Along the contested Himalayan frontier, military forces from India and China maintain a tense standoff. Yet thousands of miles away, Indian manufacturing facilities continue operations relying heavily on Chinese components and materials. This paradoxical situation represents one of the world’s most unusual geopolitical relationships, characterized by simultaneous military confrontation and deep economic interdependence.
The Unique Structure of Economic Dependence
India’s relationship with China demonstrates how the architecture of economic ties, not merely their volume, shapes strategic possibilities. New Delhi imports extensively from Beijing while maintaining minimal corporate investment within Chinese territory. This asymmetric arrangement creates policy options that would be prohibitively expensive for nations whose companies are deeply embedded in Chinese production ecosystems.
Following the deadly confrontation in Galwan Valley during June 2020, India fundamentally altered its China strategy. The country abandoned its previous approach of keeping economic and security matters separate, instead linking border tranquility to the overall bilateral relationship. Current policy emphasizes managing engagement through compartmentalization and diversification, attempting to prevent security concerns from undermining economic development goals.
Existing scholarship on Sino-Indian relations focuses on the inherent tension between strategic competition and economic integration, a challenge confronting many governments in their dealings with Beijing. While accurate, such analyses often treat interdependence as a uniform limitation when its actual configuration determines which management approaches remain feasible.
India’s ability to sustain military confrontation while accepting continued economic dependence tests whether asymmetric interdependence creates strategic flexibility unavailable to more thoroughly integrated economies. Trade between the two nations reached approximately $128 billion in 2024, with India maintaining relatively limited corporate exposure in China that could face retaliation.
Militarization Along the Border
The October 2024 border agreement between Prime Minister Modi and Chairman Xi reduced tensions at specific flashpoints along the Line of Actual Control that had escalated since 2020. However, both nations continue deploying 50,000 to 60,000 troops across the Himalayan frontier, with significant limitations remaining on the détente.
China has intensified road construction enabling year-round troop movements, established permanent infrastructure and sensor networks, and relocated civilians to border villages. India has upgraded high-altitude airbases, invested in railway connectivity, and deployed new forward outposts. This sustained militarization, five years after the deadly Galwan Valley clash that killed 20 Indian soldiers, appears incompatible with continued economic engagement and expanding annual trade.
Traditional analysis frames security competition and economic interdependence as contradictory forces requiring difficult tradeoffs. India’s experience suggests its exposure structure transforms this binary into a manageable tension rather than an irreconcilable contradiction.
Deep Manufacturing Dependencies
This hardened military stance contrasts sharply with economic developments where India’s dependence persists. Bilateral trade stood at $127.7 billion with India exporting just $14.3 billion to China, creating a substantial trade imbalance.
India’s manufacturing aspirations reveal the extent of Chinese dependence. The country imports an extensive array of goods essential to its industrial foundation including electronic components, telecommunications equipment, pharmaceutical ingredients, industrial machinery, and renewable energy inputs. China accounts for 30 percent of India’s industrial product imports, with dependencies exceeding 70 percent in electronics, machinery, chemicals, and textiles.
Chinese technology proves critical for India’s electric vehicle ambitions. India sources 75 percent of lithium-ion batteries from China, where manufacturers control three-quarters of global battery cell capacity. Rare-earth permanent magnets are sourced overwhelmingly from China. Solar expansion depends on Chinese suppliers who control four-fifths of global polysilicon production and dominate wafer, cell, and module manufacturing. Even Apple’s iPhone production expansion in India relies on components originating in China.
Building alternative supply chains requires years, enormous capital, and technical expertise India continues developing. India’s economic growth necessitates inputs from the country it identifies as its primary security threat.
Strategic Investment Controls
India’s economic relationship with China represents a delicate balance of strategic caution and underlying interdependence. In April 2020, India released Press Note 3 requiring government clearance for investments from countries sharing a land border, ostensibly targeting China. While this prevented hostile acquisitions, it affected needed Chinese capital and technology in manufacturing and startup sectors.
Chinese investments declined from approximately $127 million in 2019 to just $3 million in 2024, shelving opportunities such as BYD’s $1 billion joint venture plan. While trade increased, investment collapsed. Yet this restriction imposed limited costs on India elsewhere because it lacked parallel corporate assets in China requiring protection from retaliation.
This import dependence differs qualitatively from the reciprocal integration characterizing European or East Asian exposure to China. Beijing’s coercion patterns towards India reveal this structural difference. China’s export bans, technology transfer restrictions, and occasional supply suspensions demonstrate capacity to inflict economic costs. Yet what China does not restrict proves equally significant.
Electronics component exports continued uninterrupted even during peak border tensions in 2020-2021, despite accounting for substantial bilateral trade. Disrupting component supplies would damage Chinese manufacturers dependent on Indian assembly operations and the global supply chains they anchor. This asymmetry explains why India can pursue compartmentalization while countries with reciprocal dependencies cannot.
Security Considerations Drive Policy
Three overlapping concerns drive Indian strategic thinking about China. First, China represents a direct military threat. The People’s Liberation Army’s actions and incursions along the disputed border have fundamentally altered bilateral relations. The Chinese military’s sustained buildup along the border has also fundamentally altered the strategic balance in the Himalayan region.
