India-China Trade Deficit to Touch Record in 2025

India-China Trade Deficit to Touch Record in 2025

Why in News? 

India’s trade deficit with China is expected to reach a record $106 billion in 2025, primarily because imports are rising much faster than exports, according to a report by the Global Trade Research Initiative (GTRI). 

Current Trends in India–China Trade Relations

• Bilateral Trade Volume: In recent years, trade between India and China has shown strong expansion despite geopolitical tensions. In the financial year 2023-24, the bilateral merchandise trade reached about $118.4 billion with China retaining the position of India’s largest trading partner surpassing the United States. In the 2024-25 fiscal year, exports from India to China declined, while imports continued to grow sharply. This resulted in a trade deficit of nearly $99.2 billion, one of the largest deficits India has experienced with any trading partner.

• Import and Export Pattern: India’s imports from China far exceed its exports to the neighbouring country. In 2021, Indian imports were around $87.7 billion and exports stood higher at $23 billion. Over time, exports fell sharply before recovering slightly. By 2025 exports are expected at about $17.5 billion, still low compared to past levels. Meanwhile imports climbed steadily to an estimated $123.5 billion in 2025. During January to October 2025, Indian exports to China recorded some growth in specific months, such as November where exports jumped markedly.

• Key Import Categories: A significant share of India’s imports from China comes from electronics and machinery sectors. Nearly 80 percent of imports from China fall under four broad groupings: electronics, machinery, organic chemicals, and plastics. Within electronics, imports include mobile phone components, integrated circuits, laptops, solar modules, flat-panel displays, lithium-ion batteries, and memory chips. 

• Key Export Categories: India’s exports to China remain limited in diversity and value compared to imports. Historically, exports included primary goods such as iron ore, cotton, marine products, petroleum products, and certain engineering goods. Despite export growth in specific months of 2025, overall annual export levels remain well below past peaks like the $23 billion recorded in 2021. 

Key Drivers Behind the Rising Trade Deficit

• Heavy Dependence on Electronics Imports: India’s trade deficit with China has been driven most strongly by imports of electronics and related components. In the period from January to October 2025, India imported about $38 billion worth of electronics products from China. These items included mobile phone parts ($8.6 billion), integrated circuits ($6.2 billion), laptops ($4.5 billion), solar cells and modules ($3 billion), and lithium-ion batteries ($2.3 billion). This pattern keeps India’s import bills high and contributes directly to the widening gap between imports and exports. 

• Reliance on Active Pharmaceutical Ingredients (APIs): Another central factor in the growing trade imbalance is India’s dependence on Active Pharmaceutical Ingredients (APIs) from China. India is a global leader in generic drug production but sources most of its API inputs from China. For example, antibiotics in the API segment show very high import dependence, with China supplying nearly all of India’s requirements. The lack of diversified sources for APIs forces Indian pharmaceutical companies to buy these crucial raw materials from Chinese suppliers.

• Machinery and Capital Goods Dependence: India’s industrial and infrastructure sectors also rely heavily on machinery and capital goods from China. In 2025, machinery imports from China were valued at around $25.9 billion, with specific items like industrial transformers ($2.1 billion) making up a large share. India’s manufacturing ecosystem has not yet developed equivalent domestic capacity to replace these imports fully. The result is that capital goods and industrial machinery imports continue to grow, adding consistently to the trade deficit.

• Price Competitiveness: Chinese products remain highly competitive in international markets because of large-scale manufacturing, economies of scale, and efficient supply chains. These factors make Chinese goods cheaper than many alternatives. Indian businesses often find it more economical to import certain electronic parts, machinery components, and chemicals from China. The advantage in pricing thus encourages Indian importers to lean toward Chinese suppliers.

• Data Discrepancies: The GTRI report noted discrepancies between Indian and Chinese trade data, with Indian import figures being lower than Chinese export figures, which could suggest potential under-invoicing of imports, an issue that warrants investigation by customs authorities. 

