The long-lasting impact of the recent normalization of the four-year-old border dispute between India and China, announced earlier last week at Kazan in Russia, on the sidelines of the BRICS summit, will largely depend on how concessionary New Delhi is willing to be regarding Chinese investments and products entering India.

Officials believe that Beijing expects a swift and comprehensive welcome for its investments, which the Indian government has restricted since the Galwan crisis of June 2020.

It is pertinent to mention that initial steps toward restricting Chinese investments were being taken much before Galwan because of security concerns about allowing Chinese investments in critical and strategic sectors like communication and audio-video components.

Notably, from April 2023 to February 2024, the total value of imports from China reached $117.68 billion, constituting the largest share—15.16%—of India’s total imports. This figure was achieved despite India’s increased efforts to correct the trade imbalance following the Galwan incident. In the fiscal year 2023-2024, India’s exports to China were approximately $16.67 billion.

For the last one and a half decades, China has been India’s largest source of imports.

While it is self-explanatory that India is among the largest markets for Chinese goods, ranked 13th overall as per 2023 data, the economic situation in China has likely played an important role in pushing Beijing to seek normalization with India.

In March 2024, China’s exports declined by 7.5% from the previous year, a larger drop than expected; the decline was greater than the 2.3% drop that economists had predicted.

Exports, which have been a key driver of China’s economic growth, are facing pressures from weak domestic consumer spending and a struggling real estate sector. Heightened trade tensions, particularly with the United States and the European Union, are making it difficult for Chinese exports to maintain strong growth heading into the next year. Increased tariffs being levied on Chinese goods, including electric cars, are negatively impacting export dynamics. The growth in overall exports of autos has slowed significantly, and many consumer goods like shoes, toys, and smartphones have declined. Sources also pointed to weak domestic demand, which led to a notable drop in crude oil imports (a 10.7% decline compared to September 2023), suggesting reduced industrial activity.

For the past few years, China has relied heavily on exports to compensate for weaknesses in domestic demand. However, the current decline in prices and reduced profit margins is making it harder for manufacturers to sustain this reliance. With deflation impacting the economy, it has become increasingly difficult for domestic Chinese companies to maintain profitability and for consumers to make purchases; hence, accessibility to international markets is very much necessary right now.

This brings the burgeoning Indian market and its aspirational lower middle class, along with the rapidly increasing middle class, into the picture. Policymakers in China have realised, officials in New Delhi said, that they needed unhindered access to the Indian market.

In July this year, Chief Economic Adviser V. Anantha Nageswaran, in the country’s annual Economic Survey, proposed promoting foreign direct investments from China, thereby indicating that the government was ready to be flexible and shed its rigidity on Chinese investments into India.

A segment of policymakers in New Delhi too believes India could gain by encouraging Chinese investments to replace certain imports, boosting domestic manufacturing and reducing the trade deficit with China. Attracting investments from Chinese firms would enhance manufacturing capabilities, create jobs, and increase industrial output. This strategy, they believe, will integrate India into global supply chains, positioning the country as a key player in international trade. It also aligns with the “China plus one” sourcing approach, a trend among advanced economies to diversify supply chains beyond China, and present India as an alternative manufacturing hub.