India’s trade deficit with China widens despite efforts to reduce dependence

India’s trade deficit with China has widened sharply despite efforts to reduce imports and strengthen domestic manufacturing, according to analysis cited by the BBC. The deficit increased from $44 billion in 2020 to $112 billion this year. Exports to China remain below pre-pandemic levels, while imports have doubled over the same period.

The toy industry is a notable exception. India increased tariffs on imported toys from 20% to as much as 70% and introduced quality-control requirements. Imports fell from nearly $300 million in 2020 to $100 million this year, while exports rose from about $129 million to $200 million.

The measures also reduced China’s share of India’s toy market, previously estimated at 70%. However, analysts say similar progress has not been achieved across the wider industrial economy. China now supplies more than 30% of India’s industrial imports and is a source for more than 100 critical products, according to Ajay Srivastava of the Global Trade and Research Initiative.

He warned that the bilateral deficit could reach $134 billion if current trends continue. India has reduced imports of some finished goods, including smartphones and solar equipment, and now produces more than a quarter of the world’s iPhones. But production remains heavily dependent on Chinese components, especially in electronics, machinery, batteries, chemicals, solar cells and manufacturing equipment.

The Observer Research Foundation said electrical machinery and electronics accounted for 36% of imports, while machinery and mechanical appliances represented 21.7%. Analysts said disruption to those supplies could affect production rather than merely consumer purchases. China’s excess capacity in industries such as steel, solar panels and electric vehicles is encouraging manufacturers to seek overseas markets.

India’s expanding manufacturing activity and restrictions in Western markets have increased the flow of Chinese goods. India and China have recently sought to improve relations. Prime Minister Narendra Modi and President Xi Jinping agreed at a Brics summit to address structural trade imbalances and supply-chain issues.

Analysts said India would need stronger domestic manufacturing, improved logistics, affordable power and credit, stable regulation, and investment that brings technology transfer and local value.