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On a frozen Himalayan ridgeline, Indian and Chinese troops still stare at each other through rifle sights. Thousands of miles away, Indian factories hum along on Chinese parts. Few rivalries in the world look this schizophrenic — or have lasted this long without snapping.

India’s approach to China tests whether asymmetric interdependence gives countries strategic options that more deeply integrated economies lack. India’s import-based exposure with minimal corporate presence in China enables strategies prohibitively costly for other countries, whose firms are embedded in Chinese production networks.

India has shifted from its longstanding policy of separating economic and security issues with China to linking border stability to normal bilateral relations after the Galwan Valley clash in 2020. The current approach emphasizes compartmentalization and diversification in engagement with China, while ensuring policies in pursuit of security concerns and economic growth do not impinge upon the other.

Existing analyses of Sino-Indian relations emphasize the tension between security competition and economic interdependence, which is a dilemma facing many states navigating relations with Beijing. Such framings, while accurate, treat interdependence as a uniform constraint when in fact its structure determines which management strategies prove viable. Whether India can sustain this approach of maintaining military confrontation while accepting continued economic reliance, tests whether asymmetric interdependence creates strategic options unavailable to more deeply integrated economies.

India can, therefore, approve Chinese foreign direct investment while diversifying in other sectors because Indian firms have no parallel exposure in China requiring protection. Countries in Europe, for example, cannot adopt similar sectoral differentiation because restricting or tariffs invite retaliation against their market access in China. Thus, the interdependence architecture and not just dependency levels determine strategic options.

If India succeeds, it validates a model of managed rivalry that preserves growth amid geopolitical tension. Success requires accepting contradictions, managing risks across multiple domains, and recognizing that an ambiguous middle ground between cooperation and competition may be the only viable path forward. If China exploits economic dependencies for strategic concessions, or if the security competition spills over into the economic realm, the consequences for a developing country dependent on foreign investment could be severe.

The Militarized Border

The October 2024 border agreement between Prime Minister Narendra Modi and Chairman Xi Jinping reduced immediate friction at certain flashpoints along the Line of Actual Control that had risen in 2020, but both countries continue to maintain 50,000 to 60,000 troops across the Himalayan frontier and there remain limits to the détente. China has accelerated road construction enabling year-round movement, established permanent infrastructure and sensor networks, and relocated citizens to border villages. India has upgraded high-altitude airbases, invested in railway connectivity, and deployed new forward outposts.

This permanent militarization, five years after the deadly Galwan Valley clash, would seem incompatible with continued economic engagement and increases in annual trade. This framing treats security competition and economic interdependence as contradictory pressures requiring difficult trade-offs. India’s experience, however, suggests its exposure structure transforms this binary into a manageable tension.

The Economic Contradiction

This hardened military posture contrasts sharply with developments in the economic relationship where India’s dependence continues. Bilateral trade reached $128 billion in 2024 with India only exporting $14.25 billion to China.

India’s manufacturing ambitions illuminate the depth of Chinese dependence. India imports an extensive range of goods critical to its industrial base that includes electronic components, telecommunications equipment, pharmaceutical ingredients, industrial machinery, and renewable energy inputs. China accounts for 30 percent of India’s industrial product imports, with dependencies exceeding 70 percent in electronics, machinery, chemicals, and textiles.

For example, Chinese technology is crucial for India’s electric vehicle ambitions. Electric vehicle production requires battery cells, where Chinese manufacturers control three-quarters of global capacity. Rare-earth permanent magnets are sourced overwhelmingly from China. Solar expansion depends on Chinese suppliers who control four-fifths of global polysilicon production and dominate wafer, cell, and module manufacturing, with domestic alternatives substantially more expensive. Even Apple’s iPhone production expansion in India rests on components originating in China. Building alternative supply chains requires years, enormous capital, and technical expertise India is still developing. India’s economic growth requires inputs from the country it views as its primary security threat.

India’s economic relationship with China can thus be labelled as a delicate and evolving dynamic of strategic caution and underlying interdependence. New Delhi’s apprehension about China’s opportunistic economic activity was revealed in the early months of the COVID-19 pandemic. In April 2020 the People’s Bank of China had raised its stake in HDFC (India’s largest bank by market capitalization) to over 1 percent, having taken advantage of its stock market crash as a result of the pandemic.

