How India can fix the Chinese imports problem

The trade imbalance between India and China has widened post-pandemic. In the first five months of FY25, India’s exports were only 12.4% of its imports from China, down from 15.1% in the same period last year. This is the lowest export-import ratio in at least a decade, barring the pandemic year, highlighting India's increasing dependence on Chinese goods.

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A growing economy like India’s naturally requires more imports to meet rising consumption and manufacturing demand, with cost and quality playing a key role in sourcing. China continues to be a preferred supplier. 

“When the economy is growing, you require more imports. You import from the best place that gives you the quality and price, and China seems to be qualifying on both of them," said Madan Sabnavis, chief economist at Bank of Baroda.

In the absence of sufficient domestic substitutes, China also serves as a key supplier of cheaper raw materials in sectors like electronics and pharmaceutical APIs, which are critical for domestic production and position India as an assembly hub for finished goods. 

China's dominance in India’s import basket is striking, accounting for 15%—up from around 12% a decade ago. This share far surpasses that of other leading trade partners, including Russia and the United Arab Emirates.

MSMEs impact

A significant portion of India’s imports from China directly impacts the manufacturing sector, making it difficult for local businesses to compete, according to experts. 

An analysis of trade data over the past decade shows that China has maintained a stronghold in several commodity groups where India's micro, small, and medium enterprises (MSMEs) are heavily involved. Among the top 10 commodity groups in MSME imports, five have experienced sharp growth in the last five years, with gold, precious metals, pearls, and iron and steel seeing the steepest increases.

Domestic firms, still recovering from the post-covid disruptions, lack the scale and competitiveness to offer viable alternatives to these imported goods, perpetuating the cycle of dependence. Even in the MSME export sector, imports from China remain substantial in industries such as electronics and pharmaceuticals, despite the government’s push for higher domestic manufacturing through production-linked incentive (PLI) schemes.

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Experts say special financial packages targeted at MSMEs are the need of the hour, so that they are able to deliver better. “MSMEs lack competitiveness, which has been exacerbated by inadequate access to credit and technology. It is a well-known fact that policy shocks since 2016 and the pandemic had left this segment of the industry completely broken," said Biswajit Dhar, a former professor at Jawaharlal Nehru University.

“We need special packages for them in the form of credit, in terms of technological know-how and infrastructure to make them compete with countries like China," Sabnavis said. He added that China is known to traditionally undercut prices and engage in dumping of goods, i.e. selling at prices lower than their normal value.

China-plus-one lag?

Four years after the pandemic, China’s economy, once the world’s growth engine, remains sluggish, hampered by weak consumer spending, a struggling real estate market, and an aging population. Despite its vast consumer base and affordable labour, China is increasingly seen as unfriendly to foreign companies, as it prioritizes domestic businesses. This has eroded business confidence. 

A 2024 survey by the European Chamber of Commerce in China, a non-governmental organization that advocates for European businesses operating in China, revealed that European firms' expansion plans in China are at their weakest, with more companies choosing to shift investments elsewhere.

As global companies seek to diversify away from China, India was expected to be a prime beneficiary, offering a growing economy of similar scale. The China-plus-one strategy presents an opportunity for India to reduce its dependence on imports by bolstering domestic manufacturing and better integrating into global value chains. However, Southeast Asian nations have emerged as the main winners from China’s declining appeal as a foreign investment destination.

India still has the potential to capitalize on this shift, but government efforts to strengthen local manufacturing have produced mixed results.

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Sabnavis said domestic manufacturers have not been able to make use of these incentives through PLI to actually enhance their output so far. “There are gestation periods before tangible results are visible. Hopefully in the next three years, we should be in a position where domestic production should be able to substitute imports from China, especially in chemicals and electronics," he said.