Context: 

Discussions are ongoing between Indian departments to lift or relax some trade and investment restrictions imposed after the 2020 Galwan Valley clashes.

More on the News

• This shift comes at a time when US President Donald Trump’s demands on India to reduce tariffs and agree to US-imposed terms have added pressure on India, prompting a rethink of trade dynamics with China.
• Policymakers in India are now more open to upgrading bilateral economic ties with China.
• Tensions between India and China along their border have seen a decrease, creating a more conducive environment for economic discussions.
• India might reconsider the 2020 policy requiring approval for investments from countries sharing a land border with India, in an attempt to address the widening trade deficit.

The key proposals include:

• Easing visa restrictions for Chinese personnel.
• Lifting tariff and non-tariff barriers on imports from China, including the possibility of allowing Chinese apps back into India.
• Resumption of flights between the two countries.
• Issuance of visas to Chinese scholars.

These proposals have gained momentum, particularly in response to demands from industry groups.

Investment and Trade Balance

• Despite existing restrictions, trade between India and China remains remarkably high, with China being India’s largest trading partner in FY24, surpassing the US. 
• Bilateral trade reached $118.4 billion, with China accounting for 15% of India's total imports. 
• Chinese FDI in India has been relatively low, with $2.5 billion in equity inflows from April 2000 to September 2024.
• There is growing interest from China to increase investment in India, particularly as India is grappling with an $83 billion trade deficit with China as of 2023. 
• This deficit has been fueled by the limited range of commodities India exports to China, along with market access barriers for Indian goods in China, such as agricultural products and pharmaceuticals.

Balancing Trade and Strategic Shift towards China

• Despite existing restrictions, India is exploring ways to reduce this deficit, especially in sectors where India has export strengths like pharmaceuticals and IT.
• However, India has faced various non-tariff barriers for agricultural and pharmaceutical exports to China, which has hampered market access.
• While India is unlikely to actively incentivize trade with China, but removing some trade barriers aligns with industry demands, particularly from small and medium enterprises.
• The Indian government is focused on protecting domestic industries by imposing safeguard duties when necessary but also acknowledging the need for Chinese goods in sectors where local production cannot meet demand.
• As part of the global 'China Plus One' strategy, India is looking to capture a share of multinational companies diversifying their supply chains away from China.
• While India’s success in this strategy has been limited, opening up to Chinese investments and easing trade barriers could be part of the government’s strategy to boost economic growth.

Recent Examples of Opening Channels:

• Chinese companies, like SAIC Motors (previously owning MG Motors), have begun divesting or entering into joint ventures in India, indicating the potential for deeper economic engagement.
• Other companies, like Shein, have found ways to re-enter the Indian market after being banned, reflecting the growing acceptance of Chinese investments and partnerships.