India's $112bn China trade deficit deepens despite political tensions

Walk into a toy shop in India and you're looking at something unexpected: a working model of how a country might actually push back against economic dependence on a much larger neighbor. Six years ago, facing cheap imports flooding the market, India raised tariffs on toys from 20 percent to 70 percent and tightened quality standards. Retailers howled. But it worked. Toy imports collapsed from nearly $300 million in 2020 to $100 million by this year, while Indian toy exports nearly doubled to $200 million. China's share of the local toy market, once 70 percent, shrank dramatically. It's a rare win in what has become an increasingly one-sided economic relationship.

Everywhere else, the picture is grimmer. India's trade deficit with China has exploded to $112 billion in 2024, up from $44 billion just four years earlier—a trajectory that has continued even as the two countries' political relationship fractured. The Galwan Valley clashes in 2020 poisoned diplomatic ties. India banned Chinese apps like TikTok and imposed anti-dumping duties. Yet the economic entanglement only deepened. Exports to China remain stuck below pre-pandemic levels even as imports have doubled. China now supplies more than 30 percent of India's industrial imports and dominates over 100 critical product categories. Kevin Zongzhe Li, a fellow at the Asia Society Policy Institute's Centre for China Analysis, told the BBC that India's economic dependence on China has continued to deepen while political, security, and investment ties have hit their lowest point.

The core problem is structural. India has managed to reduce reliance on finished goods—the country now produces more than a quarter of the world's iPhones—but this production is largely assembly work that depends heavily on imported components from China. The same pattern repeats across industrial machinery, battery inputs, chemicals, solar cells, and manufacturing equipment. Electrical machinery and electronics alone account for 36 percent of India's imports from China, followed by machinery and mechanical appliances at nearly 22 percent. Soumya Bhowmik, a fellow at the Observer Research Foundation's Centre for New Economic Diplomacy, notes that disruption to these flows would not merely affect consumption; it would halt production itself. This reflects India's fundamental difficulty in substituting Chinese inputs with domestic alternatives.

China's own economic pressures are pushing these imports harder. The country has massive excess capacity in steel, solar panels, and electric vehicles that its slowing domestic economy cannot absorb. Manufacturers are therefore dumping goods into overseas markets at low prices, and India—rapidly expanding manufacturing across multiple sectors—has become a natural destination. Western tariffs and trade restrictions have also redirected Chinese exports toward India. Meanwhile, Indian companies face tariff and non-tariff barriers in China that make it nearly impossible to scale exports. Ajay Srivastava of the Delhi-based Global Trade and Research Initiative warns that if the current pace of imports continues, the bilateral deficit could reach $134 billion, handing Beijing even greater leverage over Indian industry.

In September, at the Brics summit in Delhi, Prime Minister Narendra Modi and Chinese President Xi Jinping pledged to address structural trade imbalances and supply chain issues. But experts say this will be extraordinarily difficult. India's manufacturing base has become so dependent on Chinese inputs that unwinding that dependence requires not quick fixes but sustained industrial policy. The country needs affordable power and credit, efficient logistics, and stable regulations—areas where it still falls short. India has also recently softened foreign direct investment rules, which could invite Chinese companies to expand operations in India, but Srivastava cautions that such investment must be carefully vetted. Approvals should prioritize technology transfer, local value addition, and domestic component production rather than merely expanding distribution networks or assembly operations that would deepen dependence.

In the near term, India could target higher exports to China in specific sectors—pharmaceuticals, for instance, could appeal to China's aging population and rising healthcare costs. But narrowing a $112 billion deficit cannot come from niche export sectors alone. The fundamental question, Li argues, is whether Beijing is willing to make concessions on market access as part of broader normalization. Without that, India will need to find its own leverage to force the conversation. For now, the toy sector remains an outlier: proof that protection and quality standards can work, but also a reminder of how rare such success has become in an economic relationship that has grown deeply asymmetrical despite—or perhaps because of—the political distance between the two countries.