Second, China functions as a strategic rival. This perception was reinforced during the May 2025 India-Pakistan conflict, when Islamabad deployed several advanced Chinese weapon systems against Indian forces. Beyond weapons sales, Beijing’s consistent diplomatic shielding of Pakistan in international forums has become a major source of Indian frustration.
Third, India sees China as a regional competitor systematically working to limit Indian influence across South Asia. China’s expanding engagement in Sri Lanka, Maldives, Bangladesh, Nepal, and Myanmar across economic, political, and military domains creates an environment where India assumes long-term rivalry as the baseline condition rather than a temporary phase.
Policy of Compartmentalization
India’s approach rests on two pillars exploiting its exposure structure. First, compartmentalization: securitizing the border, not the supply chain. This means maintaining military vigilance and strategic competition in security domains while adopting a more pragmatic approach to economic engagement where it serves Indian interests.
Reports suggest the Indian government is reviewing Press Note 3. Indian electronics firms are lobbying for Chinese joint ventures with 26 percent equity limits in electronics manufacturing. The government is also considering 20 to 25 percent stakes in renewable energy and auto components without government scrutiny. A draft cabinet note indicates Chinese foreign direct investment up to 49 percent in electronics and capital goods would avoid mandatory screening.
This pragmatic shift occurring while troops remain deployed along the Himalayan border demonstrates compartmentalization in practice. Chinese technology companies investing in Indian electronics manufacturing and automobile sectors are receiving approvals faster than investments in other sectors. This selective engagement and industry lobbying reflects recognition that blanket restrictions have hampered Indian industry.
According to reports, in 2024, the Indian government received 526 foreign direct investment applications from Chinese investors with 124 approved, 201 rejected, and 200 remaining pending. In 2023 only three approvals were granted, and in 2022, 80 of the 382 applications were approved. While individual approvals are onerous and further complicate the process, they also highlight India’s reactionary response rather than a structural approach balancing economic interests and national security.
Diversification Initiatives
Second, India actively continues diversification efforts to reduce critical dependencies on China while easing Chinese foreign direct investment in non-sensitive sectors. This occurs on two fronts. Domestically, the government is increasing self-reliance efforts through Production-Linked Incentive schemes across multiple manufacturing sectors offering financial incentives based on incremental sales.
Results have been mixed with progress on some fronts slower than expected. Steps have been taken to encourage domestic semiconductor manufacturing. The government has announced incentive schemes and support to reduce dependence on China for pharmaceutical ingredients. To address dependencies in the critical mineral sector, India has launched initiatives for critical mineral exploration projects. A Production-Linked Incentive scheme for rare earth permanent magnets has also been launched.
Internationally, India has signed semiconductor supply chain partnerships with Japan and the United States, initiated battery mineral cooperation with Washington, and launched the Supply Chain Resilience Initiative with Japan and Australia. India is also expanding partnerships in Africa with Zambia, Zimbabwe, Mozambique, Malawi, and Côte d’Ivoire to secure access to rare earth and critical minerals.
These initiatives show mixed results. It remains too early to judge the outcome of recently-announced initiatives and to what extent they will succeed in reducing dependence on China. A July 2025 fertilizer deal with Saudi Arabia was struck to provide 3.1 million metric tons annually for five years, up from 1.9 million tons in 2024-2025, reducing China’s leverage. Yet certain fertilizer products remain available only from Chinese suppliers.
Nevertheless, the measures taken represent an important step in India’s emerging compartmentalization and diversification strategy. Ultimately, India pursues this incremental diversification while maintaining engagement precisely because it lacks significant corporate assets in China that Beijing could hold hostage.
Implications for Other Nations
India’s experience is most relevant for import-heavy countries with limited corporate exposure in China, such as several Southeast Asian economies. This contrasts sharply with countries in Europe, Japan, and South Korea, where firms are deeply integrated into Chinese production networks and markets.
The broader insight is that structure of interdependence determines viable strategies as much as its scale. India maintains military confrontation at the border while accepting continued reliance on Chinese inputs because its one-way exposure creates asymmetric vulnerability. This doesn’t eliminate risk—China can still weaponize supply chains—but it changes the calculus of retaliation and enables policy combinations that balanced integration would foreclose.
Whether India’s strategy of compartmentalization and diversification proves sustainable depends on execution. If China escalates economic coercion or security competition spills into the economic realm limiting investment, India’s growth suffers. If diversification succeeds in reducing critical dependencies while maintaining access to Chinese inputs where beneficial, India validates a model of managed rivalry preserving growth amid geopolitical tension.
Concluding Observations
India has transitioned from an approach decoupling economic and security concerns pre-2020 to one linking border stability to bilateral relations after Galwan, and now towards a strategy of compartmentalization and diversification that acknowledges China’s importance for growth while managing competitive and security dimensions.
This strategy exploits India’s exposure architecture of import dependence without reciprocal corporate integration to pursue options unavailable to more deeply integrated economies. China remains indispensable to India’s growth, but the degree of that indispensability is not predetermined by interdependence alone.
Structure matters as much as scale. India’s experience demonstrates that asymmetric interdependence creates strategic space, though whether that space can be effectively occupied remains an open question with implications extending beyond South Asia to any country navigating rivalry in an interconnected world where complete decoupling proves neither desirable nor feasible.
Original analysis by Shantanu Roy-Chaudhury from War on the Rocks. Republished with additional research and verification by ThinkTanksMonitor.
