India–China Trade Deficit and the China+1 Test

UPSC Mains GS Paper III & II Economy & India–China Relations

India–China Trade Deficit and the China+1 Test

India’s exports to China rose 40.7% to $19.26 billion in January–September 2026, but the trade deficit has reached $105.93 billion
TRADE DEFICIT, JAN–SEP 2026
$105.93 billion
INDIA’S EXPORTS TO CHINA
$19.26 billion (+40.7%)
LAST YEAR’S RECORD DEFICIT
$116.12 billion
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Why in News

  • India’s exports to China rose 40.7% to $19.26 billion in January–September 2026, but the trade deficit has reached $105.93 billion. It is on track to pass last year’s record of $116.12 billion, according to China’s General Administration of Customs.
  • A 2026 study by the East Asian Institute (National University of Singapore), based on 50 interviews with industry leaders and experts, finds that global firms choose a State, not “India”, when they shift production out of China under the China+1 strategy.
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Source: The Hindu
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How wide is India’s trade gap with China?

Trade is growing fast, but it is growing in China’s favour.
  • Total trade: Two-way trade rose 25.4% to $144.45 billion.
  • Imports: India’s imports from China rose 23.3% to $125.19 billion.
  • Exports: India’s exports rose faster, but from a small base. They have already matched last year’s full-year total.
  • Export basket: Major exports include seafood, naphtha and printed circuit boards.
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Note: Faster export growth has not narrowed the gap, because imports are about six times larger.
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Source: The Hindu
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Why does the deficit worry India?

The concern is the nature of the trade, not the size alone.
  • Lopsided trade: India buys far more from China than it sells. Indian firms also find it hard to enter the Chinese market.
  • Import mix: India needs Chinese intermediates for manufacturing. It also imports large quantities of finished goods, such as electronics and machinery.
  • Export controls: China has widened export controls across more sectors, from fertilisers to rare earths. This raises supply-chain risk for Indian industry.
  • Diplomatic track: The two leaders met at the BRICS summit in New Delhi last month. The Ministry of External Affairs said they stressed addressing the structural trade imbalance, supply-chain issues and predictable market access.
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Source: The Hindu
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Why are States the real test of China+1?

The EAI study argues that investment depends on what a State can offer: land, power, approvals, workers and suppliers.
  • Tamil Nadu: Its strength is a manufacturing base built over four to five decades, with technical education and an automobile cluster around Chennai. Foxconn at Sriperumbudur and Tata Electronics at Hosur are anchor units.
  • Karnataka: It began with software and engineering talent. Foxconn is building a 300-acre campus at Devanahalli, and Tata Electronics took over the Narsapura iPhone plant.
  • Policy continuity: Investors value assured commitments. This is being tested after the change of government in Tamil Nadu in May 2026.
  • FDI data caution: FDI is recorded against the State where a company has its office, not where its factory is. So a company with its office in Delhi can build a plant in Tamil Nadu, and the money is still counted under Delhi.
Takeaway: National incentives open the door, but States decide whether a factory comes up.
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Source: The Hindu
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What is the Centre doing to attract investment?

National policy is shifting from first-generation incentives to component manufacturing.
  • PLI scheme: The PLI scheme for large-scale electronics ended on 31 March 2026, and the Cabinet approved a successor on 15 July.
  • ECMS: In January, the Centre cleared 22 proposals under the Electronics Components Manufacturing Scheme. They are expected to create 33,791 direct jobs across eight States.
  • Diplomatic development: In March, the Cabinet approved easing the 2020 curbs on investment from countries sharing a land border with India.
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Source: The Hindu
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Why is assembly not enough?

  • Assembly brings jobs, but India still makes very few of the parts used in it, so firms depend on China for major components.
  • This is why electronics exports were about $48 billion in 2025-26, against imports of about $116 billion.
  • Exports are mostly assembled products with only around 20% Indian inputs.
  • Growth is also concentrated in the south and west, not in populous States such as Bihar, Chhattisgarh and Jharkhand.
  • Even Tamil Nadu faces limits on land, power and labour and relies on migrant workers.
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Source: The Hindu
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Way Forward

Component Ecosystems
Build component and supplier ecosystems through the ECMS, and link incentives to local value addition.
Learn from the States
Study what States like Tamil Nadu and Karnataka did on land, skills, approvals and suppliers, and replicate what can be copied.
Policy Continuity
Give investors policy continuity across changes of government, with State commitments honoured.
Market Access & Diversification
Push for market access for Indian goods in China and diversify imports of fertilisers and rare earths.
Spread Industry
Spread industry to lagging States through ready infrastructure, not subsidies alone.
Conclusion: India’s trade gap with China will not close by export growth alone. It needs strong local suppliers and State-level readiness to turn assembly into real manufacturing.
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Source: The Hindu

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