India’s China policy reflects a strategy of managed interdependence, aiming to reduce strategic vulnerabilities while preserving economic engagement essential for growth
India’s contemporary China policy is best understood not as a binary choice between economic engagement and military confrontation, but as a calibrated strategy of managed interdependence. The June 2020 Galwan Valley clash weakened political trust and hardened the security environment, but it did not alter a central structural reality. India’s growth trajectory remains tied to regional production networks, in which China continues to occupy a major upstream position. In this context, India seeks to prevent concentrated dependencies from becoming instruments of coercive leverage during crises without precipitating a rupture that would disrupt domestic manufacturing, raise costs, and weaken employment generation. The policy objective is therefore to safeguard openness, with an emphasis on preserving room for manoeuvre, reducing strategic vulnerabilities, and expanding India’s capacity to make policy choices under stress.
India seeks to prevent concentrated dependencies from becoming instruments of coercive leverage during crises without precipitating a rupture that would disrupt domestic manufacturing, raise costs, and weaken employment generation.
India’s bilateral merchandise trade with China remains both large and asymmetric. In FY2024–25, bilateral trade totalled about US$127.7 billion, with imports of around US$113.5 billion and exports of about US$14.3 billion, resulting in a deficit of nearly US$99.2 billion. China also accounted for roughly 16 percent of India’s total imports. These numbers are significant not only because of scale, but also because they reflect production-level dependencies across electronics, machinery, chemicals, renewables, and pharmaceuticals, in which Chinese intermediates and capital goods remain deeply embedded in Indian industrial activity.
Source: Author’s own, data from India Today/ Ministry of Commerce and Industry, GoI
The bilateral deficit is thus more useful as a strategic diagnostic than as a political headline. In an era of distributed production networks, bilateral balances are an incomplete indicator of economic strength, and macroeconomic resilience depends more fundamentally on the broader external position. India’s current account deficit, at about 0.6 percent of GDP in FY2024–25, does not indicate aggregate external stress.
At the same time, a persistent and large bilateral deficit can signal geoeconomic risk when it reflects dependence on inputs that are difficult to substitute in the short run. The issue is not imports in themselves, but concentration in substitution-resistant categories whose disruption could propagate across sectors. Under conditions of high upstream concentration, even minor frictions, such as licensing delays, tighter documentation requirements, or selective export restrictions, can act as choke points. Accordingly, India’s policy debate has shifted from broad deficit reduction rhetoric to a more granular question of vulnerability. The relevant issue is which dependencies are most likely to become crisis multipliers and how rapidly credible alternatives can be developed.
Source: Author’s own, data from the Directorate General of Commercial Intelligence and Statistics, Ministry of Commerce and Industry, GoI
India’s policy toolkit increasingly reflects this more granular risk-management approach. Capability creation remains central. Industrial policy, particularly through the Production Linked Incentive (PLI) framework, is intended to scale domestic manufacturing, deepen supplier ecosystems, and increase domestic value addition over time. The PLI implementation has also supported investment deepening, with incentives disbursed across 12 sectors, helping attract about US$20.09 billion in investments by March 2025 and strengthening manufacturing scale-up in selected segments.
India has also relied on rule-based instruments to shape market behaviour in the interim. Standards, technical regulations, and conformity requirements are increasingly used as gatekeeping mechanisms in sensitive sectors, especially electronics and IT goods. Additionally, trade remedies, including anti-dumping duties, countervailing measures, and safeguards, act as instruments to manage import surges and create adjustment space for domestic firms. A third layer consists of strategic guardrails in sectors associated with national security externalities. These include investment screening for entities from land-border countries, procurement preferences, trusted-source principles for telecom and digital systems, and tighter scrutiny of data-intensive platforms.
The post-2020 record shows both policy traction and structural limits. In areas where enforcement is relatively direct, India has moved quickly, most visibly in the consumer internet space, where bans and restrictions reshaped platform ecosystems with immediate effect. In investment and critical infrastructure, the shift has been less about dramatic decoupling and more about procedural hardening. Routing certain investments through a government approval mechanism has increased scrutiny of ownership and control, while telecom reforms have institutionalised trusted-vendor principles despite transition costs. Manufacturing outcomes have been more mixed. Incentives have supported capacity creation, investment inflows, and export growth in selected segments, but upstream dependence remains persistent.
The issue is not imports in themselves, but concentration in substitution-resistant categories whose disruption could propagate across sectors. Under conditions of high upstream concentration, even minor frictions, such as licensing delays, tighter documentation requirements, or selective export restrictions, can act as choke points.
The central trade-off is therefore clear. De-risking imposes near-term costs, including higher compliance burdens, narrower vendor pools, and, in some cases, higher prices, while many of its benefits are probabilistic and realised over a longer horizon. The more difficult challenge lies in the risk of coercion at strategic chokepoints, particularly where China’s scale in processing and intermediate production confers outsized leverage. For India, this risk is especially acute in sectors it is trying to scale, including clean energy, electronics, and advanced manufacturing, where critical minerals and processed materials are foundational inputs.
India’s resilience strategy, therefore, operates along two tracks. The first is targeted domestic capacity creation in bottleneck sectors, alongside ecosystem development in related inputs, machinery, and processing capabilities. The second is diversification through external partnerships, alternative sourcing arrangements, and downstream collaboration, where unilateral capacity-building would be too slow or too costly. In this context, self-reliance is best understood as a strategic direction rather than an end-state. The objective is not autarky, but shock tolerance and the ability to sustain production during disruptions while negotiating from a position of choice rather than urgency.
Against this backdrop, the India-China thaw visible in 2024–25 is better interpreted as tactical stabilisation than strategic reconciliation, with meaningful normalisation remaining linked to durable, verifiable border stability. Practical measures that reduce transaction costs, including the decision to resume direct flights after a multi-year suspension and the restart of non-stop Delhi–Shanghai services from February 1, 2026, fit this pattern of stabilisation without settlement. The immediate objective is to limit volatility, preserve channels for issue management, and prevent economic frictions from becoming an additional source of escalation. India is therefore not pursuing a comprehensive reset of the bilateral relationship, but rather compartmentalising and governing it while continuing to institutionalise economic and technological guardrails.
The India-China thaw visible in 2024–25 is better interpreted as tactical stabilisation than strategic reconciliation, with meaningful normalisation remaining linked to durable, verifiable border stability.
Finally, India’s China policy now functions as a form of geoeconomic risk management anchored in strategic autonomy. It refers to resilience through options, reducing the likelihood that targeted supply disruptions translate into macroeconomic stress or policy constraint, while retaining selective engagement where it supports stability. The more meaningful indicator of success is not a single bilateral trade figure, but the extent to which India can move from concentrated dependence to diversified embeddedness through multiple suppliers, multiple routes, and higher domestic value addition in strategically significant sectors.
Soumya Bhowmick is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation.
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Dr. Soumya Bhowmick is a Fellow at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation (ORF). He completed industry- endorsed Ph.D. ...
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