To Compete With China, India May Need China: The Strategic Paradox

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Picture Courtesy:  THE HINDU

Context

India's economic relationship with China is a complex paradox of intensifying strategic rivalry and growing bilateral trade, prompting the policy question of how India can leverage this engagement to strengthen its own competitive capabilities.

India's Economic Dependence on China

Widening Trade Deficit

In 2025, the India-China trade deficit hit a record $116.12 billion. Total bilateral trade reached $155.62 billion, but a surge in Indian imports of Chinese goods like electronics and machinery (exceeding $135 billion) surpassed India's exports.

Sector-Specific Dependencies

India's deep reliance on China across various sectors, including critical industries, makes it highly vulnerable to supply chain disruptions.

Active Pharmaceutical Ingredients (APIs): India, the 'Pharmacy of the World,' is heavily dependent on China for drug manufacturing raw materials.

• Approximately 60-70% of India's critical bulk drugs (APIs and Key Starting Materials) are imported from China (Source: Department of Pharmaceuticals).
• In 2024-25, China accounted for 72% of India's total pharmaceutical imports. (Source: Pharmexcil).
• For certain essential antibiotics like erythromycin, the dependency on Chinese raw materials is as high as 97.7%. (Source: GTRI)

Electronics & Telecom Hardware: Critical for India's digital economy.

• India imports nearly 80% of its total electronic components, with China being the primary source. (Source: NITI Aayog)
• In FY 2024-25, imports of electronic components from China and Hong Kong totaled over $36.8 billion, representing more than half of India's total electronic component imports. (Source: Ministry of Commerce)
• In FY 2024-25, China continues to dominate the import of high-value components like integrated circuits (88% market share). (Source: Ministry of Commerce)
• Integrated Circuits: 88% sourced from China.
• Flat Panel Displays: 86% sourced from China.
• Lithium-ion Batteries: 94% sourced from China.
• Semiconductor Machinery: 99.5% sourced from China.
• China accounts for approximately 43.9% of India's total imports of electronics, telecom, and electrical products as of 2023-24, with that figure exceeding 50% when combined with Hong Kong. (Source: GTRI).
• Specific dependencies include 80.5% of laptop parts being imported from China.

Renewable Energy (Solar): India's ambitious clean energy goals are heavily reliant on Chinese imports.

• China controls between 75% and 95% of the global solar PV supply chain, including 97% of wafers. (Source: IEA)
• Despite some decline due to the PLI Scheme, India still relies on China for over 50% of its solar cells and modules, with imports worth nearly $4 billion in FY2024.(Source: Rubix).  
• For critical upstream components like solar wafers, India's dependence on China remains nearly 100% (Source: IINA).

Electric Vehicles (EVs) and Batteries: The transition to e-mobility is critically dependent on the Chinese supply chain for essential components.

• China supplies over 85% of India's lithium-ion battery imports, a core component of EVs. (Source: Observer Research Foundation)
• Only 13% of EV models sold in India meet the 50% domestic value addition requirement of the government's Production-Linked Incentive (PLI) scheme due to high import content.(Source: Ministry of Heavy Industries)

Key Risks and Vulnerabilities for India

Supply Chain Disruption: Concentrated supply chains from China are fragile, as seen during the COVID-19 pandemic; geopolitical conflicts or internal crises could paralyze Indian industries dependent on these critical goods.

Strategic Leverage for China: Dependence on critical items like APIs gives Beijing potential leverage to influence India's policies or retaliate during diplomatic standoffs.

Stifling Domestic Industry: Cheap Chinese imports pose a challenge to Indian domestic manufacturers, potentially stunting the growth of India's industrial sector.

National Security Concerns: To curb security risks and "opportunistic takeovers" of Indian companies, the government has taken several steps:

• Banned over 250 Chinese mobile applications.
• Government approval for FDI from countries sharing a land border with India. This led to a sharp fall in Chinese FDI from an annual average of $886 million (2016-2020) to just $68 million (2021-2025) (Source: DPIIT).

India's Strategy for Self-Reliance 

Production Linked Incentive (PLI) Schemes

Launched in 2020 with an outlay of ₹1.97 lakh crore across 14 key sectors. The scheme aims to boost domestic manufacturing and exports. By March 2025, it had attracted investments of ₹1.76 lakh crore, with significant success in mobile phone manufacturing. (Source: PIB)

'Make in India' & 'Aatmanirbhar Bharat'

Aim to transform India into a global manufacturing hub, with a target of increasing manufacturing's share of GDP to over 25%. (Source: NITI Aayog)

Infrastructure Development

Focus on creating industrial corridors and electronics manufacturing clusters to provide the necessary ecosystem for large-scale production.

PM Gati Shakti: A digital platform integrating 16 ministries to coordinate infrastructure planning, ensuring that industrial nodes are directly connected to railways, highways, and ports.

Diversifying Supply Chains

Collaborating with partners through forums like the Quad, EU and the Indo-Pacific Economic Framework (IPEF) to build alternative, resilient supply chains with trusted partners like Japan, Taiwan, and South Korea.

Major Trade Agreement Signed : India-EFTA Trade & Economic Partnership Agreement (TEPA) (March 2024, involving Switzerland, Norway, Iceland, and Liechtenstein), India-UK Comprehensive Economic and Trade Agreement (CETA) (2025), India-Oman CEPA (2025), agreements with the UAE (CEPA) and Australia (ECTA).

Way Forward for India

India requires a pragmatic, strategic approach, balancing economic needs with strategic imperatives, aiming for balanced interdependence over dependency.

Focus on Selective Decoupling ('De-risking')

Instead of a blanket ban, India should identify the most critical sectors (e.g., APIs, semiconductors, telecom) and strategically build domestic capacity in these areas, while allowing trade to continue in less sensitive domains.

Boost Domestic Competitiveness

Success of 'Aatmanirbhar Bharat' depends on making Indian industries globally competitive, not on protectionism. This requires improving the ease of doing business, ensuring access to affordable capital, and investing heavily in R&D and skill development.

Consider Strategic Recoupling

In certain areas, building a domestic ecosystem may require attracting Chinese investment and expertise, especially in non-strategic parts of the value chain. This can be done under strict government oversight to manage security risks.

Strengthen Strategic Alliances

India must accelerate collaboration with partners like the USA, Japan, Australia, and the EU to build reliable and resilient alternative supply chains. These alliances can provide the necessary capital, technology, and market access.

Learn from Global Lessons in 'De-risking'

Other countries offer valuable lessons in managing economic dependence on China through a strategy of "de-risking" rather than complete decoupling.

• Vietnam's "China Plus One" Model: Vietnam has successfully become an alternative manufacturing hub by positioning itself as a complement to China. It imports raw materials from China, processes them, and exports finished goods, thus integrating smartly into the global value chain without direct confrontation.
• Japan & South Korea's Approach: These nations work to reduce over-reliance on China for critical goods. For example, South Korea's "3050 Strategy" aims to reduce import dependence on 185 critical items to a maximum of 50% by 2030. They use a mix of subsidies, incentives for reshoring, and strategic investments to build domestic capacity.

Conclusion

To become a global power, India must use economic ties with China to build its own industry and mitigate vulnerabilities. The goal is to recalibrate the relationship, not sever it, to secure India's long-term strategic autonomy.

Source: THE HINDU