India-China Thaw Faces Major Economic Tests

By the Editorial Team · Tuesday, October 6, 2026

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping met recently to improve strained relations and agreed to resume greater diplomatic engagement following years of border tensions. Despite these efforts, India continues to face a large trade deficit with China, relying heavily on Chinese imports for key manufacturing inputs, which poses strategic and economic challenges for its goal of greater self-reliance.

India is attempting to strengthen diplomatic ties with China while also seeking to reduce its economic dependence on the regional power, but the challenges of doing so remain significant. Indian Prime Minister Narendra Modi and Chinese President Xi Jinping held a meeting in New Delhi last month, marking Xi’s first visit to India in seven years. The two leaders committed to repairing relations that were severely strained following fatal border clashes in 2020 along their contested Himalayan frontier.

Since the bilateral agreement last year to end the military standoff, there have been notable signs of rapprochement. Direct flights between key Indian and Chinese cities resumed after a suspension linked to the Covid-19 pandemic in 2020, and China has expanded visa services for Indian travelers. Despite these diplomatic efforts, the underlying economic balance between the two countries remains highly uneven.

According to the World Bank, China accounted for 28% of global value-added manufacturing in 2025, compared to just 3% for India. In global merchandise exports, China held a 16.3% share while India’s share stood at 1.7%. This disparity is further reflected in bilateral trade figures: India’s imports from China exceeded its exports by $116 billion in 2025. By August 2026, the deficit had already reached $91 billion, on track to surpass the previous year’s record.

India’s trade imbalance is compounded by the nature of its imports from China, with the majority consisting of intermediate goods that are vital for Indian industries. Electrical and electronic equipment, machinery, and chemicals are the top import categories, mostly used as inputs for domestic manufacturing. This dynamic creates a paradox whereby India’s ambitions to boost its exports depend heavily on importing Chinese components.

For instance, while India has expanded electronics assembly and pharmaceutical production, many critical parts and raw materials still originate from China. This reliance carries strategic risks. In April 2025, China’s implementation of export licensing on seven heavy rare earth elements highlighted these vulnerabilities, affecting India’s automotive and defense manufacturing sectors.

India’s manufacturing challenges are not solely due to external dependencies. Domestic factors also play a role, including relatively low investment in research and development. India’s R&D expenditure was 0.64% of GDP in 2024, according to the most recent Economic Survey, significantly behind other Asian economies. This shortfall is partly attributed to limited private-sector participation.

As India seeks to navigate its complex relationship with China, balancing diplomatic engagement with economic self-reliance remains a delicate and ongoing process.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.