How India became dangerously addicted to Chinese imports
India’s toy shops provide an unlikely barometer by which to measure its economic relationship with China.
How India became dangerously dependent on Chinese imports
Xi and Modi have pledged to tackle widening trade imbalances
A visit to an Indian toy shop can offer more than a new favourite plaything for a child: it can also reveal how the country is fighting for a better economic relationship with its powerful neighbour China.
Six years ago, in an effort to boost local manufacturing and keep substandard toys out of the market, India increased tariffs on imported toys from 20% to 60% and later to 70%.
Retailers protested, arguing that domestic companies could never compete with foreign-made products. But the mix of higher customs duties and quality-control standards did the job.
Indian toy imports dropped by a third, from nearly $300mn in 2020 to $100mn this year, while exports climbed from about $129mn to $200mn over the same period. India also sharply cut its reliance on China, which once accounted for 70% of the local toy market.
The toy industry is a rare bright spot in India’s otherwise unsuccessful efforts to rebalance an increasingly uneven trading relationship with its larger neighbour, which some experts say is now among the most asymmetric in the world.
Even after diplomatic relations between the two countries collapsed following the Galwan Valley clashes in 2020, and Delhi imposed a series of anti-dumping duties and banned Chinese apps such as Tik Tok, the trade deficit with Beijing has only widened — from $44bn in 2020 to a striking $112bn this year.
“India's economic dependence on China continued to deepen while political, security, and investment ties were at their lowest point,” Kevin Zongzhe Li, a Washington-based Fellow at the Asia Society Policy Institute's Centre for China Analysis, told the BBC.
More concerning still, exports to China stayed below pre-pandemic levels even as imports doubled during this period.
“China now supplies over 30% of India's industrial imports, and India depends on it for more than 100 critical products. And the imbalance is worsening,” says Ajay Srivastava of the Delhi-based Global Trade and Research Initiative (GTRI).
If imports keep rising at the current pace, the bilateral deficit could reach $134bn, giving Beijing even greater leverage over Indian industry, according to Srivastava.
Anti-China sentiment reached a peak after the 2020 border skirmishes, but relations have since thawed
On the sidelines of the Brics summit in Delhi in September, amid a deepening thaw between the Asian giants, Prime Minister Narendra Modi and Chinese President Xi Jinping vowed to address these “structural trade imbalances and supply chain issues”.
But given how deeply Chinese imports are now embedded in India’s industrial economy, experts told the BBC that this will be a formidable challenge for Delhi.
That is mainly because India relies on China not just to consume finished goods, but increasingly to produce industrial goods.
To be sure, India has cut its dependence on imports of finished products such as smartphones and solar equipment, and now makes more than a quarter of the world’s iPhones.
“Yet, production remains largely assembly-based and depends heavily on imported components, particularly from China,” says Srivastava.
The same pattern applies to industrial machinery, battery inputs, chemicals, solar cells, and manufacturing equipment.
Electrical machinery and electronics alone make up 36% of imports, followed by machinery and mechanical appliances at 21.7%, while organic chemicals and plastics also account for a substantial share, according to the Observer Research Foundation (ORF) think tank.
“Their interruption would not merely affect consumption; it would disrupt production itself,” according to Soumya Bhowmik, a Fellow at ORF's Centre for New Economic Diplomacy, who says this shows India’s difficulty in replacing Chinese inputs with local production.
Beyond the growing dependence on inputs and raw materials, Chinese imports into India are also being driven by broader macroeconomic trends.
China has massive excess capacity in industries ranging from steel to solar panels and electric vehicles, while its slowing economy cannot absorb the output.
As a result, manufacturers are increasingly looking to overseas markets and selling goods cheaply. China’s trade surplus is expected to exceed $1tn for a second consecutive year.
Many of these goods are reaching Indian shores because India is rapidly expanding manufacturing across parts of its economy, but also because “Western markets impose tariffs and other restrictions”, says Srivastava.
India has cut smartphone imports but remains heavily dependent on China for components
Meanwhile, limited access to the Chinese market remains a major obstacle for Indian companies.
“Indian products face a variety of tariff and non-tariff hurdles in China that make it difficult to scale exports,” says Li.
“If normalisation [of ties] continues without a serious push for reciprocal market access, India risks a situation where the political relationship improves but the economic dependency stays the same.”
The long-term answer to reducing avoidable imports and improving export performance will be to strengthen manufacturing, says Srivastava.
But that requires sector-specific industrial policy and stronger fundamentals — affordable power and credit, efficient logistics and stable regulations — areas where India still falls short.
India has also recently eased foreign direct investment rules, which could open the door to Chinese companies seeking to expand investments in India. But these too will need careful scrutiny, he adds.
“Investment that merely expands distribution networks or assembles products using Chinese parts could increase imports and deepen dependence. Approvals should therefore prioritise technology transfer, local value addition, domestic component production and exports from India.”
More immediately, India could aim to boost exports to China in selected sectors to reduce the trade imbalance, says Li. Sectors such as pharmaceuticals could be a natural fit as China’s population ages and healthcare costs rise.
“But narrowing a $112 billion deficit won't come from finding niche export sectors alone,” he adds.
“The key question is whether Beijing is ready and willing to make concessions on market access as part of the broader normalisation. Alternatively, India will need to find its own leverage to force that conversation.”