3 October 2025

India’s Economic Weaknesses, Lack of Foresight are being Exploited by China

Indian Prime Minister Narendra Modi visited China at the end of August breaking or ignoring several self-imposed restrictions on forward movement with China. This included an insistence on the complete resolution of the issues arising out of the Chinese transgressions in the summer of 2020. There is an uneasy and distrustful peace along the Line of Actual Control (LAC) between the two sides, but India is relaxing curbs on trade and investment from China as well as restrictions on visas for Chinese businessmen and tourists. Delhi and Beijing have also agreed to restart direct flights and border trade, share hydrological data and kick off programmes to celebrate the 75^th anniversary of the establishment of diplomatic ties between the two countries. Some of the flowery language is back too – “ancient civilizations”, “leaders of the Global South”, “dragon-elephant tango”, and so on.

The Donald Trump administration’s recent imposition of 50% tariffs against India is being seen as driving this phase of India’s opening to China. It is important, however, to move beyond the focus on the Trump tariffs as a rationale for this opening up. After all, two years ago, it was Indian Foreign Minister S. Jaishankar who snapped at fellow Indians raising questions about the government’s competence in handling the China challenge by asking on television, “What am I going to do? As a smaller economy, am I going to pick a fight with the bigger economy?”

That narrow focus on the economic size of China had not come into consideration when the Government of India imposed its restrictions on Chinese trade and investments in April 2020 – encapsulated in what is known as Press Note 3. But that admission of weakness by Jaishankar probably gave the Chinese the upper hand in later diplomatic parleys.

In any case, India’s own economic weaknesses and the inability of its businesses to make strategic choices for the long-term even if it meant short-term pain has meant that despite frequent calls for athmanirbharta, the opportunity to build up capacity has been squandered. While international circumstances have had a role to play, the Indian government’s own economic policies are no less to blame. There is little to no ‘cooperative federalism’ in practice and the states which should be the engines of growth in a large country like India are able to be that. Excessive centralization whether at the central government level or at the level of the states themselves, poor flow of bank credit, and a poorly conceived production-linked incentive scheme has reduced economic dynamism and choked off initiative and the risk-taking ability necessary to boost productivity and growth. Just as importantly, India’s big titans of industry have skimped on investments in R&D that are necessary to push India to the frontiers of technology. Chinese private companies account for 77% of gross expenditure on R&D while Indian private companies account for only 36.4% with most of the latter going to biotechnology and IT. Whatever the degree of centralization or authoritarianism in China, there is no shortage of willingness to bet on new ideas and technologies with money as well as a long rope. The Chinese understand the value of gaining asymmetric advantages through leaps in technology as they have demonstrated through the DeepSeek AI tool.

Meanwhile, the Niti Aayog’s and Indian industry’s belief that economic opportunities beckon if India and China can agree to work together is touching but misplaced. It stems from an ignorance of Chinese political economy. Ask Indian industry to define what a ‘private’ company is in China or what constitutes ‘profit’ for a Chinese enterprise and it is certain that they will be unable to do so correctly. The Chinese Party-state ensures that the so-called ‘private sector’ has to do its bidding even as they are allowed to exercise the flexibility and nimbleness associated with the private enterprise.

None of the conditions that led to Press Note 3 have changed but it is also time to stop blaming the Indian government for all ills in China policy. Indian industry has simply not pulled its weight or made the right investments or choices. The Niti Aayog is advocating for India to “plug itself into China’s supply chain” to boost manufacturing and has proposed allowing Chinese companies to take up to a 24 per cent stake in Indian firms without security clearance. What explains the figure of 24%? Why would foreign companies invest without a controlling stake especially in a market as notoriously poor for ease of business as India is?

The saving grace in this situation is that it is not only India that needs Chinese investments but China too that needs the Indian market. China’s manufacturing overcapacity is a serious economic weakness and China stares at deflationary pressures unless its enterprises get access to large, growing markets like India’s. Despite the many missteps of its foreign and economic policymaking, New Delhi still has the opportunity to turn things around if it walks the talk on cooperative federalism, incentivizes Indian companies to invest in R&D, pushes Indian banks to actively lend to small and medium enterprises. Without active economic and administrative reforms, India’s China policy will remain limited by a military and economic balance of power in China’s favour.

This article was originally published in Malayalam as Anand P. Krishnan and Jabin T. Jacob.2025 ‘അക്കരപ്പച്ചയോ ചൈന’ (Is the grass greener in China?). Mathrubhumi. 4 September.