The media is abuzz with anticipation over Chinese President Xi Jinping’s first visit to India in seven years. Expectations are high that the visit will advance the diplomatic thaw between the two giant neighbours. However, questions remain about whether trade relations will improve, as regulatory hurdles, visa delays and restrictions on industrial equipment continue to impede investment and trade. The two Asian giants are bound together by one of the largest, and most unbalanced, trading relationships.
The numbers keep climbing, and so does the discomfort in New Delhi. In fiscal year 2025-26, China overtook the US to become India’s largest trading partner. The bilateral merchandise trade reached roughly $151 billion, but the split tells the real story: India imported well over $130 billion in Chinese goods while exporting under $20 billion in return, leaving a deficit above $112 billion — the widest on record, and a jump from about $99 billion the year before. Put simply, for every dollar of goods India sells to China, it buys back somewhere between six and seven dollars. That gap has not narrowed in years of trying. It has grown.
This is not a story of India simply losing money to a rival. Much of what China sells India — telecom equipment, semiconductors, lithium-ion batteries, solar cells, industrial machinery, pharmaceutical ingredients — are productive inputs that Indian factories and assembly lines depend on to make their own products affordable and competitive. Cutting these imports off overnight would raise costs across Indian industry, not lower them. The uncomfortable truth is that even a "Made in India" smartphone, electric vehicle, or solar panel often carries a great deal of Chinese content inside it. The deficit is not merely a scoreboard; it is a mirror of where each economy sits in the global production chain — China with a deeply integrated manufacturing base built over decades, India with strong services and pockets of manufacturing that still lean on imported components.
Three problems flow from this arrangement, and together they define India's predicament. First is the sheer scale of the imbalance, which has resisted correction despite repeated policy attempts. Second is strategic dependence: India relies on China for a striking share of inputs across sensitive sectors. A 2026 NITI Aayog assessment found China supplies roughly 65% of India's critical pharmaceutical inputs — active ingredients and intermediates that underpin the country's vast generic drug industry and, by extension, public health. Third is asymmetric market access: Indian pharmaceuticals, agricultural goods, IT services, and manufactured products struggle to gain meaningful footholds in China, hemmed in by regulatory approvals, sanitary rules, and procurement practices that Beijing controls and can tighten at will.
Nowhere is this dependence more exposed than in rare earths. China controls roughly two-thirds of global rare earth mining, some 60% of processing capacity, and close to 90% of magnet manufacturing — a dominance built deliberately since the 1990s, when Beijing designated rare earths a strategic asset while Western producers retreated from the sector. In April 2025, China restricted exports of seven rare earth elements, primarily as retaliation against US tariffs rather than a move aimed at India. India was caught in the crossfire regardless, given how heavily its EV, electronics, renewable energy, and defence sectors lean on these materials, for which substitutes such as ferrite magnets perform noticeably worse.
What followed was a stop-start sequence that has made planning nearly impossible for Indian manufacturers. China eased curbs on magnets, fertilisers, and tunnel-boring equipment in August 2025 after diplomatic commitments from its foreign minister during a visit to New Delhi — only to add five more elements to its control list two months later, and to introduce a rule requiring approval for any product containing even trace amounts of Chinese-origin rare earths. By December, restrictions covered twelve elements in total. Tellingly, Chinese authorities reportedly sought assurances that magnets supplied to India would not be re-exported to the United States — a reminder that India's exposure here is often collateral damage in a larger contest between Beijing and Washington, one in which India is a bystander that still absorbs the consequences.
India's response has combined diplomacy with a push for self-reliance, and there are signs of real movement. Senior officials from both sides have held talks in Beijing aimed at stabilising ties, building on Prime Minister Modi's meeting with President Xi Jinping at the 2025 SCO Summit in Tianjin. On the domestic front, the government is preparing an incentive scheme worth roughly ₹73 billion for rare earth magnet manufacturing, alongside a ₹15 billion critical-minerals recycling initiative running through 2031. New Delhi is also courting Japan and South Korea as alternative rare earth suppliers, while state producer Indian Rare Earths Limited remains constrained to about 2,000 tonnes of annual output by Atomic Energy Act rules that classify monazite as an atomic mineral — a restriction India will likely need to revisit if it is serious about scaling domestic processing. Private capital has begun to follow, with companies raising fresh funds specifically to invest in rare earth metals.
None of these measures offers a quick fix, and none should be mistaken for one. Domestic manufacturing capacity in electronics, batteries, and critical minerals takes years to build, not months, and will require sustained policy support well beyond current incentive schemes. Diversifying supply chains toward Japan, South Korea, Australia, Taiwan, and others can reduce dependency without eliminating it. Indian negotiators have limited leverage to pry open Chinese markets for pharmaceuticals, agriculture, and IT services, so progress there is likely to stay incremental, tethered to the broader rhythm of bilateral diplomacy. And unlike blanket protectionism, which risks sheltering inefficient domestic producers, targeted measures — anti-dumping duties where dumping is proven, security screening for genuinely sensitive technologies, incentives tied to measurable gains in value addition rather than mere assembly — offer a more sustainable path.
What emerges is not a relationship headed for imminent decoupling. Trade volumes continue to set new records even as the imbalance persists. Rather, this is best understood as a case of deep and uncomfortable interdependence: economically necessary in the near term, strategically uncomfortable in the long term, and only slowly being rebalanced through a combination of diplomacy, domestic investment, and diversification. The measure of success for India will not be the deficit number itself, but whether the country manages, over time, to export more high-value goods, control more of its own critical supply chains, and reduce how exposed it is to decisions made in a geopolitical contest it did not start.
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