Column | Our Levers With China Will Always Remain Weak Until We Get Our Own House In Order

Last week, the Director-General of the Indo-Tibetan Border Police Force confirmed that Indian and Chinese troops have been in face-offs at several locations in Arunachal Pradesh, reportedly even during the BRICS summit in New Delhi which was attended by China’s President Xi Jinping. This is another in a series of problems that Chinese institutions keep posing for us, and it exemplifies why managing our relationship with China will be one of the defining challenges of India’s rise. We share a long and still-disputed border with the world’s second-largest economy and, more importantly, one of our biggest trading partners. How we handle trade and investment ties with Beijing will shape our growth as well as our security for decades to come.

The public debate on this tends to swing between two positions—restricting Chinese trade and investment when tensions flare up and opening them up when they ease. Both assume that our economic ties with China are the main lever we have over Beijing. The more important levers actually lie elsewhere—in how we treat our own businesses and how we work with our friends. But first, let’s frame the issue appropriately.

In 2025–26, we imported $131.6 billion worth of goods from China and exported $19.5 billion to it. The deficit itself is not the issue. Each of us has a 100 per cent trade deficit with the local vegetable vendor because they don’t buy anything from us. Instead, we buy vegetables cheaply from the best source, use the food as fuel and sell our services to our employer, putting us ahead overall. Similarly, we use 60-80 per cent of what we buy from China to produce goods and services that we sell to others, and in this way, they contribute to lowering our deficits, not raising them.

The real problem is that Beijing is not necessarily a dependable trading partner. In April 2025, China stopped shipping rare-earth magnets to Indian automakers. In the following months, shipments of speciality fertiliser were held up in the middle of the sowing season and more than 300 Chinese engineers were pulled out of Foxconn’s iPhone plants in Tamil Nadu and Kar­na­taka. Right in the middle of this, Ope­ra­tion Sindoor happened, during which, according to the then Deputy Chief of Army Staff Lt Gen Rahul R. Singh, China was passing Pakistan live inputs on Indian deployments. Most of the trade curbs were lifted only in August after Chinese Foreign Minister Wang Yi visited Delhi. This lack of dependability is why we must approach economic relationships with China strategically.

Indigenous Ecosystems

The most critical strategic lever available to us is actually internal competitiveness. We must reform our governing and regulatory institutions to make India a much cheaper and easier place to do business. When an Indian electronics maker imports a Chinese circuit board rather than making one here, it is simply responding to the costs we have loaded onto it. Tariffs drive up the cost of inputs like steel or fibre by as much as 20 per cent. Capital controls result in borrowing costs of 9–10 per cent here compared to 4–5 per cent in China.

Delays and uncer­tainties in approvals and regulatory clearances add ~3 per cent to the required rate of return from Indian investments. Industrial users pay a 10–25 per cent markup over the cost of supply, largely to subsidise farmers and households. Labour regulations, in spite of reforms, are still among the most costly and inflexible in the world. Land is artificially scarce because of poor zoning, titling and building regulations. No amount of diplomacy or statecraft can help us if we are the ones doing the most damage to our entrepreneurs. At the same time, no enemy can defeat us if our investment ecosystems are world-beating.

To its credit, the government has begun to tackle this. Jan Vishwas 2.0, passed by Parliament in April, removed criminal penalties from 717 provisions across 79 central laws, and the four labour codes came into force last November. These are important reforms, but they need to be taken much further. Nearly two-thirds of all compliances sit with the states, and the two biggest gaps with our competitors, the price of raw materials and the price of capital, still need fixing. The way forward must include action around radical reform in large city economic regions because that is the only viable way to build world-beating ecosystems in a reasonable amount of time.

We must protect our strategic independence from Chinese influence, but we must be smart about it. Since strategic independence is a legitimate use of state power, its scope quickly expands to include things that are clearly absurd. Two principles are important to keep in mind here. First, define strategic as narrowly as possible—ideally to only include critical defence procurement. Next, any instruments chosen to protect strategic independence must not burden the entire economy. For example, the government can insist that the entire supply chain for goods that it procures for defence should be based domestically or in approved countries. This will make defence procurement costly, but that is a cost that will be visible and limited. Everything else should be freely traded wherever it is most competitive. For example, we should reject instruments like tariffs on ‘strategic’ sectors like steel, which increase the cost of steel in India by ~20 per cent, making the entire economy bear the cost of elevated margins for steel producers.

Engaging with China

Finally, and this may sound counterintuitive, we should encourage Chinese companies to invest in India. The usual worry is that Chinese capital brings Chinese influence with it. This misreads who holds the leverage. When we import a component from China, Beijing decides whether it arrives, as we saw in 2025. When a Chinese company builds a factory in India, the plant and the capital sit on Indian soil, subject to Indian law. China can recall its engineers overnight, but it cannot move a factory in Noida back to Shenzhen. It is precisely these long-term commitments that will deter future hostilities in geopolitical relations. Here too there has been some movement. In March, the Union Cabinet amended Press Note 3 so that non-controlling stakes below 10 per cent can come in through the automatic route, and promised decisions within 60 days for electronics components, capital goods and solar manufacturing, provided Indian partners hold a majority. But China’s share of our FDI has fallen from close to 2 per cent before 2020 to about 0.3 per cent, and only around half of the roughly $12 billion proposed since then has been approved.

None of this means trusting Beijing or relaxing our guard in Arunachal. Our levers with China will always remain weak until we get our own house in order. And to do that, we must focus on becoming a competitive place to manufacture and do business so that we can make our choices from a place of strength and confidence.

(Views expressed are personal)

Rahul Ahluwalia is founder-Director, Foundation For Economic Development