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When you enter an Indian toy store to select toys for children, you immediately notice how the country struggles to strengthen economic ties with its powerful neighbor, China.
Six years ago, India increased import taxes on toys from 20–60 percent, eventually reaching 70 percent, aiming to promote domestic production and curb the market flooded with low-quality imports.
Retailers opposed this move, arguing that local products could not compete with foreign goods. However, the high tariffs and quality regulations proved effective.
In 2020, toy imports in India fell by one-third, while exports increased from $12 million to $20 million that year. This success reduced the country’s dependence on China, which held a 70 percent share of the local market.
India’s success in this sector remains a rare exception. In other areas, efforts to balance trade with China have largely failed. Some experts say that India-China economic relations are among the most imbalanced in the world.
Deep Dependence in India’s Industrial Economy
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Following the 2020 Galwan Valley tensions, diplomatic relations between India and China have cooled. India banned Chinese apps like TikTok, yet the trade deficit ballooned from $44 billion in 2020 to $112 billion this year.
“Although political, security, and investment ties are the weakest, India’s economic dependence on China continues,” says China expert Kevin Jiangli from Washington.
Worryingly, India’s exports to China have remained steady since before COVID-19, while imports have doubled.
“More than 30 percent of Indian industrial production depends on China, with over 100 sensitive products reliant on imports from China,” explains Ajay Srivastava of the World Trade Research Institute in Delhi.
If this trend continues, the bilateral trade deficit could exceed $134 billion, to Beijing’s benefit.
In September, at the BRICS summit in Delhi, Modi and Xi Jinping pledged to address trade imbalances and supply chain issues.
However, reducing dependence on China in the industrial economy remains a significant challenge.
A primary reason is that India has grown ever more reliant on Chinese inputs for industrial production.
India has reduced its dependence on imports of smartphones and solar equipment. Over a quarter of iPhones globally are now assembled in India.
“But these products are mainly assembled in India while many parts are still imported from China,” says Srivastava.
The situation is similar for industrial machinery, battery materials, chemicals, solar cells, and equipment.
Research shows electrical machinery and equipment account for 36 percent of total imports, followed by machinery and mechanical appliances at 21.7 percent. Organic chemicals and plastics also represent significant shares.
Challenging Access to the Chinese Market
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Due to growing dependence on raw materials and other economic trends, Chinese imports to India continue rising.
China has expanded capacity from solar panels to electric vehicles, yet slow economic growth has led to low domestic consumption.
As a result, Chinese-made products are being sold cheaply abroad. China is expected to record a profit of $1 trillion for the second consecutive year.
According to Srivastava, despite increased import taxes by Western countries, large volumes of Chinese goods continue entering India.
Conversely, limited Indian access to the Chinese market remains a major challenge.
“It’s difficult for Indian products to increase exports to China due to taxes and other regulatory hurdles,” explains Kevin Li.
“Unless both sides achieve equal market access, economic dependence will remain despite improved political relations.”
Srivastava points out that a long-term solution to reduce imports lies in boosting domestic production.
However, this requires regional industrial policies, affordable electricity, loans, essential materials, and stable regulations.
Recently, India has eased foreign direct investment regulations, which may assist Chinese companies investing in the country.
China expert Li highlights that India should increase exports to China immediately. With an aging population and high healthcare costs, pharmaceutical exports hold potential.
However, Li notes that a trade deficit exceeding $100 billion cannot be offset by exports in a single sector alone.
