India’s Trade Deficit with China Widened

Syllabus: GS2/IR

Context

• India’s trade deficit with China widened to a record $99.2 billion in the 2024-25 fiscal year.

About

• The trade deficit is driven by a surge in imports of electronics, batteries and solar components, even as exports fell sharply.
• China remained India’s second-largest trading partner in 2024-25, with total bilateral trade amounting to $127.7 billion, behind the United States.
• Total imports from China for the financial year ending March climbed to $113.5 billion. In contrast, India’s exports fell to $14.3 billion.

Reasons for India’s Trade Deficit with China

• Intermediate goods and raw materials: India imports a significant volume of components and raw materials from China, especially in sectors like electronics, pharmaceuticals (APIs), chemicals, and textiles.
• Consumer electronics and machinery: China is a major exporter of mobile phones, electrical machinery, and telecom equipment to India.
• Narrow export basket: India’s exports to China are primarily raw materials such as iron ore, cotton, and copper, which are low in value addition.
• Barriers to market access: Indian firms face regulatory hurdles, quality norms, and lack of demand for Indian goods in China’s domestic market.
• Cost and scale advantages: China’s well-established manufacturing infrastructure allows it to produce goods more cheaply and efficiently.
• Global supply chain integration: Chinese firms are deeply embedded in global value chains, providing a wider variety of goods at competitive prices.
• India’s ‘Make in India’ initiative is still evolving, and local manufacturing isn’t yet competitive enough to substitute Chinese imports, especially in electronics and industrial machinery.

Concerns

• Future Outlook: Chinese imports could rise by as much as 20% in the current fiscal year as Chinese exporters seek to re-route goods away from the United States in the wake of new American tariffs.
• Cheap imports from China undercut Indian manufacturers, especially MSMEs (Micro, Small and Medium Enterprises), leading to reduced competitiveness, job losses, and slow industrial growth.
• Heavy import of telecom equipment, surveillance gear, and electronics from China raises cybersecurity and data security concerns.
• A large trade deficit contributes to a wider current account deficit (CAD), putting pressure on the rupee and foreign exchange reserves.
• Border tensions and strained diplomatic relations make the large trade dependence appear contradictory and risky, raising public and political pressure to reduce imports.
• Dependence on Chinese tech goods reflects India’s lag in high-tech innovation and manufacturing, which has broader implications for economic and strategic autonomy.

Government Initiatives 

• The Directorate General of Trade Remedies (DGTR) actively monitors unfair trade practices by foreign companies and recommends corrective remedial actions. 
• The Government is also encouraging Vocal for Local Campaign by promoting awareness among consumers and businesses to buy Indian-made products, thereby aiming to reduce demand for imported goods. 
• Production Linked Incentive (PLI) Schemes for 14 key sectors are under implementation to enhance India’s manufacturing capabilities and exports. 
• Assistance provided through several schemes to promote exports, namely, Trade Infrastructure for Export Scheme (TIES) and Market Access Initiatives (MAI) Scheme.
• Agricultural & Processed Food Products Export Development Authority (APEDA) has a Central Sector specific scheme for Financial Assistance to facilitate the export of agriproducts. 
• The Marine Products Export Development Authority (MPEDA) provides assistance for upgrading the infrastructure facilities for value addition, establishing testing laboratories, participating in international trade fairs, and providing technical assistance for aquaculture production meant for exports etc. 
• Districts as an Export Hubs initiative has been launched by identifying products with export potential in each district, addressing bottlenecks for exporting these products and supporting local exporters/manufacturers. 

Conclusion

• While this dependency has facilitated cost-effective manufacturing and consumer affordability, it has also exposed India to vulnerabilities in its supply chain and trade balance.
• To ensure economic resilience and strategic autonomy, India must work toward diversifying its import sources, investing in domestic manufacturing through initiatives like ‘Make in India’ and PLI (Production-Linked Incentives), and enhancing technological capabilities. 
• Reducing dependency does not imply isolation but creating a more balanced and secure economic framework.

Source: IE