Why India’s Dependence On Chinese Imports Is Getting Harder To Break

India has managed to reduce its reliance on Chinese toys, but replacing Chinese imports becomes far harder when those goods are used not by consumers but by factories producing goods in India. That is the central problem facing New Delhi as it tries to reduce a trade deficit with China that has more than doubled since 2020.

According to BBC, India's trade deficit with China has risen from $44 billion in 2020 to $112 billion this year, despite a sharp deterioration in political and security ties between the two countries. Indian exports to China have remained below pre-pandemic levels even as imports have doubled.

The figures point to a wider problem than India's appetite for Chinese finished products. Chinese machinery, components, chemicals, battery inputs, solar cells and other industrial goods are now tied to India's own manufacturing capacity. That makes replacing imports considerably more complicated than simply raising tariffs or restricting Chinese products.

The Toy Industry Shows That Dependence Can Be Reduced

India's toy industry offers one example of what can happen when import restrictions are combined with domestic manufacturing measures.

Six years ago, India raised tariffs on imported toys from 20% to 60%, eventually taking them to 70%. The government also introduced quality-control measures intended to keep substandard toys out of the Indian market.

Retailers objected to the changes, arguing that Indian manufacturers would not be able to compete with foreign-made toys. But the combination of higher customs duties and quality standards changed the market.

Toy imports fell from nearly $300 million in 2020 to around $100 million this year. Over the same period, Indian toy exports increased from about $129 million to $200 million.

The measures also reduced China's dominance of India's toy market. China had accounted for about 70% of the market, but India's dependence on Chinese toys has since fallen substantially.

The toy sector, however, is a rare exception to India's broader efforts to rebalance trade with China. Across the wider relationship, dependence on Chinese imports has continued to grow, with some experts describing the trade relationship as among the most asymmetric in the world.

Political Tensions Did Not Stop Economic Dependence

Relations between New Delhi and Beijing deteriorated sharply after the Galwan Valley clashes in 2020. India responded with measures including anti-dumping duties and bans on Chinese apps such as TikTok.

Those steps did not reverse the broader trade imbalance.

"India's economic dependence on China continued to deepen while political, security, and investment ties were at their lowest point," Kevin Zongzhe Li, a Washington-based Fellow at the Asia Society Policy Institute's Centre for China Analysis, told the BBC.

The trade figures illustrate the gap. India's exports to China remain below their pre-pandemic level, while imports have doubled.

"China now supplies over 30% of India's industrial imports, and India depends on it for more than 100 critical products. And the imbalance is worsening," says Ajay Srivastava of the Delhi-based Global Trade and Research Initiative (GTRI).

If the current pace of imports continues, Srivastava estimates that the bilateral deficit could rise to $134 billion. That would give Beijing greater leverage over Indian industry.

India's Manufacturing Push Is Part Of The Problem

The nature of India's imports explains why the trade deficit is so difficult to address.

India has reduced its dependence on some Chinese finished goods, including smartphones and solar equipment. The country now assembles more than a quarter of the world's iPhones.

But a significant part of that manufacturing remains assembly-based. The factories producing those goods continue to rely heavily on imported components, particularly from China.

"Yet, production remains largely assembly-based and depends heavily on imported components, particularly from China," says Srivastava.

The same pattern extends well beyond smartphones.

India depends on China for industrial machinery, battery inputs, chemicals, solar cells and manufacturing equipment. These are not simply products entering the country for consumers to buy. They are inputs used to make other products.

According to the Observer Research Foundation (ORF), electrical machinery and electronics account for 36% of India's imports, while machinery and mechanical appliances make up another 21.7%. Organic chemicals and plastics also represent significant shares.

For India, therefore, abruptly cutting Chinese imports could affect factories as much as consumers.

"Their interruption would not merely affect consumption; it would disrupt production itself," according to Soumya Bhowmik, a Fellow at ORF's Centre for New Economic Diplomacy, who argues that this reflects India's difficulty in substituting Chinese inputs with local production.

