This article was originally published in “Understanding Our Times" n°3 

Christophe Jaffrelot is CNRS research director at the Centre for International Studies (CERI),

Sino-Indian relations have long been dominated by conflict, mainly due to border disputes. These even led to war (or served as a pretext for it) in 1962, after which new border disputes arose, as China conquered territories claimed by India, including Aksai Chin (in the north of present-day Indian Ladakh). When dialogue between the two countries resumed – briefly in the 1970s and then on a sustained basis at the end of the following decade – these disputes became the focus of all bilateral exchanges. Since the McMahon line inherited from British colonisation was never recognised as an international border, Beijing and New Delhi endeavoured to define a Line of Actual Control (LAC), which the Chinese have had no qualms about crossing on numerous occasions, precipitating altercations between soldiers in the middle of the Himalayas. In 2020, the violence reached a level unseen since 1967, with twenty Indian soldiers dying from stab wounds – the use of firearms having been banned by mutual agreement – or freezing to death after falling into the Galwan river from an altitude of over 4,000 metres. Following this episode, which turned the Indian population against China and even led to a boycott of some of its products, the Indian government took a harder line and made any new Chinese investment conditional on approval from central authorities.  

Five years later, the situation has changed. In October 2024, at a time when Indian and Chinese officers had already held seventeen rounds of talks without reaching an agreement, the Indian Foreign Secretary stated in an official press release that ‘an agreement has been reached on the modalities of patrolling along the Line of Actual Control between India and China, with a view to achieving disengagement and resolving the difficulties encountered in these areas in 2020’.. Independent experts estimate that the Chinese army still occupies 2,000 square kilometres of Indian territory in the Himalayas, but New Delhi prefers to turn a blind eye and continue to normalise its relationship with Beijing. In January 2025, the two countries re-established direct flights.

The world's pharmacy on a Chinese drip

What explains this development? Probably economics. India is increasingly dependent on China for its industrial needs. In 2014, Narendra Modi launched a major programme called ‘Make in India’, designed to attract foreign investors and increase the share of the manufacturing sector to 25 per cent of gross domestic product (GDP) by 2025. Ten years later, the results of this initiative are very mixed, with the manufacturing share of India’s GDP down to 14 per cent, compared with almost 17 per cent in 2017. This decline is attributable to two trends. First, foreign investors, beginning with Western countries, have not been as numerous as New Delhi had hoped, with foreign direct investment (FDI) falling from 3.5 per cent of GDP in 2009 to 1.25 per cent in 2023. Second, Chinese competition has been detrimental to Indian businesses. As a result, India's trade deficit with China widened from USD 46 billion in 2020 to USD 118 billion in 2023, before falling back to USD 85 billion in 2024.

What's more, entire sectors of Indian industry are now so dependent on Chinese supplies that in order to export more (mainly to Western markets), India has to import more ... from China. Generic drugs are a case in point. India's success in this field has earned it the nickname ‘the world's pharmacy’. The country now produces generic versions of 60,000 medicines and 40 per cent of those consumed in the United States. This business generates USD 25 billion a year in exports. However, this success hinges on the active ingredients that India imports from China. In 2023, a remarkable Bloomberg survey showed that one of the leaders in the sector, Aurobindo Pharma, imported 55 per cent of its active ingredients and other components from China. This dependence partly stems from the unbeatable cost of Chinese products, holding back Indian manufacturers from reshoring what they have outsourced despite government injunctions. It also stems from the quality/price ratio, which in turn is due to the weakness of Indian investment in research and development – the Achilles heel of Indian industry as a whole. 

The situation is similar in the electronics sector. Granted, many manufacturers, starting with the smartphone leaders, have diversified their sources of supply by relocating some of their Chinese factories to India. As a result, between 2019 and 2023, smartphone exports jumped from USD1.6 billion to USD11.1 billion. But India has still not generated a trade surplus from this activity, mainly because many components are imported, especially from China and from Chinese factories that relocated to Vietnam or elsewhere in South-East Asia in order to stay under the radar or even to circumvent import quotas set by some countries, including India.              

A broad-spectrum addiction

The dependence of Indian industry on China can be deduced from the structure of its imports. Not only has the share of Chinese products in India's imports of manufactured goods risen from 21 per cent in 2006 to 30 per cent in 2024, but these products are essentially intermediate goods and production goods, with these two categories accounting for 70.9 per cent and 22.3 per cent, respectively, in 2024. These figures reveal India’s role in the international division of labour, where it remains a country of assembly rather than of production, mainly because of its low labour costs. Hence the correlation mentioned above: to export more, India must also import more.

