Can Chinese investment revive India's manufacturing?

India's widening trade deficit with China has reignited a long-standing policy debate: should India allow greater Chinese investment to strengthen its manufacturing sector, or continue prioritising self-reliance and strategic caution? The discussion has gained momentum after recent trade data showed India's merchandise trade imbalance with China continuing to widen despite robust bilateral trade growth. Economists believe the challenge highlights deeper structural issues within India's manufacturing ecosystem rather than simply a trade imbalance.
India's total trade with China rose 24 per cent year-on-year to $91.7 billion during the first half of 2026, reflecting deepening commercial ties,according to agency reports. However, imports continued to far outpace exports, with India's shipments to China rising 37 per cent to just $12.3 billion, resulting in a massive trade deficit of $67.1 billion. Economists note that India's exports remain largely concentrated in raw materials and low-value products, while imports are dominated by electronics, machinery, electrical equipment, integrated circuits, computers and other industrial inputs, underscoring the structural imbalance in bilateral trade.
Experts argue that the trend underscores India's continued dependence on Chinese manufacturing capabilities.Former RBI Deputy Governor and member of the Prime Minister's Economic Advisory Council Rakesh Mohan has suggested that India should consider permitting greater export-oriented Chinese investment, particularly in labour-intensive industries such as textiles, garments, footwear and furniture. According to him, attracting Chinese manufacturers could help India generate employment, expand exports and reduce its growing merchandise trade deficit.Several economists believe such investments could also integrate Indian firms into global supply chains, bringing technology, production expertise and scale that domestic manufacturers currently lack.The debate comes at a time when the much-discussed "China+1" strategy has delivered mixed results for India. Although multinational companies have diversified portions of their supply chains away from China, countries such as Vietnam, Indonesia and Mexico have attracted a larger share of manufacturing investments.Analysts say India continues to face structural bottlenecks, including higher logistics costs, complex land acquisition processes, skill shortages and regulatory uncertainties, which have limited its competitiveness despite initiatives such as "Make in India" and production-linked incentive (PLI) schemes.
Even the Reserve Bank of India has repeatedly emphasised the importance of strengthening domestic manufacturing to sustain long-term economic growth.RBI Governor Sanjay Malhotra recently said that manufacturing remains "an important driver of sustainable economic growth, employment generation and external sector resilience," while stressing that improvements in productivity, infrastructure and competitiveness are essential for India to become a global manufacturing hub.
Many economists argue that selective Chinese investment could complement, rather than undermine, India's manufacturing ambitions if accompanied by strong regulatory safeguards.
"India should distinguish between strategic sectors involving national security and export-oriented manufacturing where foreign investment can create jobs and expand production capacity," said an economist tracking India's industrial policy. "The objective should be technology transfer, local value addition and export competitiveness—not import dependence."
However, not everyone is convinced...
Several trade experts caution that allowing unrestricted Chinese investment could deepen India's dependence on its largest trading partner and expose sensitive sectors to strategic vulnerabilities, especially given continuing geopolitical tensions and unresolved border disputes.
There is a real risk that India becomes merely an assembly base while critical technologies, components and intellectual property remain concentrated in China, an economist stated. Manufacturing growth should ultimately be driven by stronger domestic capabilities.Others believe the focus should remain on improving India's investment climate irrespective of the source of capital. Simplifying regulations, reducing logistics costs, investing in research and development, upgrading workforce skills and expanding infrastructure could make Indian manufacturing globally competitive over the long term.
Economists also point out that India's large domestic market offers a significant advantage if supported by consistent industrial policies that encourage domestic firms to move up the value chain.As global supply chains continue to realign amid geopolitical uncertainty and rising protectionism, India faces a critical policy choice. Greater Chinese investment may provide a short-term boost to exports and manufacturing capacity, but experts say sustainable industrialisation will ultimately depend on India's ability to build indigenous technological capabilities, strengthen domestic enterprises and create a globally competitive manufacturing ecosystem.For policymakers, the challenge is no longer whether India needs manufacturing-led growth, but how to achieve it without compromising economic resilience or strategic autonomy.

(Business Correspondent)