China Is Sending More Goods Abroad

Another factor behind the increase in Chinese imports is China's own industrial capacity.

Chinese manufacturers have accumulated excess capacity across industries ranging from steel to solar panels and electric vehicles. At the same time, a slowing Chinese economy is unable to absorb all the output produced by its manufacturers.

That leaves companies looking to overseas markets to sell their goods, often at low prices.

China's trade surplus is expected to exceed $1 trillion for a second consecutive year.

India is one of the markets receiving those products. The country is expanding manufacturing across several sectors, creating demand for machinery, components and other industrial inputs. At the same time, Chinese manufacturers are facing tariffs and other restrictions in Western markets, making alternative destinations more important.

A larger Indian manufacturing sector can therefore increase demand for Chinese industrial goods even while New Delhi is trying to reduce its overall dependence on China.

India Has Struggled To Sell More To China

The imbalance is also linked to Indian companies' limited access to the Chinese market.

"Indian products face a variety of tariff and non-tariff hurdles in China that make it difficult to scale exports," says Li.

The problem is not simply that India imports too much from China. Indian companies have also struggled to gain comparable access to Chinese consumers.

According to BBC, that creates a risk for any improvement in bilateral relations. If political and diplomatic ties continue to recover without a corresponding change in market access, India could remain heavily dependent on Chinese goods even as relations between the governments improve.

"If normalisation [of ties] continues without a serious push for reciprocal market access, India risks a situation where the political relationship improves but the economic dependency stays the same."

The issue has already entered discussions between the two countries.

On the sidelines of the BRICS summit in Delhi in September, Prime Minister Narendra Modi and Chinese President Xi Jinping pledged to address what they described as "structural trade imbalances and supply chain issues".

The commitment came amid a deepening thaw in relations between the two Asian powers. But improving diplomatic ties does not automatically solve the structural dependence that has developed inside India's industrial economy.

Why India Cannot Simply Shut Out Chinese Imports

The experience of the toy industry shows that tariffs and standards can reduce imports when domestic manufacturers are capable of filling the gap.

Industrial goods present a different challenge.

If an Indian factory depends on Chinese machinery, components or raw materials, restricting those imports without creating domestic alternatives can affect the factory's own ability to produce goods.

That is why reducing the trade deficit requires more than restrictions on Chinese products. India needs domestic suppliers capable of replacing Chinese inputs while remaining competitive on cost and quality.

The longer-term answer to reducing avoidable imports and improving export performance, according to Srivastava, is stronger domestic manufacturing.

But that requires sector-specific industrial policy and stronger fundamentals, including affordable power and credit, efficient logistics and stable regulations, areas where India still falls short.

Chinese Investment Could Help — Or Deepen Dependence

India has also recently softened its foreign direct investment rules, potentially opening the way for greater investment by Chinese companies.

But increased Chinese investment does not automatically mean reduced dependence.

Investment that brings technology, develops Indian suppliers, increases local production and creates exports could help build domestic capacity. Investment that primarily expands Chinese distribution networks or assembles products in India using imported Chinese components could have the opposite effect.

"Investment that merely expands distribution networks or assembles products using Chinese parts could increase imports and deepen dependence. Approvals should therefore prioritise technology transfer, local value addition, domestic component production and exports from India."

That makes the quality and purpose of investment as important as the amount of money coming into the country.

India Needs More Exports, Not Just Fewer Imports

India can also try to narrow the imbalance by increasing exports to China in sectors where it has a realistic opportunity to compete.

Li points to pharmaceuticals as one potential area. China's ageing population and rising healthcare costs could create greater demand for pharmaceutical products, offering Indian companies an opportunity to expand their presence in the Chinese market.

But increasing exports in a few sectors would not be enough to eliminate a $112 billion deficit.

"But narrowing a $112bn deficit won't come from finding niche export sectors alone," he adds.

The larger question is whether China will provide Indian companies with greater access to its market as bilateral relations improve.

"The key question is whether Beijing is ready and willing to make concessions on market access as part of the broader normalisation. Alternatively, India will need to find its own leverage to force that conversation."