India’s economic relationship with China has evolved in uneven but persistent ways since 2005, when both sides agreed that boundary disputes would not obstruct broader cooperation. That principle allowed trade to flourish despite recurring standoffs in Ladakh, Doklam, and Galwan. According to a new report by Carnegie India, bilateral trade grew from $17bn in 2005 to nearly $120bn by 2024, with China becoming India’s largest trading partner and the trade deficit swelling to almost $100bn.

Attempts to narrow the gap by boosting Indian exports ran into Chinese non-tariff barriers in pharmaceuticals, IT, and procurement, leaving India structurally dependent on Chinese goods. Through these years, even the most violent clashes along the Line of Actual Control did not dent the trajectory of imports; only global shocks such as the 2008 financial crisis, the 2018 trade war, and the 2020 pandemic briefly slowed the deficit’s rise. Investment flows tell a more complex story. Chinese commitments in manufacturing and infrastructure spiked after 2014, riding Xi Jinping’s outbound investment liberalisation and Narendra Modi’s “Make in India” campaign.

According to the Carnegie India report, big-ticket deals, such as Fosun’s acquisition of Gland Pharma, signalled growing comfort with cross-border capital. But momentum was cut short by Beijing’s clampdown on outbound flows in 2016 and India’s abrupt policy pivot in 2020 after Galwan. The introduction of mandatory screening for investments from land-bordering countries effectively shut down new Chinese capital. Venture investment, which had funneled billions into India’s booming internet economy, was also caught in the crossfire.

By 2019, nearly two-thirds of India’s unicorns counted Chinese investors, but the subsequent app bans and policy shifts triggered rapid unwinding. What was once a deepening digital partnership was dismantled within half a decade, leaving only a few residual stakes by 2025. Public procurement emerged as another battleground.

A July 2020 order barred bidders from border-sharing countries without special clearance, effectively targeting Chinese construction and engineering firms. While this halted new government contracts, ongoing projects continued to generate billions in revenue for Chinese companies, and Indian contractors still relied heavily on Chinese input for railways and power equipment. This contradiction highlighted the limits of punitive procurement policies in a market where domestic substitutes remain underdeveloped.

The broader calculus grew even more complicated in 2025 as India’s relationship with the US has hit turbulence during Donald Trump’s second term. Early in the year, both sides announced ambitious trade targets, but optimism soured quickly. Trump imposed steep tariffs on Indian exports under the banner of “reciprocity,” escalating the measures within weeks. He further linked a hike in tariff to penalties on India’s continued imports of discounted Russian oil, casting the issue as one of strategic loyalty.

New Delhi dismissed the tariffs as unjustified and bristled at Washington’s attempts to dictate its energy policy. The trade war spilled into defense, with reports of procurement delays feeding speculation about a deeper chill in ties. The friction with Washington also carried political consequences at home. Modi’s government, once keen to frame India as a natural US partner in countering China, now faced a difficult balancing act. Public opinion turned skeptical of the reliability of American commitments, while business lobbies fretted over lost export markets.

The sudden reversal in tone from Washington reinforced India’s instinct to hedge, looking beyond its Quad partnership to options within BRICS and other multilateral formats. For Beijing, the cracks in the US-India relationship presented an opening to soften its own posture and explore areas of cooperation despite the lingering shadow of Galwan. Taken together, these dynamics underscore the paradox at the heart of India’s economic statecraft. Trade with China remains indispensable but lopsided. Investment ties can be throttled or revived depending on political calculations.

Procurement restrictions reveal dependency even when couched in national security terms. And now, India must contend with an uncertain partner in Washington, where tariff wars and energy disputes have cast doubt on the stability of what was once touted as a defining partnership.

The result is an India forced to refine its playbook, seeking flexibility, developing layered tools of retaliation and deterrence, and ensuring that neither neighbor nor ally can dictate the terms of its economic future.