India’s toy factories broke China’s grip. Its industrial supply chains have not

An Indian toy shop offers a glimpse of something the country has struggled to achieve across its economy: less dependence on China. Higher import duties and tougher quality standards helped local producers gain ground, despite retailers’ warnings that they could not compete with foreign goods. But beyond the toy aisle, the opposite story is unfolding. India’s factories increasingly need Chinese supplies to keep producing, according to BBC Business (direct).

Six years ago, India began raising tariffs—taxes on imports—on toys from 20% to 60%, and eventually to 70%. Toy imports dropped from nearly $300 million in 2020 to $100 million in the reporting year, while exports increased from about $129 million to $200 million. The measures also sharply reduced reliance on China, which had accounted for 70% of India’s toy market.

The dependence has moved inside the factory

The wider trade relationship has moved in a different direction. India’s deficit with China—the gap between what it buys and sells—expanded from $44 billion in 2020 to $112 billion in the reporting year. Imports doubled over that period, while exports to China remained below their pre-pandemic level. The imbalance grew despite the rupture in diplomatic relations after the 2020 Galwan Valley clashes, Indian duties aimed at unfairly cheap imports and restrictions on Chinese apps, including TikTok.

Ajay Srivastava of the Delhi-based Global Trade and Research Initiative says China supplies more than 30% of India’s industrial imports, with dependence extending to more than 100 critical products. If the fast pace of imports persists, he says, the bilateral deficit could reach $134 billion. India has reduced reliance on imported finished smartphones and solar equipment, and now makes more than a quarter of the world’s iPhones. Yet much of that production remains assembly work using imported components, particularly Chinese ones.

Electrical machinery and electronics represent 36% of imports, followed by machinery and mechanical appliances at 21.7%, according to the Observer Research Foundation. Chemicals, plastics, battery inputs and solar cells also feature in the supply relationship. The risk therefore extends beyond shoppers losing access to cheap goods: factories could struggle to operate if supplies were interrupted.

A break in these supplies would disrupt production, not just consumption, according to Soumya Bhowmik of the Observer Research Foundation.

More exports alone will not close the gap

China’s excess production capacity adds to the pressure. Its slowing domestic economy cannot absorb output in sectors ranging from steel to solar panels and electric vehicles, pushing manufacturers towards overseas buyers at low prices. Srivastava says India is receiving these goods as it expands manufacturing and Western markets impose trade barriers. Indian exporters face a different problem: tariff and other market-access hurdles in China, according to Kevin Zongzhe Li of the Asia Society Policy Institute’s Centre for China Analysis.

Prime Minister Narendra Modi and Chinese President Xi Jinping pledged to tackle structural trade and supply-chain problems on the sidelines of the Brics summit in Delhi in September. But Srivastava argues that India also needs stronger domestic manufacturing, supported by affordable electricity and credit, efficient logistics and predictable rules. Recently eased foreign direct investment rules could draw Chinese companies, although assembly operations using Chinese parts could deepen import dependence rather than reduce it.

The next test is whether improving political relations brings better access to Chinese buyers and investment that builds Indian component production, transfers technology and supports exports. Li identifies pharmaceuticals as a possible opportunity as China’s population ages and healthcare costs rise. But he cautions that a few promising export sectors cannot close a $112 billion gap: meaningful Chinese market-access concessions remain central to the challenge.