Why Chinese Investment Could Help India Rebalance Its Trade Equation

• India’s trade deficit with China reached USD 112 billion in 2025-26.

• China sold India USD 131 billion in goods, while buying only USD 19 billion.

• Chinese investment in India remains just USD 2.5 billion over two decades.

• Targeted investment could create mutual dependence.

• Safeguards are needed in critical sectors.

India’s long-running trade imbalance with China may require an unexpected solution: allowing more Chinese investment into carefully selected sectors of the Indian economy.

For years, India has relied heavily on Chinese goods, machinery and industrial inputs, while China has had very little economic exposure to India in return. This one-sided dependence has created a structural weakness. When tensions rise, Beijing has the ability to apply pressure through trade restrictions without facing comparable economic costs of its own.

China’s own economic slowdown is adding urgency to the debate. Its GDP growth was only 4.3% in the most recent quarter, while retail sales, a key indicator of domestic demand, rose just 1% in June. With Western markets becoming less willing to absorb Chinese industrial overcapacity, Beijing may increasingly look to export not only finished goods but also factories, capital, technology, brands and production systems.

That creates a strategic question for India. Should it allow some of this relocation to happen within its borders under strict conditions, or should it leave the opportunity to countries such as Vietnam and Mexico? If managed properly, Chinese investment could help India correct an imbalance that has persisted for nearly two decades.

The asymmetry is clear. Whenever China seeks leverage over India, it can act through supply chains. Restrictions on gallium and graphite exports in 2023, and rare-earth magnets in 2025, showed how Indian assembly lines can be affected when China controls key inputs. Beijing can take such steps at limited cost because it has few major assets in India that would be put at risk if relations deteriorate.

India is exposed to China through trade, but China is not meaningfully exposed to India through investment. Chinese factories, jobs, equity stakes and supply-chain assets in India could change that equation. A Chinese-owned or Chinese-backed plant operating in India would represent value that Beijing would not want to lose.

The scale of the imbalance is significant. China is now India’s largest trading partner. In 2025-26, bilateral trade stood at USD 151 billion, but the flows were overwhelmingly tilted in China’s favour. India imported USD 131 billion from China and exported only USD 19 billion, producing a record trade deficit of USD 112 billion. That gap had widened from USD 99 billion a year earlier.

China accounts for about one-sixth of India’s imports and close to 31% of its industrial goods. In some sectors, the dependence is deeper. Around 70% of India’s active pharmaceutical ingredients and between 75% and 90% of its lithium-ion cells are imported from China.

By contrast, Chinese investment in India is minimal. China’s annual outward foreign direct investment is close to USD 177 billion, and its cumulative overseas investment since 2005 is about USD 2.7 trillion. Yet India has received only around USD 2.5 billion in Chinese investment over the past two decades and does not rank among China’s top ten investment destinations.

Other countries have captured much more. Hungary, for example, received 31% of Chinese FDI into Europe in 2025, with major investments from companies such as battery maker CATL and electric vehicle manufacturer BYD. These projects have created thousands of jobs. India, meanwhile, continues to absorb Chinese products without capturing a

meaningful share of Chinese capital or manufacturing activity.

The issue is not dependence itself. All modern economies depend on others in some form. The problem arises when dependence runs in only one direction. India’s policy challenge is to make the relationship more reciprocal. If Chinese companies invest in factories in India, generate returns, hire local workers and build supply chains, China would have economic assets to protect.

India has already pursued diversification in trade through free trade agreements with partners such as the UAE, Australia, Britain and the European Union since 2021. A similar logic can now be applied to investment. Bringing in controlled Chinese capital alongside investments from Singapore, the UAE, the Netherlands, the United States and Mauritius, which together account for more than 80% of India’s FDI, could broaden India’s capital base.

This does not imply political normalisation with China. The border dispute remains unresolved, and concerns over opaque Chinese business practices remain valid. The argument is not for open access, but for a tightly regulated framework that allows India to benefit while protecting sensitive interests.

One possible model is the Committee on Foreign Investment in the United States, or CFIUS, which reviews Chinese investment sector by sector instead of imposing a blanket ban. It restricts access to critical technologies such as artificial intelligence, quantum computing and semiconductors, while allowing less sensitive investments under scrutiny.

India’s own policy shift in March 2026 appears to move in a similar direction. The easing allows entry through a 10% automatic-route ceiling, limited to non-critical manufacturing. It keeps majority ownership and control with resident Indians and provides a 60-day fast-track route for sectors such as capital goods, electronic components and solar cells.

Early signs suggest that the approach may be producing results. Electronics component exports to China increased from USD 920 million to a projected USD 3.5 billion within a year. More than USD 2.5 billion of that figure reportedly came from Apple, while printed circuit board assembly exports are said to have risen 40 times.

India already imports large volumes of Chinese machinery to build factories domestically. Allowing Chinese manufacturers to set up production in India under strict rules could deepen local manufacturing capabilities. Once a plant becomes part of an Indian industrial cluster, its suppliers, technical know-how and trained workforce are more likely to stay, expand and contribute to domestic value addition.

The experience of Apple’s vendor ecosystem shows how such integration can develop over time. In other sectors too, including textiles, India could benefit from Chinese strengths in factory discipline, worker productivity, quality control and timely delivery, regardless of who owns the enterprise.

There are global precedents for this approach. South Korean manufacturers learned from Japanese and American companies before building their own industrial strength. China itself used Japanese investment as one of the tools in its manufacturing rise. India can apply a similar strategy now, adapting it to its own security concerns and industrial priorities.

As China looks for new destinations for its capital and production capacity, India has an opportunity to attract selected investments, create jobs, strengthen domestic supply chains and gain leverage in a relationship that has long been unequal.

The decision should be guided by pragmatism rather than sentiment. With firm safeguards, sectoral screening and clear ownership rules, Chinese investment could become not a vulnerability but a tool for correcting India’s trade imbalance with Beijing.