India-China Trade Deficit

India's trade deficit with China is the gap between what India buys from China and what it sells to China. India imports a huge amount of goods from China, such as electronic parts, machinery, chemicals and solar panels, but sells much less in return. In 2025-26, India imported about US$131.6 billion of goods from China and exported only about US$19.5 billion, leaving a record deficit of about US$112 billion.

In 2025-26, total India-China trade was about US$151.1 billion, and China overtook the US to become India's biggest trading partner. China is also India's biggest source of trade deficit.

Why does this deficit matter?

A trade deficit simply means you buy more than you sell. Think of a family that buys most of its groceries, clothes and appliances from one shop but sells almost nothing back to that shop. The family is not poorer just because of that. But if the shop suddenly stops selling, or raises prices, the family is in trouble.

In the same way, India's problem with China is less about the money gap and more about dependence: many Indian factories cannot run without Chinese parts and raw materials.

How did the gap grow?

The deficit was small in the early 2000s. It was about US$1.5 billion in 2004-05. By 2013-14 it had grown to about US$36.2 billion. It rose to about US$99.2 billion in 2024-25 and about US$112 billion in 2025-26. So, since 2014, the deficit has roughly tripled. This happened as India's economy grew and its factories, phone makers and solar projects needed more inputs that China makes cheaply and at huge scale.

What does India buy from China?

India's imports from China are mostly industrial goods that go into making other goods:

• Electronics and telecom parts: phone components, circuit boards, displays and other electronic parts. China supplies a large share of India's electronics imports.
• Machinery and electrical equipment: factory machines, transformers and power equipment.
• Chemicals and medicine ingredients: India's medicine makers import about 70% of their Active Pharmaceutical Ingredients (APIs) from China. For some essential medicines, the dependence is 80% to 100%.
• Solar equipment: solar cells, modules and upstream materials like polysilicon and wafers.
• Rare earth magnets and critical minerals: used in electric vehicles and electronics.

What does India sell to China?

India's exports to China are much smaller and are mostly raw or semi-processed goods. These include iron ore, petroleum products, marine products (like shrimp), engineering goods and some electronic goods. China takes about 90% of India's iron ore exports. Raw materials earn much less than finished, high-technology goods, which is one reason the gap stays wide.

Why is the gap so wide? The main causes

• Scale and price: Chinese factories produce at enormous scale, so their goods are cheaper. Indian buyers naturally choose cheaper inputs.
• India's manufacturing gaps: India does a lot of final assembly (for example, of phones) but does not yet make many of the parts. More assembly means more imported parts.
• Market access barriers in China: Indian exporters of medicines, farm products and IT services complain of non-tariff barriers in China. These are hurdles other than tariffs, such as long approval processes, strict testing rules and licensing delays.
• Weak export basket: India mostly sells low-value raw materials to China, while buying high-value finished and intermediate goods.

What has India done about it?

India has used several tools, each with a different purpose:

• Stayed out of RCEP (2019): In November 2019, India decided not to join the Regional Comprehensive Economic Partnership (RCEP), a large Asian trade deal that includes China. A key reason was the fear that cheap Chinese goods would flood Indian markets and hurt local industry and farmers.
• Anti-dumping duties: "Dumping" means a foreign company selling goods in India below their fair price, to grab the market. The Directorate General of Trade Remedies (DGTR), under the Commerce Ministry, investigates such cases and recommends extra duties. A large share of India's anti-dumping cases involve Chinese goods, such as chemicals, steel and aluminium foil.
• Press Note 3 (2020): In April 2020, India said that any investment from a country sharing a land border with India (including China) needs government approval. This was meant to stop opportunistic takeovers of Indian companies during the COVID-19 crisis.
• Production Linked Incentive (PLI) schemes: These schemes give companies cash rewards linked to how much extra they produce in India, in sectors such as electronics, APIs and solar modules. The aim is to make in India what is now imported.
• Quality Control Orders (QCOs): Rules that require certain imported goods to meet Indian quality standards, which also screen out cheap low-quality imports.
• Rare earth magnet scheme: In November 2025, the Union Cabinet approved a ₹7,280 crore scheme to build domestic rare earth magnet manufacturing.

India's position and the bigger picture

India and China do not have a free trade agreement. Both are, however, members of the Asia-Pacific Trade Agreement (APTA), an old preferential deal that gives limited tariff cuts on some products. So the deficit has grown mainly through normal trade at regular tariffs, not because of a special trade deal. India's stated approach is to keep trading with China where it is useful, while reducing dependence in sensitive sectors like medicines, electronics, solar power and rare earths.

Commonly confused concepts

• Trade deficit vs current account deficit (CAD): A trade deficit counts only goods. The CAD also includes services, income and remittances. India's large services exports and remittances mean its overall CAD is much smaller than its goods trade deficit.
• Bilateral deficit vs overall deficit: A deficit with one country (China) is different from India's total trade deficit with the whole world. India can have a deficit with China and a surplus with the US at the same time.
• Anti-dumping duty vs safeguard duty vs countervailing duty: An anti-dumping duty targets goods sold below fair price by particular exporters. A countervailing duty targets goods made cheaper by foreign government subsidies. A safeguard duty is a temporary protection against a sudden surge of imports from all countries, even if the goods are fairly priced.
• APTA vs RCEP: India is a member of APTA (with China) but is not a member of RCEP.
• Indian figures vs Chinese figures: India counts its trade by fiscal year (April to March). China counts its trade by calendar year (January to December). The two countries also record trade in slightly different ways. So Indian and Chinese numbers for the same trade never match exactly. Always check whose data and which period a number uses.

Issues, criticism and the way forward

• Supply-chain risk: Heavy dependence on one country for key inputs is risky. If supply stops, as happened with rare earth export controls, Indian factories can be hit.
• Protection vs competitiveness: Some experts argue that high duties on Chinese inputs raise costs for Indian manufacturers and make their exports less competitive. Others argue protection is needed to build local industry.
• Assembly vs deep manufacturing: Critics point out that PLI schemes have boosted assembly but that much of the value still comes from imported Chinese parts. Building local component makers takes longer.
• Way forward suggested by experts: build supply chains for components and raw materials at home; diversify suppliers through trade deals with trusted partners (like the EU, UK, Australia and UAE); push China for better market access for Indian medicines, farm products and IT services; and strengthen quality standards rather than relying only on tariffs.

Concepts to Know

• Intermediate goods: Goods used to make other goods, such as electronic parts used to make a phone. They are not sold to the final customer as they are.
• Active Pharmaceutical Ingredient (API): The main chemical in a medicine that actually treats the illness. For example, paracetamol is the API in a fever tablet.
• Non-tariff barrier: Any trade hurdle other than an import tax, such as strict testing rules, slow approvals, licences or quotas.
• Tariff: A tax charged on goods when they are imported into a country.
• Diversification of supply chains: Buying the same input from several countries instead of one, so that a problem in one country does not stop production.