How Does India Manage Its Economic Relations with China: Insights and Lessons?

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The global economy is poised to undergo a substantial transformation in the near future. The present analysis delves into the profound entanglement between political and economic realms, specifically focusing on the ramifications of their intricate interplay. On the other hand, the prominent actors in the global economy have formed alliances due to their ability to exert influence on many aspects of the world economy. Conversely, Western countries are now grappling with a significant dilemma pertaining to expenditures, with India and China becoming as prominent players in the global economy’s spending landscape.

However, in recent years, how do the positions of China and India compare? The global economy after the end of the Cold War has undergone significant transformations, resulting in these nations now experiencing the advantages arising from international economic conflicts. Over the past few years, two nations have exhibited a range of uncertainties in their political development. However, their economic growth remains robust, and the economic ties between China and India are now regarded as a pioneering force in the broader regions of South Asia and Southeast Asia, potentially shaping the trajectory of the developing world.

India has effectively maintained its commercial ties with China, demonstrating the robustness of the Indian economy, the prowess of Indian manufacturing, and the aspiration to position India as a prominent player not just within the region but also on the world stage. India has emerged as a notable exemplar in effectively managing its rising economy in the post-Crisis era, owing to its strategic economic measures and partnerships with China and other Western entities.

China-India Economic Relations: Assessing the Current Landscape

China holds a pivotal role in India’s economic interactions, serving as its primary source of imports for over 15 years. Despite India’s efforts to diversify and reduce reliance through trade agreements, China’s dominance remains pronounced. Non-oil imports, comprising more than a quarter of India’s total, are heavily dependent on China. This dependency persists even amid China’s economic slowdown and disruptions, with imports surpassing pre-Covid levels in 2021-22. China’s share in India’s imports reached 16.53% and 15.43% in 2020-21 and 2021-22 respectively, dwarfing other sources like the UAE. The imports span electrical goods, organic chemicals, and plastics, which constitute 70% of China-sourced imports. Conversely, India’s exports to China have grown, totalling $21.2 billion in 2020-21, yet lagging behind imports significantly. The trade deficit between the two nations expanded to approximately $73.3 billion in 2021-22, comprising a substantial portion of India’s post-Covid merchandise deficit. This disparity led India’s deficit with China to be projected to exceed $100 billion in FY23.

China Exports to India
Products Value Year
Electrical, electronic equipment $33.83B 2022
Machinery, nuclear reactors, boilers $21.95B 2022
Organic chemicals $13.05B 2022
Plastics $6.03B 2022
Iron and steel $3.88B 2022
Articles of iron or steel $3.69B 2022

India Exports to China
Products Value Year
Mineral fuels, oils, distillation products $1.98B 2022
Organic chemicals $1.63B 2022
Fish, crustaceans, molluscs, aquatics invertebrates $1.27B 2022
Ores slag and ash $1.07B 2022
Machinery, nuclear reactors, boilers $993.68M 2022
Salt, sulphur, earth, stone, plaster, lime and cement $986.81M 2022

While the bilateral trade thrived over the past years, early 2023 witnessed a slight decline, with China’s exports to India dropping by 0.9%, and imports decreasing by 0.6%. In 2022, the trade volume hit $135.98 billion, amplifying the trade deficit as India imported $101.02 billion more than it exported. The 2021 trade deficit of $69.38 billion was a consequence of this trend.

The dynamics of the China-India economic relationship underwent a transformation after the Galwan Valley border clash. China seeks to isolate the crisis from the broader relationship, but

India aims to resolve it before restoring normalcy. China’s exports to India reached $27.1 billion in Q1 2022, heightening concerns over the growing trade deficit.

Managing Complex Trade Relations with China

India adopts a comprehensive strategy including a set of strategies, policies, and initiatives to efficiently manage its economic engagements with China. This technique has been specifically formulated to attain a balanced trade equilibrium, address relevant concerns, and promote cooperative initiatives. The aforementioned activities serve as illustrations of India’s strategic approach to engaging in diplomatic relations with China, while concurrently placing significant emphasis on safeguarding its economic well-being and national security. There are essential variables that are relevant to India’s handling of its economic relations with China.

In light of concerns about dependence on Chinese imports, India has implemented initiatives to promote domestic manufacturing and increase self-reliance across many sectors. The “Make in India” and “Atmanirbhar Bharat” initiatives have been implemented with the objective of fostering indigenous manufacturing and reducing dependence on imports, namely from China.

Additionally, diplomatic channels function as a mechanism for resolving economic issues and promoting cooperation. High-level dialogues, economic summits, and bilateral meetings are organized with the objective of correcting trade imbalances, investigating investment opportunities, and promoting enhanced economic cooperation. India has persistently engaged in diplomatic discussions with China, despite facing territorial challenges. These negotiations mostly focus on subjects that significantly influence the economy.

Furthermore, India closely monitors Chinese investments in its neighbouring areas that align with its economic objectives. Simultaneously, India strives to attract foreign direct investment (FDI) from other countries with the aim of expanding and diversifying its economic partnerships and strengthening its economic position. Based on statistical data provided by Statista, the inflow of foreign direct investment (FDI) from China to India had a significant decrease, with amounts of US$279.46 million and US$205.19 million recorded in 2021 and 2020, respectively.

This fall is notable when compared to the FDI value of US$534.60 million seen in 2019. On the other hand, in the year 2015, the foreign direct investment (FDI) originating from China and directed towards India attained a notable milestone, amounting to $705.25 million. The significant decrease in foreign direct investment (FDI) inflow may be ascribed to India’s revised FDI policy for nations that share a border, subsequent to the border conflicts between India and China in 2020. However, beginning in the middle of 2022, New Delhi began the practice of granting permissions to individual projects in a manner that considers each case independently. According to available sources, as of June 29, 2022, India has granted approval to around 80 foreign direct investment (FDI) applications associated with China, out of a total of 382.

According to data provided by the Chinese Ministry of Commerce, the investment made by India in China during the year 2021 amounted to US$6.32 million, reflecting a decline of 47.4 percent compared to the previous year. Furthermore, the total cumulative investment made by India in China at the conclusion of 2021 reached US$943.96 million. India is now engaged in proactive efforts to achieve improved market entry opportunities for its merchandise in China, with the objective of building a commercial relationship that is characterized by fairness and equality. The main goal of discussions is to effectively resolve and alleviate trade impediments, such as tariffs and non-tariff barriers that hinder India’s export endeavours.

Furthermore, India demonstrates a prudent stance in relation to Chinese investments in sectors that possess the capacity to impact its national security. Significant attention is allocated towards crucial sectors such as telecommunications, technology, and infrastructure. Furthermore, India regularly participates in regional forums, such as the Shanghai Cooperation Organization (SCO) and the BRICS group, with the aim of promoting economic cooperation and addressing relevant concerns. These meetings provide significant platforms for discourse and cooperation among the governments involved. In addition, India actively participates in the monitoring of trade patterns, analysis of data, and assessment of the implications stemming from economic interactions with China. These efforts help India in making educated decisions and adjusting its approaches as required.

– S. M. Saifee Islam is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).

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