India-China Dynamics: Balancing Economic Interests Amid strategic Competition

Renewed Dialog Between Modi and Xi: A Pivotal Diplomatic Encounter

After a seven-year pause, india’s Prime Minister Narendra Modi and China’s President Xi Jinping are scheduled to meet at the 25th Shanghai Cooperation institution summit in Tianjin. This encounter marks Modi’s first visit to China since the violent Galwan Valley clash in 2020, an incident that deeply strained relations between these two Asian powerhouses.

The summit offers a crucial opportunity for informal discussions, wiht New Delhi signaling willingness to engage in bilateral talks. Yet, analysts warn that longstanding mistrust continues to impede any substantial thawing of ties.

Economic Realities Prompting Tentative Engagement

Despite persistent geopolitical friction, economic imperatives are nudging India and China toward cautious cooperation. Both countries face increasing challenges from U.S.-imposed tariffs and evolving global supply chains that disrupt traditional trade patterns.

A recent illustration of this tension is Foxconn’s decision to recall several Chinese engineers from its Indian manufacturing facility-a move reportedly influenced by beijing’s efforts to restrict technology transfer amid rising competition concerns.

The Persistent Trade Deficit Issue

India’s trade deficit with China has expanded substantially, reaching $99.2 billion for the fiscal year ending March 2025-up sharply from around $85 billion the previous year. Imports surged beyond $113 billion during this period, highlighting India’s continued reliance on Chinese products despite government initiatives aimed at reducing this imbalance.

The Indian embassy in Beijing has voiced concern over both the magnitude and steady growth of this deficit while actively negotiating market access improvements with Chinese officials.

Beyond Commerce: Strategic Security Concerns

Tensions extend well past economic matters; China’s robust military partnership with Pakistan remains a critical source of unease for India.From 2020 through 2024, approximately 63% of China’s arms exports were directed toward Pakistan-a notable increase compared to earlier years-further complicating regional security dynamics.

India’s Emergence as a Manufacturing Choice

Amid global companies diversifying supply chains away from China due to geopolitical uncertainties,India is positioning itself as an appealing manufacturing hub. Notably, India surpassed China as the top smartphone supplier to the U.S. market in Q2 2024; concurrently, China’s share plummeted from 61% last year down to just 25%, according to industry data firm Canalys.

however, India’s full potential within the “China Plus One” strategy remains constrained by its dependence on Chinese raw materials and intermediate goods essential for production processes-a challenge yet unresolved effectively.

Diving Into Supply Chain Dependencies

• Pharmaceutical Ingredients: Around 70% of India’s chemical-based active pharmaceutical ingredients (APIs) originate from China; dependency rises close to 90% when considering biosimilar APIs.
• Electronics & machinery: Critical components such as electrical machinery heavily rely on imports sourced primarily from Beijing-based manufacturers.
• E-Mobility Sector: With ambitions targeting electric vehicles (EVs) constituting roughly 30% of new vehicle sales by 2030-up sharply from about 7.6% in early-2024-India depends substantially on rare earth magnets and battery materials predominantly supplied by China.

Navigating Interdependence: Risks and Opportunities Ahead

This intricate interconnection creates vulnerabilities across vital sectors like automotive manufacturing where disruptions could ripple widely due to reliance on imported inputs such as lithium or cobalt minerals largely controlled by Chinese suppliers.

“Government policies have inadvertently entrenched dependencies where key industrial inputs remain externally sourced,” observed experts monitoring Indo-Chinese industrial ties during recent diplomatic exchanges involving commitments related to rare earth elements and fertilizers directly supplied under Beijing’s assurances.”

Bilateral Trade Amidst Restrictions: Challenges & Prospects

Tensions have prompted new Delhi into banning numerous prominent Chinese companies spanning e-commerce platforms like Shein through social media apps including TikTok-measures intended primarily for safeguarding domestic interests but which together limit market access opportunities for Chinese firms facing slowing consumption domestically.

This surroundings also opens doors: firms such as BYD have expressed interest in setting up production bases within India following examples set by competitors like Vietnam’s VinFast entering local markets-reflecting broader trends where excess capacity pressures push manufacturers toward emerging economies offering expanding demand pools like India’s growing EV sector.

Smoothing Travel & Trade Channels Indicate Possible Thaw?

• The resumption of direct flights between mainland China and India after four years signals tentative progress towards restoring connectivity disrupted since early pandemic lockdowns.
  
  
• A recent agreement permits border trade operations at three designated points along their shared frontier.
  
  
• Larger Indian conglomerates including reliance Industries alongside Adani Group are exploring partnerships with their Chinese counterparts – demonstrating pragmatic business-driven engagement despite political headwinds.
  
  

An Ongoing Complex Relationship Between Two Regional Titans

“Deep-seated suspicion regarding China’s strategic intentions persists within Indian policy circles,” noted senior analysts specializing in energy investments and connectivity strategies-but economic realities necessitate cautious engagement nonetheless.”

The forthcoming SCO summit will test whether these fragile overtures can mature into substantive collaboration or if entrenched rivalries will continue shaping one of Asia’s most significant bilateral relationships amid shifting global power balances-and how sustainable any emerging alignment might be given competing strategic interests intertwined with economic necessities alike.