India’s trade relationship with China sits at the intersection of economic necessity and national security anxiety. While bilateral commerce continues to thrive in volume, it remains fundamentally distorted by strategic asymmetries. India’s widening trade deficit, its reliance on Chinese technology inputs, and Beijing’s growing support for Islamabad have sharpened the dilemma facing Indian policymakers: How to engage economically without compromising sovereignty and security. In response, New Delhi is reimagining its economic diplomacy through a “China-plus-one” playbook — anchored in diversification, industrial policy, and regional recalibration.AdvertisementBilateral trade remains substantial between the two countries, but it is significantly imbalanced. In FY2024–25, India’s two-way merchandise trade with China reached approximately US$127.7 billion, making China India’s second-largest trading partner after the US. However, this came at the cost of a record trade deficit of US$99.2 billion — the highest on record — highlighting deep structural dependencies in India’s economy, particularly in the technology and pharmaceutical sectors.In light of these dynamics, Indian policymakers have adopted a cautious approach. Under a policy introduced in 2020, all foreign direct investment (FDI) from China and other countries sharing land borders with India must obtain prior government approval. In April 2025, Commerce Minister Piyush Goyal reiterated that India “does not intend to encourage” Foreign Direct Investment (FDI) from China. By the end of 2024, Chinese firms accounted for only about 0.37 per cent of India’s total FDI inflows. While easing these restrictions in non-sensitive sectors such as solar energy and batteries may be helpful, the prevailing geopolitical climate has stalled such proposals. Instead, India has intensified scrutiny of Chinese technology and infrastructure investments, banned dozens of Chinese apps, and maintained strict regulatory oversight over the telecom and electronics sectors.Also Read | In US-China trade war, norms take the backseatChina’s overt support for Pakistan has further deepened Indian scepticism. Beijing’s financing and arming of a country India considers a direct security threat has amplified concerns about the strategic costs of deeper economic ties. In response, India has adopted diversification strategies, including strengthening economic partnerships with the United States, Japan, and the Association of Southeast Asian Nations (ASEAN), as well as promoting domestic manufacturing under the “Make in India” initiative. These measures aim to reduce dependency on any single partner while retaining space for selective engagement with China. This hedging strategy reflects a broader shift in India’s foreign economic policy — from passive openness to strategic selectivity.AdvertisementTrade without trustIndia’s answer to the widening trade gap with China is a two-pronged strategy: Build deeper commercial coalitions with trusted partners and turbo-charge domestic manufacturing so that tomorrow’s supply chains run through, not around, India. The result is a deliberate “China-plus-one” realignment that now threads through New Delhi’s engagements with Washington, Tokyo, and ASEAN while anchoring at home under the Make in India and Production-Linked Incentive (PLI) drives. This strategy is not just about trade — it is about securing India’s place in a reconfigured global production map. Such shifts reflect the growing convergence of commercial logic with strategic alignment.Washington has become India’s largest goods-trade partner for the fourth consecutive year, with bilateral merchandise commerce reaching US$131.8 billion in FY 2024-25 — up from barely US$88 billion in 2019 — and resulting in India having a healthy surplus of more than US$41 billion. The new backbone of that relationship is the Initiative on Critical and Emerging Technologies (iCET), which has already green-lighted joint semiconductor, AI, and space projects and prodded both governments to prune export-control frictions.Tokyo complements this pivot by underwriting supply-chain security and industrial upgrading. More than four-fifths of Japanese firms operating in India intend to expand over the next two years, according to JETRO’s latest global survey, by far the highest figure among major host economies. At the policy level, the Supply-Chain Resilience Initiative (SCRI), in collaboration with Japan and Australia, has targeted investment in electronics, batteries, and rare-earth processing hubs in India, specifically designed to mitigate single-country dependency. Japan’s role is pivotal, not just as an investor, but also as a norm-setter for resilient and transparent value chains.Southeast Asia forms the third pillar. India’s two-way goods trade with ASEAN hovers around US$110 billion. Still, both sides have agreed to fast-track a review of the ASEAN-India Trade in Goods Agreement to reduce non-tariff barriers and open services markets. Simultaneously, niche collaborations — such as semiconductor ecosystem talks with Singapore and defence-manufacturing tie-ups with Indonesia — are knitting India into “China-plus-one” production networks across the region. This eastward economic orientation reinforces India’s Indo-Pacific vision and places regional connectivity at its core.De-risking growthExternal diversification is reinforced at home by the PLI programmes, which now span 14 sectors with approved investments of approximately US$18.7 billion. One headline success is electronics: India has become the world’s second-largest mobile phone maker, producing 99 per cent of the handsets sold domestically. Smartphone exports alone surged 55 per cent in FY 2024-25 to US$ 24.1 billion, leap-frogging petroleum and diamonds to become India’s single most oversized export item and signalling a decisive shift toward higher-value manufacturing. India’s industrial push is not only about import substitution — it is about export-led competitiveness in sunrise sectors.most readIndia’s evolving economic strategy increasingly hinges on deepening ties with alternative partners across the Indo-Pacific. This pivot is also visible in recalibrating subregional engagement through BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation). As SAARC remains paralysed by India–Pakistan tensions, BIMSTEC has emerged as the primary forum for regional cooperation, offering a platform that bypasses Islamabad and aligns with India’s Act East policy.At the 6th BIMSTEC Summit in Bangkok in April 2025, member states adopted the Bangkok Vision 2030. They signed new agreements on maritime connectivity and security cooperation, signalling intent to re-anchor the Bay of Bengal as a geoeconomic hub. For India, BIMSTEC complements its external diversification efforts by linking its northeastern states to Southeast Asian economies, spurring regional infrastructure, trade, and logistical corridors that sidestep China.Finally, India’s evolving engagement with China reflects a strategy of managed rivalry — balancing selective cooperation with strategic hedging. Rather than decoupling, India is recalibrating its economic and diplomatic posture by diversifying partnerships, securing resilient supply chains, and reducing dependence on China, especially as Beijing deepens ties with Pakistan. This marks a shift from reactive diplomacy to a tactically layered approach, where competition is contained without collapsing ties.The writer is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at Observer Research Foundation (ORF)