Tianjin test: Modi to meet Xi amid fragile reset

The Chinese People’s Liberation Army’s ingress into Eastern Ladakh in the summer of 2020, and the loss of lives of soldiers at Galwan valley, ruptured bilateral relations and brought the two militaries into a stand-off along their disputed de facto border. After seeing little progress for four years, diplomatic and military negotiations for disengagement of the two countries’ forces at the Line of Actual Control finally gathered pace with the announcement of a Patrolling Agreement in October 2024.

While the disengagement has not led to de-escalation, the increase in pace for resetting ties has been the result of compelling economic imperatives. Modi’s visit comes at a time when India is facing 50 percent tariffs from its largest trading partner, the US.

China is India’s second-largest trade partner after the US. Their total trade was US$28 million in Financial Year 2024-25. However, within this, US$113 million was in imports to India, highlighting the huge trade imbalance. The high dependence on China – for components, machinery and technical personnel – further illustrates this economic reality. From solar panel batteries to tunnel boring machines, electronics and home appliances to EV batteries, China has become a critical component (pun intended) in the Indian political economy.

Therefore, notwithstanding the hardening of the Indian government’s positions post Galwan, and the shrill rhetoric of boycotting Chinese products in the immediate aftermath of the incident, Indian industry and business, in the last four years, had been pushing for easing of tensions and loosening of curbs on Chinese suppliers.

Going beyond components, finished products – especially personal and home electronics – by Chinese companies have created a dedicated clientele through careful brand building and promotional campaigns, despite the increased scrutiny from Indian agencies, and thus withstood the turbulence in bilateral relations. Further, in certain sectors like port infrastructure, the dominance of Chinese entities, and lack of viable alternatives, results in making them dependable vendors for port concessionaires around the world.

Knowing its indispensable position – solidified further through the impact of the US tariffs – China has also visibly leveraged and weaponised its strategic location in the network of supply chains. Restrictions on machinery and equipment for iPhone production, tunnel boring machines and rare earths are some examples of China’s zero-sum approach to slow down industrial-infrastructural development and hold onto an advantageous negotiating position.

While some of these restrictions may have workarounds, it shows China’s muscle flexing and its negative effects for India’s domestic manufacturing ecosystem. Indian industry has voiced the need to reduce overdependence on China, but it has also called for higher inflow of Chinese FDI into key sectors such as electronics by re-looking at restrictions from countries sharing land boundaries with India.

The transformation of India into a manufacturing hub – the template here being China – is one of the priority objectives for the Narendra Modi government. The ambitious Make in India campaign and schemes like Production Linked Incentives (PLI) are a fillip to these ambitions to attain self-sufficiency. India has also been actively seeking benefits from the China Plus One diversification strategy, developed by Western corporations to find alternative production bases and de-risk their businesses, learning from their experiences of Covid-related disruptions in China. However, this strategy is now confronted with challenges after the 50 per cent tariffs by the Trump administration which took effect from August 27.

As a geopolitical rival, Beijing is aware of this approach – especially with India betting big on Apple-Foxconn as a critical entity to its manufacturing ambitions – and hence the squeeze on machinery and personnel to Foxconn’s Indian facilities. In the meeting with Chinese foreign minister Wang Yi in Delhi, India also sought assurances from China that it would remove export curbs on products such as fertilisers and rare earths.

There is a realisation within the Indian government that in the short to medium term, it will have to rely on China for components, machinery and technology. The admission in the Economic Survey in 2024 that ‘to boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain’, is illustrative of this reality.

The Centre has also greenlit proposals of collaborations between Indian and Chinese electronics companies through joint ventures. Plans are also afoot to create easier visa norms for Chinese nationals in non-technical executive roles in Chinese companies’ India operations. This seems to be a U-turn from the norms laid down in the last few years for these companies to only have Indian nationals in these roles.

The present ‘normalisation’ of the relations and the speed at which it is happening is not on India’s terms nor determined by it. Therefore, questions of market access of Indian products in China and non-tariff barriers remain unresolved, and there are no positive signals from Beijing on these.

While Apple has big plans for India, with a steady stream of media announcements on US tariffs, matters are complicated. For all its diversification plans, the company still retains its main production lines in China and has not announced any plans to move out of the country.

Keeping this context in mind, loud announcements by politicians need to be tempered by reality. In the recent book, Apple in China: The Capture of the World’s Greatest Company, author Patrick McGee points out that most operations of Apple’s suppliers in India are “final assembly, test, and pack out” (FATP) with components shipped from China.

India’s focused attention on electronics component manufacturing only began in March this year, as the cabinet approved a scheme of Rs 23,000 crore over six years (US$2.63 trillion) in March this year, to which about 70 companies are reported to have expressed interest. However, there is no evidence of any Chinese company having come onboard the PLI scheme for mobile manufacturing with the lion’s share garnered by Apple’s contract manufacturers. The efficacy of the PLI scheme has also come into question with regard to the value addition by foreign companies as well as lack of capabilities of domestic firms.

The foundations towards holistic end-to-end manufacturing may have been laid for India to future-proof itself, but in the short to medium term future, China will remain well entrenched in Indian supply chains.

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