The paradox of self-reliance: India-China trade dynamics

Economy & Foreign Trade · 22 September 2026 · Based on The Hindu (original report)

2-minute summary

India's trade dynamics with China reveal a paradox within the 'Atmanirbhar Bharat' (self-reliant India) initiative. While India has expanded its manufacturing and export capabilities—notably in electronics assembly and mobile phones—this growth remains deeply dependent on China-centric import supply chains. Bilateral trade reached $167.6 billion in 2025, marked by an asymmetric widening of the trade deficit. Exports to China remained stagnant between 2021 and 2025, whereas imports surged by 71% to $149.5 billion. Significantly, about 70% of imports from China comprise intermediate goods and 22% capital goods, concentrated heavily in electronics inputs like telecom equipment, laptops, and integrated circuits. This reflects an 'assembly trap' where downstream manufacturing thrives on imported upstream components rather than a deep domestic component ecosystem. Experts argue that financial incentives like Production-Linked Incentive (PLI) schemes alone cannot resolve structural capability challenges. Instead, India must transition toward 'guarded globalisation'—utilising calibrated tariffs on components to nurture domestic upstream capabilities, foster technological innovation, and prevent strategic vulnerabilities without resorting to blanket import restrictions.

Why it's in the news

The article analyses the widening trade deficit and structural trade asymmetry between India and China following bilateral discussions at the BRICS Summit in New Delhi, highlighting the paradox of import-dependent manufacturing growth despite self-reliance policies.

Facts to remember

• India's bilateral trade with China reached $167.6 billion in 2025, marked by an asymmetric widening of the trade deficit.
• Exports to China remained stagnant between 2021 and 2025, whereas imports surged by 71% to $149.5 billion.
• About 70% of imports from China comprise intermediate goods and 22% capital goods, concentrated heavily in electronics inputs.

Background and context

India's economic engagement with China has historically been characterised by a structural trade deficit. Following the launch of the 'Atmanirbhar Bharat' mission in 2020 and various import substitution policies—including the Production-Linked Incentive (PLI) schemes and Phased Manufacturing Programmes (PMP) across sectors like electronics, pharmaceuticals, and automobiles—India sought to insulate its economy from external supply chain shocks. However, because modern manufacturing relies heavily on Global Value Chains (GVCs), Indian manufacturing industries—particularly electronics assembly—remained critically dependent on Chinese intermediate inputs, raw materials, active pharmaceutical ingredients (APIs), and capital goods. Despite geopolitical tensions and strategic decoupling efforts, bilateral trade volumes have scaled new heights, underscoring the deep structural entrenchment of Chinese intermediate and capital goods in India's industrial ecosystem.

Government schemes

• Production-Linked Incentive (PLI) Scheme — Designed to boost domestic manufacturing capacity and exports by offering financial incentives on incremental sales, though criticized for focusing heavily on downstream assembly rather than upstream component ecosystems.
• Phased Manufacturing Programme (PMP) — Aims to promote domestic production of electronic products by incentivizing the setting up of manufacturing units and gradually increasing domestic value addition.

International organisations

• BRICS — Serves as a multilateral diplomatic forum where leaders of India and China meet to address bilateral concerns, including structural trade imbalances and supply chain resilience.
• World Bank / World Integrated Trade Solution (WITS) — Provides comprehensive international trade and tariff data utilized for analyzing bilateral import-export trends.

Previous UPSC questions on this theme

• Mains GS-2 2017 — "China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia." In the light of this statement, discuss its impact on India as her neighbour.
• Mains GS-2 2024 — 'The West is fostering India as an alternative to reduce dependence on China's supply chain and as a strategic ally to counter China's political and economic dominance.' Explain this statement with examples.

Mains practice: Analyze the structural nature of India-China trade dynamics and suggest measures to overcome the 'assembly trap' in India's manufacturing sector.