This can also be explained by China's ability to supply India, and indeed the rest of the world, with equipment, such as solar panels, at costs that beat all competitors. Although India has invested heavily in this key renewable energy, it has not developed its own production: officially, ‘only’ 57 per cent of the components assembled in India come from China, but this figure does not include the products that Chinese manufacturers in the sector sell to India via Hong Kong, Vietnam, Malaysia, and so on, to avoid crossing the 80 per cent red line quota set by New Delhi.

Aware of their country's dependence on China, some Indian officials have proposed opening up to Chinese investment in order to reduce the their trade deficit with China and t’en finally industrialise. This last objective is increasingly looking like an imperative. First, New Delhi's aspirations to the status of a great power depend on the creation of an industry capable of reducing its dependence in strategic sectors such as defence and energy. Second, only the industrialisation of the country will enable it to provide employment for the 10 million or so young people who enter the job market every year and for the rural population, which still represents two thirds of the population who have no alternative to agricultural work, which, however, is becoming increasingly less remunerative. Against the backdrop of mass unemployment (8.3 per cent in December 2024), especially among young people, the Economic Survey – an economic report published every year by the government to coincide with the budget vote – stated in 2024 that opening up to Chinese FDI could help increase India's participation in the global supply chain and boost exports. According to the Economic Survey, a policy of opening up to Chinese FDI would be more promising for boosting Indian exports to the US, as East Asian economies have done in the past. The report concluded that, at a time when the US and Europe are relocating immediate supplies outside of China, it is more effective to encourage Chinese companies to invest in India and then export their products to Western markets.

While the Ministry of Finance supported this new strategy, the Ministry of Trade was much more reticent. The Chinese have nevertheless a perceived a shift that they are working hard to capitalise on: the tone of diplomats from the People’s Republic has changed. The ambassador himself has been sending messages of appeasement since the summer of 2024, calling on India to cooperate with China. In reality, the Chinese authorities are trying above all to facilitate access to India for their companies, which are still dubious about the conditions under which they could set up shop in their neighbouring country. In an interview with the online newspaper Zone Bourse in September 2024, the Chinese ambassador to India expressed hope that ‘the Indian side would be able to provide a sound business environment for Chinese companies in India’. These amicable and potentially constructive words are the antithesis of those that followed the clashes in 2020.   

In less than five years, India and China have moved from open conflict to a form of normalisation strongly determined by the former's economic dependence on the latter. This process will undoubtedly continue if China is forced to find new trading partners in response to Donald Trump's protectionist offensive and if, for that reason, it seeks to reconcile with India. However, India will undoubtedly seek to emancipate itself from a dependence with political implications that are problematic to say the least. To do so, it will need external support from the West and Japan that may not be forthcoming if New Delhi does not do more to attract foreign investment.  

This article was in press when the hostilities between India and Pakistan complicated the process of normalising relations between New Delhi and Beijing. China has given unfailing support to its Pakistani ally, both diplomatically and militarily, with the fighter jets sold by Beijing to Islamabad proving particularly effective in attacking the Indian army. It is too early to say whether this episode will call into question the process described above. Will India seek to emancipate itself further from its dependence on China, and does it have the means to do so? Only time will tell.

Christophe Jaffrelot is CNRS research director at the Centre for International Studies (CERI), President of the French Association of Political Science and of the British Association for South Asian Studies. He is also a permanent consultant at the Centre for Foresight and Strategy, Quai d'Orsay (Foreign Office), and researcher at the Carnegie Endowment for International Peace. He headed CERI from 2000 to 2008 and has published numerous books about the Indian subcontinent, including Modi’s India: National Populism and Ethnic Democracy (Princeton University Press, 2021), and authored Histoire de Bombay/Mumbai (Fayard, 2024) with Vanessa Caru. 

References

• Anand, R., K., Kochhar K., and Mishra S. (2015). "Make in India. Which Exports Can Drive the Next Wave of Growth?", IMF Working Paper, WP/15/119, 2015.
• Chakraborty, A. and Weiwei, X. (2024), "Chinese FDI Seen Positive for Indian Economy", China Daily, 31 July 2024. 
• Dhar, B., "India Ready to Welcome Chinese Capital Again?” (2024). The New Indian Express, 8 August 2024.
• Sarda, S. (2024). "Will India's Pharma Sector Be Able to Come out of its China Dependence?”, The Economic Times, 27 February 2024.