India–China Trade Dependence: Deficit Reaches $112 Billion in 2025-26

The news

India's trade deficit with China has reached $112 billion in 2025-26, nearly tripling from $44 billion in 2020-21, even as bilateral trade rose 75% to $151 billion over the same period. The figures, drawn from official trade data, underscore a dilemma for New Delhi as it resumes engagement with Beijing after a prolonged freeze following the 2020 Galwan clashes. Prime Minister Narendra Modi and President Xi Jinping met on the sidelines of the BRICS summit in Russia in October 2024, endorsed a disengagement deal in eastern Ladakh and agreed to restore high-level dialogues.

Officials acknowledge that dismantling the restrictions imposed after June 2020 and restoring normal processes — including business visas, security clearances for investments and permission for large Chinese factories — pose considerable challenges. The government has sought to support domestic capacity building through programmes such as the Production-Linked Incentive Scheme. One cited success is Apple iPhones: India has become the second largest exporter after China, with domestic value addition rising to 22% from 15% four years ago, and is expected to reach 35-40% by 2030-31. However, Indian industry's appetite for Chinese imports did not decline during the rough patch, and the government believes cheap and easy imports have lulled companies into rising dependencies without building alternative capacity.

What is the Production-Linked Incentive scheme?

The Production-Linked Incentive (PLI) scheme was launched in 2020. The PLI scheme was part of the Indian government's Atmanirbhar Bharat package. The PLI scheme offers financial incentives on incremental sales of domestically manufactured products. The PLI scheme covers sectors including electronics, pharmaceuticals, and automobiles. The PLI scheme aims to reduce import dependence and create global manufacturing champions.

How did the relationship reach this point?

China began opening its economy under Deng Xiaoping in 1978 and became the world's factory over the next three decades. India–China relations were frozen after the Galwan clashes in eastern Ladakh in June 2020. In October 2024, the two leaders endorsed a disengagement deal and agreed to resume high-level dialogue. Xi has since emphasised 'new quality productive forces' — sectors such as semiconductors, electric vehicles, batteries, artificial intelligence, robotics, renewable energy, critical minerals, commercial spaceflight and quantum computing — where India will play catch-up for a long time.

What has the trade data achieved and missed?

Bilateral trade jumped 75% between 2020-21 and 2025-26, but the deficit almost tripled, reflecting India Inc's concentrated dependence on Chinese inputs. The government's Production-Linked Incentive Scheme has helped build a vendor ecosystem for iPhones, raising domestic value addition from 15% to 22% in four years. However, many companies have not worked on reducing dependencies, believing business can be decoupled from geopolitics. Officials warn that concentrated dependence without sufficient alternative capacity exposes businesses to disruption from Chinese export licensing and geopolitical tensions.

What is the next step?

As engagement resumes, the government must decide whether to allow Chinese investment that brings technology along with it. Security-related sensitivities require strategic calibration, with different ministries sitting together to simplify procedures for business visas and investment clearances. What Beijing does is not in Delhi's control, and India must do what is the need of the hour.