What Happened
- China has surpassed the United States to become India's largest trading partner in FY2025-26, with bilateral trade reaching USD 151.1 billion for the full financial year.
- The trade deficit with China widened sharply to USD 112.16 billion in FY26, up from USD 99.21 billion in FY25, marking a record high.
- India's imports from China stood at approximately USD 131.63 billion in FY26, a steep rise from USD 113.45 billion in FY25.
- India's exports to China surged to USD 19.48 billion from USD 14.25 billion in FY25 — a growth of 36.7%, making China the fastest-growing export destination among India's top markets.
- The United States, which had been India's largest trading partner for four consecutive years, now ranks second.
Static Topic Bridges
India's Trade Deficit and Balance of Payments
The trade deficit (also called the merchandise trade deficit) refers to the gap between a country's imports and exports of goods. When imports consistently exceed exports, it creates a Current Account Deficit (CAD) in the Balance of Payments. India's widening deficit with China is a structural concern — it reflects India's heavy dependence on Chinese imports in critical sectors including electronics, capital goods, and active pharmaceutical ingredients (APIs).
- India's Current Account is part of its Balance of Payments (BoP) alongside the Capital Account and Financial Account.
- A persistent CAD must be financed through capital inflows (FDI, FPI, ECB) or by drawing down foreign exchange reserves.
- The RBI monitors CAD as a percentage of GDP; a CAD above 3% is generally considered a zone of concern.
- India's top imports from China include electrical machinery and equipment (~USD 38 billion in FY25), nuclear reactors and parts, organic chemicals, and plastics.
Connection to this news: A deficit of USD 112 billion with a single country — representing over 40% of India's total trade with China — underscores the structural asymmetry in the bilateral relationship and raises concerns for India's CAD management and import dependency in strategic sectors.
India's Foreign Trade Policy and Import Substitution
India periodically frames a Foreign Trade Policy (FTP) to regulate, promote, and diversify its trade. The FTP 2023 (valid for 5 years) emphasizes export promotion, reducing import dependency, and boosting manufacturing under the Production Linked Incentive (PLI) scheme. India has also used selective tariff barriers and non-tariff measures (quality orders, licensing norms) to curb specific Chinese imports — particularly in telecom, electronics, and solar equipment.
- India's PLI scheme covers 14 sectors including semiconductors, electronics, pharmaceuticals, and solar PV modules — all areas of high import dependence from China.
- The "Make in India" initiative launched in 2014 specifically targets reducing import substitution in electronics and capital goods.
- India has imposed anti-dumping duties on over 100 Chinese products, including chemicals, textiles, and steel.
- The Directorate General of Foreign Trade (DGFT), under the Ministry of Commerce and Industry, administers India's FTP.
Connection to this news: Despite these policy efforts, the deficit widening to USD 112 billion reveals that import substitution is not keeping pace with rising demand for Chinese intermediate and capital goods, particularly as India's manufacturing sector expands.
India-China Economic Relations: Post-Galwan Dynamics
After the June 2020 Galwan Valley clashes, India imposed significant restrictions on Chinese FDI (mandatory government approval for investment from China), banned hundreds of Chinese mobile applications, and tightened import norms. Yet trade has continued to grow, highlighting the tension between security imperatives and economic interdependence. The bilateral relationship is characterized by what analysts describe as "competitive coexistence" — political tensions co-existing with deep trade ties.
- India banned over 300 Chinese apps between 2020–2022 citing national security, including TikTok, PUBG Mobile, and AliExpress.
- Press Note 3 (2020) requires all FDI from China to go through the government approval route, unlike the automatic route for most other countries.
- Despite restrictions, China's share in India's total imports remained above 15% throughout FY21–FY26.
- India-China bilateral relations are governed by multiple agreements including the 1993 Peace and Tranquility Agreement and the 1996 Confidence Building Measures Agreement.
Connection to this news: China regaining the top trading partner spot — even as bilateral relations remain strained — illustrates how supply chain dependencies and competitive pricing make it difficult for India to decouple from China quickly.
Key Facts & Data
- India-China bilateral trade in FY26: USD 151.1 billion (full year)
- India's imports from China in FY26: ~USD 131.63 billion
- India's exports to China in FY26: ~USD 19.48 billion
- Trade deficit with China in FY26: USD 112.16 billion (record high)
- Export growth to China in FY26: 36.7% year-on-year
- For comparison, India-US trade in the same period: approximately USD 127–130 billion
- China was India's largest trading partner for most of FY21–FY22, then the US held the top spot for four years (FY22–FY25)
- China accounts for ~15–18% of India's total merchandise imports
- Key India exports to China: iron ore, organic chemicals, cotton, seafood, machinery parts
- Key India imports from China: electronics, machinery, chemicals, APIs, solar panels