Trade Deficit Soars: Is the $100 Billion Gap with China Driving Curbs on Chinese Goods?

India is facing a significant challenge in its trade relationship with China, with the merchandise trade deficit nearing an alarming $100 billion. Despite a global slowdown in trade and a reduction in India’s import growth due to geopolitical tensions, data reveals that the trade gap with China surged by 16.6% year-on-year, reaching $99.2 billion for the fiscal year 2025.

Trade Dynamics: A Closer Look at the Numbers

This rising deficit contradicts India’s efforts to limit the influx of Chinese products. In fact, China’s robust economy has not only weathered India’s restrictions but has also successfully increased its exports to the Indian market. According to China’s statistics, the trade surplus with India reached $103 billion in 2024, significantly higher than $57 billion in 2019.

India’s imports from China climbed by 11.5% to $113.4 billion in FY25.
In contrast, exports to China fell by 14.5%, totaling $14.2 billion.

Key Imports from China

The bulk of India’s imports from China includes essential goods such as:

Machinery and electrical components: Approximately $53.2 billion.
Organic and other chemicals: Around $10.9 billion.
Plastics: Totaling $5.3 billion.
Metals like steel, aluminum, copper, and nickel: Roughly $6.33 billion.

These imports are crucial as they supply raw materials for India’s industrial processes. As highlighted by Ajay Srivastava, founder of the Global Trade Research Initiative, the demand for electronics, electric vehicle batteries, and solar cells is driving this import growth, particularly as China remains a dominant supplier across all major industrial categories.

Decline in Exports: A Competitiveness Concern

Worryingly, the 14.5% drop in exports to China suggests deeper issues within India’s manufacturing sector. The current export figures are even lower than those recorded in FY14 when the rupee’s value was significantly stronger. Srivastava emphasizes that this trend goes beyond mere trade figures; it points to a competitiveness crisis that necessitates urgent action to enhance India’s manufacturing capabilities and reduce dependency on external suppliers.

Comparative Trade Landscape

In FY25, the United States continued to be India’s largest trading partner, with exports growing by 11.6% to $86.51 billion, while imports rose 7.4% to $45.3 billion. This growth highlights the importance of diversifying trade relationships away from China.

The UAE stands as the second-largest export destination, with shipments increasing 2.8% to $36.6 billion.
Notably, imports from the UAE surged 32% to $63.4 billion.
Russia follows closely as a major source of imports, with a 4.3% increase to $63.8 billion, primarily driven by crude oil imports.

The Netherlands and the UK also emerged as significant markets, with exports growing 1.7% to $22.76 billion and 12.0% to $14.5 billion, respectively.

Conclusion: The Need for Strategic Action

The current trade dynamics with China indicate a pressing need for India to reassess its manufacturing strategies and bolster internal production capabilities. Without a concerted effort to bridge these gaps, the trade deficit is likely to continue expanding, underscoring an urgent call for a reevaluation of economic policies and trade practices.