India has been working to address its trade imbalance with China, particularly in the toy industry. Six years ago, India increased tariffs on imported toys from 20% to 60% and eventually to 70% to promote local manufacturing and improve quality standards. As a result, toy imports decreased from nearly $300 million in 2020 to $100 million in 2026, while exports rose from around $129 million to $200 million. This sector has shown some success in reducing dependence on Chinese products, which previously held a 70% share of the local toy market.
However, the overall trade relationship remains heavily skewed. India's trade deficit with China has increased from $44 billion in 2020 to $112 billion in 2026. Kevin Zongzhe Li, a Fellow at the Asia Society Policy Institute, noted that India's economic dependence on China has deepened despite deteriorating political and security ties. Exports to China have not recovered to pre-pandemic levels, while imports have surged, with China supplying over 30% of India's industrial imports.
Experts warn that if the trend continues, the bilateral trade deficit could rise to $134 billion, increasing China's leverage over Indian industries. Despite anti-China sentiment following border clashes in 2020, Prime Minister Narendra Modi and President Xi Jinping have expressed intentions to address trade imbalances during the Brics summit in September 2026.
India has made some progress in reducing reliance on finished goods, producing over a quarter of the world's iPhones. However, the country still relies heavily on Chinese components for industrial goods, including machinery, chemicals, and electronics. Electrical machinery and electronics account for 36% of imports, while machinery and mechanical appliances make up 21.7%.
Macroeconomic trends also contribute to the growing reliance on Chinese imports, as China has excess capacity in various sectors and is looking to expand its market share abroad due to its slowing economy. Indian products face significant barriers in China, making it difficult for Indian companies to scale exports.
To address the trade imbalance, experts suggest strengthening India's manufacturing capabilities through sector-specific policies and improving infrastructure. Recent changes to foreign direct investment rules may allow for increased Chinese investment in India, but there are concerns that this could exacerbate dependency on Chinese imports. Targeting higher exports to China in sectors like pharmaceuticals could help reduce the trade deficit, but experts emphasize the need for reciprocal market access from China as a critical factor in normalizing trade relations.