The paradox of self-reliance: India-China trade dynamics

Why in the News

India has said that the Prime Minister and the Chinese President, meeting on the sidelines of the BRICS summit in Delhi, underlined the need to address each other’s concerns, including “structural trade imbalance and supply chain issues”. Bilateral trade reached $167.6 billion in 2025. Indian exports to China have stayed broadly flat since 2021, and imports rose about 71% to $149.5 billion. Nearly 70% of those imports are intermediate goods and another 22% are capital goods, so the deficit is built out of manufacturing inputs rather than finished consumer products. The tension is that the Atmanirbhar Bharat mission was framed to reduce dependence on global supply chains, with China as the implicit target, and the manufacturing expansion it produced has deepened that dependence instead.

What is the “assembly trap”?

1. Definition: The assembly trap is a position in which manufacturing output and exports grow while the inputs behind them continue to be imported from a single source.
2. Where the value sits: Final assembly captures the smallest share of value in an electronics chain, and the design, components and precision inputs that carry the margin stay offshore.
3. Why output data conceals it: A rising share of goods stamped as made in India can coexist with a rising share of imported parts inside each unit.
4. The measure that matters: Self reliance is established by the depth of the domestic component ecosystem, not by the volume of finished goods leaving Indian factories.

How has the India China trade balance moved since 2021?

1. Import trajectory: Imports from China rose from $87.5 billion in 2021 to $102.2 billion in 2022, $122 billion in 2023, $127 billion in 2024 and $149.5 billion in 2025.
2. Export stagnation: Exports to China fell from $23 billion in 2021 to $15.1 billion in 2022, and recovered only to $18.1 billion in 2025.
3. Widening deficit: The deficit moved from $64.5 billion in 2021 through $87.2 billion, $105.7 billion and $112.1 billion to $131.4 billion in 2025.
4. What the gap measures: A deficit that doubles during the period in which export capacity is being built points to a competitiveness weakness in Indian manufacturing rather than to consumer preference for Chinese goods.
5. Data source: The series is drawn from the World Integrated Trade Solution (WITS), a trade statistics platform built by the World Bank with the United Nations Conference on Trade and Development (UNCTAD).

What does the composition of imports reveal?

1. Inputs rather than products: Intermediate goods and capital goods together account for over nine tenths of what India buys from China, so the deficit sits inside the production system rather than at the retail counter.
2. Concentration in five categories: The combined value of the top five import categories rose from $19 billion in 2021 to $34.6 billion in 2025, close to one fourth of all imports from China.
3. The categories themselves: Telecom parts, laptops and integrated circuits have stayed in the top five every year since 2021, joined across the period by LED and solar cells, lithium ion batteries, mobile phones and, in 2025, silver.
4. Narrowing rather than diversifying: The basket has concentrated further into a few electronics linked categories over five years instead of spreading across sectors.
5. Why concentration raises exposure: A basket resting on a handful of electronics categories transmits any single export restriction directly into Indian assembly lines.

Why does mobile phone assembly sharpen the paradox?

1. Assembly success: India has become a major hub for mobile phone assembly and now exports finished handsets at scale.
2. Rising imported content: The share of imported mobile phone parts and components rose from 3.3% of the import basket from China in 2022 to 10.1% in 2025.
3. Downstream rather than deep: The success has been shaped by downstream assembly rather than by a domestic component ecosystem behind it.
4. Where capability is missing: Domestic firms have not built capability in semiconductors and other precision components, so imported inputs remain structural rather than transitional.
5. When imports stop helping: Sophisticated inputs and capital goods assist industrial upgrading, and they become a problem at the point where the dependence turns structurally persistent.

What would shift the strategy from assembly to capability?

1. Calibrated tariffs, not blanket restrictions: The proposed response is calibrated tariffs on parts and components designed to nurture specific segments of domestic value chains, in place of across the board import restrictions.
2. Incentive redesign: Incentives should move from rewarding assembly volume to rewarding domestic technological capability, innovation and supplier networks.
3. Component ecosystems: A component ecosystem requires tiered suppliers built around each assembly hub, which is what converts an assembly base into a manufacturing base.
4. Global value chain access: Access to global value chains should be enhanced alongside domestic capability building, so that technological dependencies do not harden into strategic vulnerabilities.
5. Where the existing programmes fall short: Make in India and the Phased Manufacturing Programme (PMP) have raised assembly volumes without shifting the composition of the import basket.

Challenges to Atmanirbhar Bharat’s manufacturing push

1. Component dependence behind assembly growth: Incentive schemes reward output at the final stage, so an assembly plant can scale without a domestic supplier base forming behind it. Eg. Under the Production Linked Incentive scheme for large scale electronics manufacturing, most approved incentive has flowed to a small group of mobile phone assemblers.
   The Fix: Tie a share of the incentive to verified domestic value addition at the component stage rather than to finished output alone.
2. Processing chokepoints outside India: A single country controlling a processing stage can halt Indian production lines irrespective of tariff policy. Eg. China’s export controls on rare earth magnets in April 2025 disrupted Indian automobile and electric vehicle production plans.
   The Fix: Build stockpiles and alternative processing tie ups for the specific inputs where one country holds more than half of global processing capacity.
3. Semiconductor capability gap: Fabrication capacity takes years to mature, so precision inputs stay imported through the period in which assembly capacity is expanding. Eg. The first commercial fabrication units approved under the India Semiconductor Mission are still to reach volume production.
   The Fix: Sequence assembly incentives behind firm fabrication and packaging milestones, so downstream capacity does not run years ahead of upstream supply.
4. Tariff design cuts both ways: A duty on components raises the cost of the assembly the same policy is trying to grow, and it can push assemblers to competing locations. Eg. Import duties on several mobile phone parts were cut in the 2024 Budget after industry warned of a loss of export competitiveness.
   The Fix: Publish a dated tariff calendar component by component, so a duty rises only once domestic supply for that component is verified.
5. Third country routing: Restricting direct imports shifts sourcing to intermediaries without changing the origin of the component. Eg. Chinese origin goods routed through Southeast Asian countries have been a recurring subject of Indian anti dumping and rules of origin investigations.
   The Fix: Enforce origin certification under the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020, at the component level rather than at the consignment level.

Conclusion

The paradox is not that India buys more from China than it sells. It is that the import basket has narrowed into precisely the inputs India’s own manufacturing expansion consumes. Self reliance measured at the point of final assembly will keep recording success while the dependence it was meant to remove settles one tier upstream. The marker to watch is whether the next round of incentives is written against domestic value addition at the component stage rather than against finished output.

Back2Basics: Phased Manufacturing Programme (PMP)

1. What it is: The Phased Manufacturing Programme is a graded customs duty structure that raises import duty on a component only after domestic capacity to make it is judged to exist.
2. Who runs it: It was notified in 2017 by the Ministry of Electronics and Information Technology, beginning with mobile handsets and their sub assemblies.
3. How the phasing works: Duty was applied first to fully assembled handsets, then to chargers, batteries and mechanics, and then to printed circuit board assembly and camera modules.
4. Extension: The same phased duty approach was later notified for other electronics categories, including wearables and hearables.

Matching Previous Year Question

“The West is fostering India as an alternative to reduce dependence on China’s supply chain and as a strategic ally to counter China’s political and economic dominance.’ Explain this statement with examples.”