Plugged In: How China Remains Critical for India’s Economic Ambitions

 One of the opening calls in Finance Minister Nirmala Sitharaman’s budget speech was to build domestic manufacturing capacity in an imperiled external environment by remaining deeply integrated with world markets and attracting stable long-term investment. How, however, does this call square with simultaneous calls to build up domestic capacity in strategic sectors and India’s concerns over external dependence, particularly on China, a major contributor to India’s insecure external environment?

It is this complicated economic imperative that offers the context for the growing thaw in India-China economic relations after the meeting between Indian Prime Minister Narendra Modi and Chinese President Xi Jinping at Tianjin in September last year. From low-hanging fruits like restoration of flight services, resumption of tourist visas for Chinese nationals, and easier entry norms for skilled workers from China, and even talk of allowing Alipay into India’s instant payment system, over the last few months and weeks, the needle has certainly moved a great deal on India’s economic engagement with China following the tensions after Galwan.

China’s Indispensability

There are plans to lift restrictions imposed six years ago on Chinese firms bidding for Indian government contracts, and to ease scrutiny of equity partnerships between Indian and Chinese entities. Specifically, in the electronics and capital goods sector – as per a draft cabinet note circulated to relevant ministries – Chinese companies acquiring upto 49 per cent stake in Indian firms will not undergo extensive security. The note also calls for relaxation of the ‘beneficial owner’ clause of 2020, under which the acquisition by any entity, based in countries sharing land borders with India, of more than 10 per cent stake in any Indian company requires New Delhi’s approval.

Following military disengagement by both countries at the Line of Actual Control in Eastern Ladakh in 2024, the Indian government has started greenlighting proposals for joint ventures (JVs) between Indian and Chinese electronics contracts manufacturers aimed at achieving expertise in original design manufacturing and localizing sub-component production. While the caveat of case-by-case evaluation of proposals remains in place, the eagerness for JVs between Indian and Chinese counterparts is mutual, with a particular interest in the Indian government’s Electronics Components Manufacturing Scheme launched in April last year. Meanwhile, after being banned following the Galwan clashes, Chinese fast-fashion e-commerce company, Shein, made a return to the Indian retail market in February 2025. This time it partnered with Reliance Retail though the partnership has lagged Amazon and Flipkart in gaining traction. For the Chinese, meanwhile, the sheer size of India’s market and its stable financial system are sources of attraction.

A combination of domestic and international factors explains India’s return to economic engagement with China. Through its three continuous terms in power, the Bharatiya Janata Party-led National Democratic Alliance government has remained vocal about transforming India into a manufacturing powerhouse, built on self-reliance. However, this long-term drive to make India well-connected with global supply chains is reliant on Chinese components, machinery and technology. Whether it be electronics, electric vehicles, or solar panels, manufacturing and/or assembling is dependent on components from China. The indispensability of China also extends to the infrastructure sector like ports, where Chinese state-owned engineering company, Shanghai Zhenhua Heavy Industries Limited, for instance, has come to be the sole supplier of cranes.

US President Donald Trump’s heavy-handed tariffs have upended the global trade regime and the training of guns at India has also been a compelling factor in the latter’s warming up to Chinese capital. Both from within the government and from India Inc., there have been calls for revisiting and revising hard-line positions. The admission as early as the 2023-24 Economic Survey that ‘to boost Indian manufacturing and plug India into the global supply chain, it had to plugs itself into China’s supply chain’, aptly sums up India’s predicament. 

Chinese Economic Coercion

The Indian government has preferred a graded re-opening, based on reciprocity from the Chinese side. On the one hand, this is a case of optics to avoid being seen as desperate and lacking in viable alternatives. On the other, there is also recognition of Beijing seeking to use its dominance in supply chains and intermediate goods to weaponize Indian dependence and squeeze New Delhi from achieving its manufacturing ambitions. From stopping machinery and its nationals employed as technicians in Foxconn’s facilities in India to the sudden imposition of curbs on rare earth elements (REE), China has consciously exerted geopolitical leverage underscoring its asymmetric advantages against India.

Cognizant of the need to future proof itself and build its own manufacturing capabilities, India has also initiated measures like the Electronics Components Manufacturing Scheme – its outlay was increased to Rs.40,000 crore in the latest budget – and augmented production-linked incentives. Similarly, Indian firms – especially start-ups – are emerging with workarounds and alternatives for sectors that are tied to REE – from developing new motors based on relatively lighter REE that could be sourced locally, to eliminating magnets from motors altogether. The budget announcement on dedicated Rare Earth Corridors in select States adds to Indian efforts to domestically manufacture vital permanent magnets. However, these efforts are yet to scale up, and Indian industry will remain unable to provide solutions in the near to medium term.

Therefore, while India implements long-term de-risking strategies from China including building capabilities from the ground up, it can paradoxically do so only by keeping China plugged into India’s economic and industrial aspirations. 

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This article was originally published in The Tribune as part of an arrangement with the Centre of Excellence for Himalayan Studies