This led to the release of Press Note 3 which required government clearance for investments from countries India shared a land border with, ostensibly aimed at China. While this prevented hostile acquisitions, it affected the much-required Chinese capital and cutting-edge technology going into the technology, manufacturing, and start-up sectors. Chinese investments declined from around $127 million in 2019 to just $3 million in 2024, shelving opportunities such as BYD’s $1 billion joint venture plan. While trade increased, investment collapsed. Yet this restriction imposed limited costs on India on other fronts, because it had no parallel corporate assets in China requiring protection from retaliation.

This import dependence differs qualitatively from the reciprocal integration characterizing European or East Asian exposure to China. China’s coercion patterns towards India reveal this structural difference. Beijing’s ban on rare earths exports, blocking the sale of tunnel boring machines, recalling of Chinese of Foxconn technicians from Indian factories, restricting EV technology transfers, and suspending fertilizer exports demonstrate capacity to inflict economic costs. Yet what China does not restrict proves equally significant. Electronics component exports continued uninterrupted even during peak border tensions in 2020-2021, despite accounting for substantial bilateral trade. Disrupting component supplies would damage Chinese manufacturers dependent on Indian assembly operations and the global supply chains they anchor. This asymmetry explains why India can pursue compartmentalization while countries with reciprocal dependencies cannot. The architecture of interdependence, not just its scale, determines strategic option space.

The Security Calculus

Taking the economic dependencies into account, three overlapping concerns drive Indian strategic thinking about China.

First, China represents a direct military threat. The People’s Liberation Army’s actions and incursions along the disputed border have led to numerous skirmishes and standoffs that have fundamentally altered bilateral relations. The Chinese military’s sustained buildup along the border has also fundamentally altered the strategic balance in the Himalayan region.

Second, China functions as a strategic rival. This perception was reinforced during the May 2025 India-Pakistan conflict, when Islamabad deployed several advanced Chinese weapon systems against Indian forces. Beyond weapons sales, Beijing’s consistent diplomatic shielding of Pakistan in international forums has become a major source of Indian frustration.

Third, India sees China as a regional competitor systematically working to limit Indian influence across South Asia. China’s expanding engagement in Sri Lanka, Maldives, Bangladesh, Nepal, and Myanmar across the economic, political, and military domains creates an environment where India assumes long-term rivalry as the baseline condition rather than a temporary phase.

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Compartmentalization and Diversification: The Strategic Response

India’s approach rests on two pillars exploiting its exposure structure. First, compartmentalization: securitizing the border, not the supply chain. This means maintaining military vigilance and strategic competition in security domains while adopting a more pragmatic approach to economic engagement where it serves Indian interests.

On this front, reports suggest the Indian government is reviewing Press Note 3. Indian electronics firms are lobbying for Chinese joint ventures with 26 percent equity limits in electronics manufacturing. The government is also considering 20 to 25 percent stakes in renewable energy and auto components without government scrutiny. A draft cabinet note also indicates Chinese foreign direct investment up to 49 percent in electronics and capital goods would avoid the mandatory screening. This pragmatic shift occurring while troops remain deployed along the Himalayan border demonstrates compartmentalization in practice.

At the same time, since government approval is still required, Chinese technology companies investing in Indian electronics manufacturing and automobile sectors are getting approvals faster than investments in other sectors. This selective engagement and industry lobbying reflects recognition that blanket restrictions have hampered Indian industry. According to reports, in 2024, the Indian government received 526 foreign direct investment applications from Chinese investors (124 were approved, 201 were rejected, and 200 remain pending); in 2023 only three approvals were granted; and in 2022, 80 of the 382 applications were approved.

While individual approvals are onerous and further complicate the process, they also highlight India’s reactionary response rather than a structural approach balancing economic interests and national security. As others have argued, Chinese investments in the short to medium term could localize production and  create jobs, and investments in non-sensitive sectors could strengthen domestic capacities.

