India’s economic engagement with China over the past five years tells a sobering story. While bilateral trade volumes have expanded, the balance has moved steadily against India. Exports to China have declined from around $22 billion in FY21 to roughly $14 billion in FY25. Imports, meanwhile, have surged from $65 billion to over $113 billion in the same period. The result is not just a widening trade deficit, but a deeper structural dependence that carries strategic, industrial and risk implications.
This trend matters far beyond headline numbers. Trade deficits of this scale translate into vulnerabilities across supply chains, domestic manufacturing capacity and long-term competitiveness. More importantly, they expose a critical question India must confront: can it continue to rely on a narrow import-heavy model while aspiring to be a resilient, self-reliant manufacturing economy?
At the heart of this challenge lies a paradox. India has one of the world’s largest SME ecosystems, employing millions and contributing significantly to GDP. Yet this vast productive base remains under-integrated into global value chains in a way that meaningfully substitutes imports or scales exports, particularly in sectors where China dominates.
A closer look at import composition reveals why. China’s exports to India are concentrated in electronics, electrical machinery, APIs and bulk drugs, industrial chemicals, auto components, capital goods, solar equipment and intermediate inputs used by Indian manufacturers themselves. These are not luxury imports; they are production enablers. Any abrupt disruption would hurt Indian industry. But continued dependence without a substitution strategy locks India into a structurally weak position.
This is where SMEs become not just relevant, but essential.
India’s large corporates already play a role in strategic sectors, but scale alone will not correct the imbalance. What India needs is depth, thousands of competitive, specialised, quality-driven SMEs embedded into domestic and export-oriented supply chains. Import substitution at this level is less about protectionism and more about capability creation.
Consider electronics and components. While India has made progress in assembly, a large share of value still comes from imported sub-assemblies and components. SME clusters focused on precision manufacturing, tooling, printed circuit boards, sensors and power electronics can significantly reduce this dependence if supported with patient capital, technology partnerships and assured offtake.
Similarly, in pharmaceuticals and chemicals, SMEs can play a transformative role by scaling fermentation, intermediates and specialty chemical production. China’s dominance here was built over decades through scale, cost efficiency and ecosystem support. India’s response must be equally systemic, not episodic.
However, capability alone is insufficient. Indian SMEs face persistent constraints: access to affordable finance, inconsistent power and logistics costs, fragmented skilling pipelines, limited exposure to global quality standards and weak integration with large buyers. Addressing these gaps requires coordinated action across policy, finance and industry.
Equally critical is risk awareness. SMEs stepping into global supply chains must be cyber-secure, compliant with data protection norms, ESG-ready and resilient to regulatory shocks. Global buyers today assess vendors not just on price, but on reliability, compliance and risk posture. Strengthening SMEs on these dimensions enhances export credibility while protecting domestic supply chains.
Reducing dependence on China is therefore not about decoupling, it is about de-risking. A diversified, SME-led manufacturing base gives India optionality. It cushions external shocks, strengthens negotiating leverage and creates sustainable employment.
The widening trade deficit is a signal, not a sentence. It highlights what must change. If India’s SME ecosystem is empowered to move up the value chain through smarter policy, targeted capital, technology infusion and risk-ready frameworks, it can become the quiet but decisive force in correcting the imbalance.
The path to trade resilience will not be driven by slogans, but by thousands of SMEs building capability, credibility and scale. That is where India’s long-term answer lies, not just in reducing a deficit, but in reshaping its economic future
