Prospects and Terms of an India-China Economic Reset

In this brief, the author examines whether India and China can reset their economic relationship amid a changing global trade and geopolitical environment. He argues that a reset could offer economic opportunities for India, but that it cannot simply mean a return to the pre-2020 model of expanding trade and investment without adequate safeguards.

China’s growing manufacturing and trade dominance, its persistent external surpluses, industrial subsidies and increasing use of regulatory and trade-policy instruments have generated concern across major economies. There is also a risk that trade diversion and China+1 arrangements could together increase pressures on India, particularly given its already large bilateral trade deficit with China.

Against this backdrop, the brief identifies several possible avenues for a more economic sustainable economic engagement with China. A meaningful reset would require substantially greater and more predictable access for Indian goods and services to the Chinese market, particularly in areas such as pharmaceuticals. India would simultaneously need to strengthen its own export capabilities, including by examining how ASEAN countries have been able to penetrate some segments of the Chinese market for industrial goods. India also needs to enforce rules of origin rigorously to prevent increased Chinese goods from entering through third countries.

The author argues that investment, rather than simply greater merchandise trade, could be a potentially more productive channel of engagement. Carefully screened Chinese investments could bring technology, employment, local value addition and manufacturing capacity to India, while also helping China diversify some production. However, further investment liberalisation by India for investments from China needs to remain calibrated and linked to clearly defined economic benefits, including domestic supply chains, technology transfer, exports and reduced import dependence. The China+1 investment model in ASEAN cannot simply be replicated in the Indian context, as ASEAN countries have a fundamentally different relationship with China encompassing deeper economic, connectivity and people-to-people ties.

The reset proposed by the author, therefore, envisages selective economic engagement alongside continued diversification, self-reliance and economic-security safeguards. A structured bilateral economic dialogue, preferably at the ministerial level, could help provide greater clarity to businesses and translate political understandings into practical arrangements. Ultimately, however, sustained economic cooperation with China will depend on continued peace and tranquillity along the India-China border.

To read this DPG Policy Brief please click “Prospects and Terms of an India-China Economic Reset”.