Introduction:

India's trade data reveals a persistent paradox: despite aggressive self-reliance initiatives like 'Atmanirbhar Bharat' and the Production-Linked Incentive (PLI) schemes, domestic manufacturing expansion remains deeply embedded in China-centric import supply chains, creating an 'assembly trap.'

Body:

• Structural Asymmetry: Bilateral trade has become heavily skewed. Imports from China surged significantly, driven predominantly by intermediate goods (approx. 70%) and capital goods (22%), rather than finished consumer products.

• The Electronics Paradox: While India has emerged as a major hub for mobile phone and electronics assembly, the share of imported parts and components has risen, reflecting a lack of deep domestic component ecosystems for semiconductors, integrated circuits, and precision displays.

• Limitations of Financial Incentives: While PLI and PMP schemes address scaling and capital investment issues, financial subsidies alone cannot resolve foundational capability and technological gaps in upstream manufacturing.

• The Need for Guarded Globalisation: Blanket import restrictions risk hurting downstream competitiveness. Instead, India requires calibrated tariffs on parts and components to nurture upstream domestic value chains.

Conclusion:

Achieving true self-reliance does not mean economic isolation. India must strategically leverage global value chains while systematically building domestic technological capabilities, R&D, and supplier networks to transform trade asymmetries into enduring economic strength.

Prelims practice questions

Q1. Consider the following categories of India's imports from China in recent years: 1. Intermediate goods 2. Capital goods 3. Finished consumer electronics Which of the above constitute the overwhelming majority (over 90%) of India's import basket from China?

1. 1 only
2. 1 and 2 only
3. 2 and 3 only
4. 1, 2 and 3

Answer: B. Nearly 70% of India's imports from China are intermediate goods and another 22% are capital goods. The trade deficit is driven by structural reliance on inputs, components, and semi-processed goods rather than finished consumer products.

Q2. With reference to India's trade and manufacturing policies, the term 'assembly trap' most accurately refers to:

1. A situation where labor laws prevent factories from assembling heavy machinery.
2. A trade embargo imposed by international bodies on the assembly of high-tech electronic items.
3. A regulatory bottleneck that restricts foreign direct investment in assembly-line manufacturing.
4. A condition where manufacturing growth relies heavily on downstream assembly using imported upstream components, failing to build domestic component ecosystems.

Answer: D. The 'assembly trap' describes a scenario where downstream manufacturing and export success (like mobile phone assembly) is heavily dependent on imported parts and components, exposing structural vulnerabilities due to the lack of a robust domestic component ecosystem.

Q3. Which of the following best describes the policy concept of 'guarded globalisation' in the context of international trade?

1. Enhancing access to global value chains while simultaneously building domestic manufacturing capabilities and using calibrated tariffs to protect critical sectors.
2. Unrestricted free trade with all neighboring nations without any tariff barriers.
3. Outsourcing all domestic manufacturing to international partners to focus exclusively on services.
4. Complete self-sufficiency and total ban on all foreign imports.

Answer: A. 'Guarded globalisation' advocates for engaging with global markets and value chains while nurturing domestic manufacturing and technological capabilities through strategic interventions like calibrated tariffs, avoiding both total protectionism and uncritical openness.

Revision flashcards

• What percentage range of India's imports from China typically comprises intermediate and capital goods? Roughly 70% intermediate goods and 22% capital goods (totaling over 90%).
• What is the 'assembly trap' in India's manufacturing sector? Expansion in downstream assembly (e.g., electronics) that remains structurally dependent on imported upstream parts, components, and raw materials rather than a domestic component ecosystem.
• What does 'guarded globalisation' entail? Balancing integration into global value chains with strategic domestic capacity building using calibrated tariffs instead of blanket import bans.
• What is the primary objective of the Phased Manufacturing Programme (PMP)? To promote domestic production of electronic products by incentivizing manufacturing units and gradually increasing domestic value addition over time.
• What structural limitation do financial incentives like PLI face in high-tech manufacturing? While they address scaling and investment issues, they cannot alone resolve foundational technological capability gaps in upstream segments like semiconductors and precision components.