing Depend on China?

China’s Large Manufacturing Capacity

• Global Footprint: China accounts for nearly one-third of global Manufacturing Value-Added (MVA).

• Dual-Track Production: State-backed industrial ecosystems provide a floor for operations while exports capture global market share.

Lower Production Costs

• Cost Disparity: Manufacturing solar PV components is 10% lower in cost in China than in India, while Chinese wind turbines are 30% to 60% cheaper than those assembled or locally made in India.

• Subsidized Overhead: Subsidized land, lower capital costs, and cheaper industrial electricity give Chinese suppliers a structural price advantage.

Economies of Scale

• Steep Learning Curves: Decades of targeted industrial policy allow Chinese manufacturers to operate along steep learning curves, achieving low unit production costs.

Established Supply Chains

• Physical Integration: Chinese manufacturing hubs feature tightly integrated raw material refining, midstream component fabrication, and final assembly within single geographic zones.

Availability of Intermediate Goods

• Off-the-Shelf Availability: Chinese suppliers offer a vast spectrum of specialized intermediate inputs and capital goods with high volume reliability.

Technology and Production Capabilities

• Critical Tech Lead: China leads in 69 out of 74 critical technologies globally (per the ASPI Critical Technology Tracker), holding a monopolistic lead in 41 of them.

How Does This Create a Paradox for Atmanirbhar Bharat?

Domestic Manufacturing Increases

• Industrial Output Push: Incentive programs have successfully scaled domestic production across electronics, automotive, and clean energy assembly.

Demand for Imported Inputs Also Increases

• Proportional Scaling: Because domestic component ecosystems remain shallow, every increase in final assembly output drives a corresponding surge in imported Chinese sub-assemblies and raw materials.

Import Substitution Remains Incomplete

• Sub-Assembly Lag: Import substitution has succeeded at the final assembly stage (e.g., mobile handsets) but has not yet penetrated deep upstream components like active semiconductors, display modules, or specialized chemicals.

Production-Linked Incentives and Imported Components

• PLI Paradox: Electronics assembly under the PLI scheme scaled smartphone exports to $30 billion in 2025, yet imported components rose from 3.3% of total imports in 2022 to 10.1% in 2025.

Manufacturing Without Complete Supply-Chain Independence

• The Assembly Trap: Financial incentives resolve downstream capital constraints but do not automatically build raw material refining, precision tooling, or deep component ecosystems.

What is India’s Approach to China?

De-Risking Rather Than Complete Decoupling

• Managed Interdependence: Accepting that complete severing is unviable, India practices "managed interdependence"—using regulatory guardrails to absorb capital and technology while securing critical infrastructure.

Diversification of Supply Chains

• Friendshoring & Multi-sourcing: Actively building bilateral supply partnerships with the US, Japan, South Korea, Vietnam, and the EU.

Domestic Manufacturing Promotion

• Targeted Localization: Using incentive schemes to build domestic capability in specific high-impact midstream component sectors.

• Production Linked Incentive Scheme: Allocates over ₹1.97 lakh crore across 14 strategic sectors, offering 4% to 6% incentives on incremental sales.

• National Programme on Advanced Chemistry Cell Battery Storage: An ₹18,100-crore PLI program targeting 50 GWh of indigenous ACC battery manufacturing capacity.

• Semiconductor Mission: Deploys ₹76,000 crore under Semicon 1.0 and ₹1,27,500 crore under Semicon 2.0 to fund fab construction, OSAT/ATMP units, and chip design ecosystems.

• Critical Mineral Initiatives: Legislative amendments enabling private auction of critical mineral blocks alongside international asset acquisitions.

• National Critical Mineral Mission: By the Ministry of Mines to secure overseas mineral assets and set up domestic refining for lithium, cobalt, nickel, and rare earths.

Alternative International Suppliers

• Shifting Uncompetitive Imports: Redirecting orders for price-uncompetitive Chinese goods (e.g., sourcing displays and smartphones from Vietnam/Hong Kong, and Penicillin from the UAE).

Greater Export Access to China

• Tapping Untapped Potential: Targeting an estimated $161 billion in untapped Indian export potential to China in high-value sectors like medicaments, turbojets, auto parts, and agricultural goods.

Bilateral Dialogue on Trade Imbalance

• Addressing Market Barriers: Engaging through economic channels to push for the removal of opaque Chinese Non-Tariff Barriers (NTBs), Sanitary and Phytosanitary (SPS) rejections, and technical standards.

What Should India Do to Reduce Dependence on China? 

Develop Domestic Component Manufacturing: Expand PLI 2.0 from final assembly to deep component fabrication, including active semiconductors, printed circuit boards (PCBs), camera modules, and specialized chemical precursors. 

Build Competitive Supply Chains: Establish plug-and-play manufacturing infrastructure with subsidized power tariffs, streamlined land acquisition, and plug-and-play factory sheds. 

Increase Research and Development: Elevate national R&D expenditure from 0.64% toward 2% of GDP, providing tax incentives, concessional patient capital, and technology funds to match China's 2.7% R&D intensity.

Promote Technology Transfer: Leverage Press Note 2 of 2026 fast-track channels to mandate technical licensing and tacit technology transfer in joint ventures. 

Diversify Import Sources: Shift uncompetitive imports to price-competitive nations, such as sourcing smartphones from Vietnam, flat panel display modules from South Korea, and Penicillin from the UAE.   

Increase Indian Exports to China: Form a joint bilateral task force to resolve opaque Chinese regulatory hurdles, non-appealable laboratory testing, and language barriers to capture $161 billion in untapped export potential.  

Strengthen Critical Mineral Security: Accelerate the National Critical Mineral Mission to acquire overseas equity stakes, build domestic processing plants, and incentivize urban battery recycling. 

Improve Logistics and Infrastructure: Scale modern customs initiatives like Turant Customs / Faceless Assessment and port infrastructure to eliminate port shopping and reduce domestic transaction costs. 

Conclusion

India must move beyond final assembly to absorb high-tech midstream capital, building domestic component ecosystems, and securing raw material autonomy to achieve true economic sovereignty.

Source: THEHINDU