India-China Bilateral Trade Dynamics: Operating Variables & Business Implications

India's bilateral trade with China hit an all-time high of $151.1bn in FY2025-26, with its corresponding trade deficit with Beijing also rising year-on-year, by 13.5%, to reach a new record level of $112.6bn.

What’s ironical is that this unprecedented trade growth happened despite significant political friction between the two countries during the last five years, the resulting FDI restrictions on Chinese companies via Press Note 3, and India’s consistent “China+1” pitch to Western investors and businesses post COVID.

After all, the Indian government has assiduously positioned the country as a credible, attractive destination for foreign companies looking to diversify their supply chains as part of de-risking and resilience building initiatives. Delhi’s efforts to secure foreign capital and technology exploring alternatives to Beijing’s manufacturing dominance have further been reinforced by intensifying geopolitical and geoeconomic fragmentation.

Trade dependence despite political friction

Yet, the actual trajectory of India’s trade with China has moved in the opposite direction to its proclaimed positioning as an alternative to Beijing. India’s structural import dependence, despite production-linked incentive (PLI) schemes and other industrial policy measures unveiled in recent years to incentivise the rapid expansion of a domestic manufacturing base, is the principal driver of the bilateral trade dynamic – and not Delhi’s stated policy stance towards China.

Most investment and supply chain analysis treat the 2025 diplomatic thaw between the two countries as a policy variable into business strategy and capital allocation planning. However, that’s the wrong input to factor in. The more relevant and prudent one is the inherent trade dependence that preceded the political reset, drove it, and is unlikely to reverse anytime soon.

Recognising this fundamental reality is crucial for companies assessing and making medium- to long-term sourcing, market entry and manufacturing-related investment decisions in India today.

And, reframing the India-China trade dynamic around the above structural paradigm transforms how companies should be recast or refine their India playbooks.

Structural operating variables

Three operating variables must be part of any boardroom calculus on gauging the viability of entering into or expanding in the Indian market.

PLI design limitations

First, companies need to be cognisant of the limitations of existing PLI schemes in India, wherein outcome-based incentives are defined without the underlying facilitating conditions being created or encouraged first.

For all the tangible progress made on various sector-specific PLIs in the last six years, Indian manufacturing still remains hugely dependent on Chinese inputs, given the long gestation periods involved in building and scaling up the domestic upstream ecosystem.

Take, for instance, the Advanced Chemistry Cell (ACC) PLI, launched in October 2021, that set a condition for beneficiary companies to attain domestic value addition (DVA) of 25% within two years – scaling up to 60% by the end of the fifth year – from the date of project commencement.

The actual outcomes, though, are sobering. As of October 2025, a mere 2.8% of the ACC PLI’s targeted 50GWh capacity had been commissioned, failing to attain the requisite DVA levels for incentive eligibility. The absence of a robust local supplier base around component production and refining of critical minerals, among others, means companies enrolled under the scheme continue to rely heavily on Chinese imports.

Similarly, in the case of India's solar PLI scheme, the operational achievement rate stood at around 29% of the overall awarded capacity as of June 2025. Capacity addition has been hampered by delayed commissioning of manufacturing facilities for upstream components such as polysilicon and silicon wafer, a situation compounded by continuing reliance on specialised machinery and technical visas from China.

It’s no surprise, then, that Indian manufacturing finds it challenging to make a real leap in gaining market share in high-complexity exports, as reflected in the country’s 44th ranking on the Economic Complexity Index (ECI) – a position unchanged since 2019.

Mapping sector-specific viability

The second operating variable companies should reflect upon, while evaluating India’s viability as part of the “China+1” playbook, is a sector-specific mapping of local manufacturing maturity.

To be fair to the Indian government, domestic manufacturing, aided by policy push in recent years, has built up some real muscle to translate the “China+1” narrative into reality. In sectors like smartphone assembly, automotive components, specialty chemicals and pharmaceutical APIs, India has established itself as a genuinely viable alternative manufacturing base for global companies and investors.

However, in segments like EV powertrains, high-volume electronics and component ecosystems, India remains disproportionately dependent on imports – particularly from China.

Almost 40% of India’s electronics components and nearly 70% of API inputs are sourced from China, with the corresponding figures for machinery and computer imports, and organic chemicals, estimated at 40% and 44%, respectively. In pharma, despite five years of PLI, India’s API dependence score – measured on a composite resilience index entailing share of Chinese imports, import surge and PLI coverage – remains at 68 out of 100.

Press Note 2 and Chinese pushback

The third and final operating variable for businesses to keep in mind is India’s gradual reversal of its onerous policy on Chinese FDI and Beijing’s swift response to the same.

Recognising that curbing Chinese investment in India for six years did not reduce reliance on imports of goods from Beijing, New Delhi unveiled Press Note 2 in March 2026, a policy amendment easing a set of restrictive measures linked to land-border investments emanating from China and other neighbouring countries.

Under the new policy framework, Chinese FDI will secure automatic approval for minority stakes below 10%, and a 60-day fast-track window for priority manufacturing sectors. The move represents a tacit acknowledgement by the Indian government of the limitations of its PLI schemes, and signals an attempt to pursue tactical stabilisation with China, even as major differences persist over strategic aspects of the bilateral relationship.

Delhi will find it difficult to publicly alter its “China+1” rhetoric to concede that India can successfully reduce imports of Chinese components and technology, and yet build industrial capacity in vital sectors including capital goods, EVs, renewables, electronics and chemicals.

Hence, the discreet reversal via administrative approval channels, while the public posture persists. That’s the variable most investment and supply chain analyses continue to ignore. The operative question should not be what New Delhi says about Chinese FDI – it is what is actually moving through the bureaucratic set-up, and at what pace.

China Decrees 834 and 835

While India is now seeking to attract patient Chinee capital to bolster domestic manufacturing and build a scalable, viable local integrated ecosystem of suppliers, component makers, etc., Beijing has announced new curbs to maintain its dominance.

In late March and early April 2026, Chinese authorities rolled out State Council Decrees 834 and 835, imposing fresh regulations around supply chain security and extraterritorial jurisdiction, respectively.

Specifically, Decree 834 outlines early-warning and risk-monitoring measures alongside new investigative and enforcement mandates for Chinese regulators, while Decree 835 is aimed at overseas individuals and entities that enact or help enact measures, which Beijing will construe as improper extraterritorial jurisdiction.

The timing of these measures was pretty instructive, coming as they did barely weeks after India’s Press Note 2 relaxation. The decrees introduce a new element of risk and uncertainty into the supply chain diversification analysis of global businesses that want to hedge against excessive exposure to China – with direct implications for India’s manufacturing ambitions.

Hybrid approach over binary lens

So, how do you then plan around these variables and gauge the viability of your India entry or expansion thesis?

A good approach will be not to assess India, in the context of “China plus one” as a binary substitute option, but rather from a system design lens that determines if a potential “India and China” hybrid framework enhances diversification, reliability and resilience of supply chains.

Rather than pursuing an outright shift from China to India in an either-or way, you should clinically examine the sectors and categories where each geography delivers distinct, competitive advantages.

A sector-wise, calibrated capacity enhancement approach that anchors long-term commitments around India’s core and unique strengths would ensure your India operations become a strategic node in global manufacturing networks – and not merely a reactive, tactical hedge to geopolitical and geoeconomic fragmentation.