Second, India should actively continue its diversification efforts to reduce critical dependencies on China while easing Chinese foreign direct investment in non-sensitive sectors. This has taken place on two fronts. The first is in the domestic domain where the government is increasing self-reliance efforts. It has established Production-Linked Incentive schemes across multiple manufacturing sectors offering financial incentives based on their incremental sales. Results have been mixed with progress on some fronts slower than expected. Steps have also been taken to encourage the domestic manufacturing of semiconductors. The government has also announced incentive schemes and support to reduce dependence on China for pharmaceutical ingredients. To address dependencies in the critical mineral sector, India has launched an initiative which would conduct critical mineral exploration projects around the country. Furthermore, a Production-Linked Incentive scheme for rare earth permanent magnets has also been launched.

The second is through global partnerships. Internationally, India has signed semiconductor supply chain partnerships with Japan and the United States, initiated battery mineral cooperation with Washington, and launched the Supply Chain Resilience Initiative with Japan and Australia to address supply chain disruptions in the Indo-Pacific region as well as a partnership with Canberra to develop lithium and cobalt projects. India is also expanding partnerships in Africa with Zambia, Zimbabwe, Mozambique, Malawi, and Côte d’Ivoire, among others, to secure access to rare earth and critical minerals to reduce China’s dominance of those supply chains.

These initiatives show mixed results. On one hand it is too early to judge the outcome of these recently-announced initiatives and to what extent they will be successful in reducing dependence on China. On the other, a July 2025 fertilizer deal with Saudi Arabia was struck to provide 3.1 million metric tons annually for five years, up from 1.9 million tons in 2024-2025, reducing China’s leverage. Yet certain fertilizer products remain available only from Chinese suppliers. Nevertheless, the measures taken are an important step in India’s emerging compartmentalization and diversification strategy. Ultimately, India is able to pursue this incremental diversification while maintaining engagement precisely because it lacks significant corporate assets in China that Beijing could hold hostage.

Strategic Implications

India’s experience is most relevant for import-heavy countries with limited corporate exposure in China, such as several Southeast Asian economies. This contrasts sharply with countries in Europe, Japan, and South Korea, where firms are deeply integrated into Chinese production networks and markets.

The broader insight is that structure of interdependence determines viable strategies as much as its scale. India maintains military confrontation at the border while accepting continued reliance on Chinese inputs because its one-way exposure creates asymmetric vulnerability. This doesn’t eliminate risk — China can still weaponize supply chains, as the rare earths restrictions demonstrate — but it changes the calculus of retaliation and enables policy combinations that balanced integration would foreclose.

Whether India’s strategy of compartmentalization and diversification proves sustainable depends on execution. If China escalates economic coercion or security competition spills into the economic realm limiting investment, India’s growth suffers. If diversification succeeds in reducing critical dependencies while maintaining access to Chinese inputs where beneficial, India validates a model of managed rivalry preserving growth amid geopolitical tension.

Conclusion

India has transitioned from an approach decoupling economic and security concerns pre-2020 to one linking border stability to bilateral relations after Galwan, and now towards a strategy of compartmentalization and diversification that acknowledges China’s importance for growth while managing competitive and security dimensions. This strategy exploits India’s exposure architecture of import dependence without reciprocal corporate integration, to pursue options unavailable to more deeply integrated economies.

China remains indispensable to India’s growth, but the degree of that indispensability is not predetermined by interdependence alone. Structure matters as much as scale. India’s experience demonstrates that asymmetric interdependence creates strategic space, though whether that space can be effectively occupied remains an open question with implications extending beyond South Asia to any country navigating rivalry in an interconnected world where complete decoupling proves neither desirable nor feasible.

Shantanu Roy-Chaudhury is a geopolitical analyst and a David Rockefeller Fellow at the Trilateral Commission. His research and publications focus on the Indo-Pacific region, with expertise in China’s foreign policy and regional engagement, India’s foreign and security policy, Sino-Indian relations, and South Asian security issues. Shantanu is the author of The China Factor: Beijing’s Expanding Engagement in Sri Lanka, Maldives, Bangladesh, and Myanmar (Routledge, 2023). He has been a non-resident Vasey fellow at the Pacific Forum and worked at the Institute of Chinese Studies and the Centre for Air Power Studies in New Delhi. Shantanu has an MPhil from Oxford University.

Image: Wikimedia Commons