View: India-China thaw faces major economic tests

India is striving to break free from China's economic influence while enhancing diplomatic ties. Indian Prime Minister Narendra Modi and Chinese President Xi Jinping met in New Delhi, marking Xi's first trip to the subcontinent in seven years. Both leaders pledged to mend the strained relations following the deadly border clashes in 2020.

Since then, direct flights and visa services have resumed, and visa services have expanded. However, these measures are not enough to address the deep economic asymmetry between the two nations. China's share of global manufacturing value-added stands at 28%, while India's is a mere 3%. Similarly, China's 16.3% share of global merchandise exports vastly exceeds India's 1.7%.

Moreover, India imported $116 billion more from China than it exported in 2025, resulting in a deficit of $91 billion. Many of these imports are crucial intermediate goods for Indian manufacturers. India's heavy reliance on China exposes vulnerabilities in sectors like automotive and defense manufacturing, as demonstrated by China's imposition of export licensing requirements on seven heavy rare earths.

While India has made progress in electronics and pharmaceuticals, many components are still sourced from China. Additionally, India's research and development spending is low at 0.64% of GDP, and skilled labor shortages further compound the problem. Despite these challenges, India is taking steps to address the imbalance. It has relaxed FDI restrictions for Chinese companies, allowing them up to a 10% stake in Indian firms.

The government has also announced fast-track clearance for investment proposals in five high-technology areas, but these measures rely on joint ventures with majority Indian ownership. India's electronics exports to China have increased by 40% between April and August, driven by industrial machinery, automotive components, printed circuit boards, smartphones, and other electronics.

However, this export surge does not signify a fundamental shift in the relationship as much of India's electronics growth still depends on imported Chinese components. Northeast Asia's AI boom is generating positive spillovers for India, but this reinforces the centrality of Chinese supply chains. To build its own domestic capabilities, India must overcome trust deficits and convince Chinese companies to transfer critical technologies.

India's advantage lies in its large market and low-cost labor pool, but China is not willing to budge. The 3,800-km Himalayan border remains a contentious issue, and a final resolution seems distant. For now, both governments are willing to give economic cooperation more room, but India's challenge is to use renewed engagement with China to build its own domestic capabilities.