Policy Measures Taken by India to Address the Imbalance

• Expansion of PLI Schemes: The Production-Linked Incentive (PLI) scheme, with an outlay of ₹1.97 lakh crore across 14 sectors, is the primary tool for reducing import dependency.
  • Electronics: New incentives approved in April 2025 (totaling ₹22,919 crore) specifically target localizing electronic components to counter Chinese dominance in this sector.
  • Renewable Energy: By June 2026, all clean energy projects will be required to use solar modules made from locally-produced cells, a direct move to cut the ~82.7% reliance on Chinese solar imports.
  • Pharmaceuticals: India has achieved significant import substitution for critical bulk drugs like Penicillin G, aimed at reducing the ~70% dependence on Chinese Active Pharmaceutical Ingredients (APIs).
• National Critical Minerals Mission (NCMM): Launched in 2025, this mission aims for self-reliance in critical minerals like lithium, silicon, and graphite by 2035 to protect India’s EV and semiconductor supply chains from Chinese export curbs. 
• Trade Remedial Measures: India has implemented several trade measures against Chinese goods. This includes imposing five-year anti-dumping duties on various items such as steel products, kitchenware, and chemicals to counter unfair trade practices. The Bureau of Indian Standards (BIS) is enforcing Quality Control Orders (QCOs) through stricter certifications and testing to prevent the import of substandard Chinese goods. Additionally, a temporary 12% safeguard duty was proposed in 2025 for specific steel products to protect domestic producers from an influx of inexpensive Chinese imports. 
• Export Promotion & Market Diversification: India is focusing on improving market access for its exports in China by engaging in negotiations to remove non-tariff barriers in sectors like pharmaceuticals, IT, and agriculture. To reduce reliance on China, India is pursuing a “China Plus One” strategy by actively seeking Free Trade Agreements (FTAs) with countries like the UK, EU, and Australia. While facilitating visas for essential manufacturing experts, India maintains stringent screening of Chinese Foreign Direct Investment (FDI) in sensitive areas like telecom, power, and fintech to ensure strategic autonomy. 

Impact on Domestic Manufacturing and MSMEs

• Pressure on Domestic Manufacturing Capacity: The rising trade deficit with China places sustained pressure on domestic manufacturing in India. Large volumes of low-cost imports from China reduce demand for locally produced goods. Since the launch of Make in India in 2014, India has aimed to raise manufacturing’s share in GDP to 25 percent, but it remains around 17 percent in 2024-25. Cheaper Chinese imports limit capacity expansion for Indian firms because domestic producers struggle to match prices and scale.

• Production Linked Incentive Schemes: The government introduced the Production Linked Incentive (PLI) schemes in 2020 to counter import dependence and boost domestic output. As of 2024, PLI covers 14 strategic sectors including electronics, pharmaceuticals, telecom, solar modules, and automobiles. PLI has helped attract investment in mobile phone assembly and electronics manufacturing. However, the schemes show limits. Many firms still import key components such as semiconductors, display panels, battery cells, and APIs from China. This means value addition inside India remains modest. 

• Disproportionate Impact on MSMEs: Micro Small and Medium Enterprises (MSMEs) face the most direct stress from Chinese imports. India has over 6.3 crore MSMEs, contributing about 30 percent of GDP and nearly 45 percent of exports as per 2023 government data. Many MSMEs operate in price-sensitive segments such as electrical goods, plastic items, bicycle parts, toys, and household products. Chinese firms benefit from bulk production, state support, and integrated supply chains.

Way Forward 

To address the widening trade deficit, India must shift from short-term export gains to long-term competitive manufacturing. The Global Trade Research Initiative (GTRI) emphasizes reducing import dependence in critical sectors and strategies include implementing reverse-engineering programs to deconstruct Chinese products and promoting deep-tech manufacturing for chips and batteries. Furthermore, the government’s Inter-Ministerial Committee should intensify trade monitoring and investigate data discrepancies suggesting potential under-invoicing, while leveraging PLI schemes to foster a self-reliant domestic industrial ecosystem.