A historic shift in relations between India and China? The two Asian giants have announced a breakthrough agreement on patrolling their shared border, ending years of tension that had strained their economic and diplomatic ties. This development could potentially unlock a new era of cooperation, boosting trade and investment flows between the two economic powerhouses.
The border pact, a significant step towards rebuilding trust, comes after a series of border clashes, including the violent incident at Galwan Valley in June 2020. This event severely impacted bilateral ties, causing a near standstill in engagement between the nuclear-armed neighbors. The recent agreement paves the way for a meeting between Chinese President Xi Jinping and Prime Minister Narendra Modi at the BRICS Summit in Russia, marking their first interaction since 2020.
While the thawing of relations brings hope, concerns remain about the lingering anti-China sentiment in India. A Pew Research Centre survey revealed that 67% of Indians hold an unfavorable view of China. This sentiment stems from a complex history of mistrust and geopolitical friction, which has hampered bilateral relations for decades.
Multiple factors contribute to the challenging relationship. The 3,379 km long border remains undemarcated, leading to periodic flare-ups. Trade remains heavily skewed in China’s favor, with India exporting significantly less to China than it imports. This trade imbalance has fueled economic anxiety in India.
Geopolitical dynamics further complicate the relationship. China’s close partnership with Pakistan, a country with historical tensions with India, makes India apprehensive. Conversely, China views India’s growing proximity with the US with suspicion, particularly its involvement in the Quad grouping, a strategic alliance with the US, Australia, and Japan, which Beijing sees as an anti-China bloc.
Despite these challenges, trade between India and China has continued to grow. Chinese imports crossed the $100 billion mark in Fiscal Year 2024, reaching $118.4 billion in total trade. India’s imports stood at $101.7 billion, with exports reaching $16.7 billion, resulting in a substantial trade deficit of $85 billion. Even in the first six months of Fiscal Year 2025, trade witnessed a 12% growth.
China’s dominance in the trade landscape is further highlighted by its position as India’s largest trading partner in Fiscal Year 2024, surpassing the United States. However, the investment landscape presents a different picture. While China doesn’t figure among the top 10 countries by foreign direct investment (FDI) equity inflows into India, a policy implemented in 2020 imposed restrictions on investments from countries sharing a border with India, specifically targeting China. In July 2023, India rejected a $1 billion investment by Chinese electric vehicle giant BYD.
The potential for Chinese investment in India, while currently limited, has gained renewed attention. The 2023-24 Economic Survey argued for encouraging Chinese FDI, suggesting it would be more beneficial to receive investments and manufacture goods in India rather than importing them from China. The Survey also raised questions about India’s ability to integrate into the global supply chain without first establishing connections with the Chinese supply chain.
However, bridging the trust deficit between the two nations remains crucial for fostering meaningful economic cooperation. The recent border pact offers a glimmer of hope, suggesting a willingness to engage in dialogue and address outstanding issues. Whether this agreement will lead to a lasting thaw in relations and unlock the full potential of economic cooperation remains to be seen, but it represents a significant step in the right direction.
