Elephant-dragon tango: Modi's visit to China signals improving ties — will the bonhomie last?

India and China are cautiously exploring enhanced economic engagement, highlighted by PM Modi's upcoming meeting with President Xi at the SCO summit, despite long-standing geopolitical tensions and India's widening trade deficit, which hit $99.2 billion for the year ended March 2025. Facing mutual pressures from US tariffs and supply chain shifts, India seeks to leverage Chinese intermediates for its 'China Plus One' strategy, while China eyes the Indian market amid domestic slowdowns. Although recent signs like resumed direct flights and potential bilateral partnerships suggest warming ties, deep-seated suspicions and border disputes limit prospects for a truly collaborative relationship, leaving the extent of their economic 'tango' uncertain.

Analysis

A fragile, economically-driven rapprochement is underway between India and China, set against a backdrop of deep-seated geopolitical mistrust and escalating trade imbalances. While both nations face external pressure from U.S. tariffs, their internal dynamics are complex. India's trade deficit with China has widened to a record $99.2 billion for the fiscal year ending March 2025, with imports hitting an all-time high of $113.45 billion. This dependency creates a significant vulnerability, particularly as India's 'China Plus One' manufacturing ambitions are critically reliant on Chinese inputs. Key Indian industries, including pharmaceuticals (70-90% of APIs from China), electronics, and electric vehicles, are tethered to the Chinese supply chain, complicating New Delhi's goal of achieving 30% EV sales by 2030. For China, facing domestic overcapacity and slowing consumption, the Indian market represents a vital growth avenue, exemplified by BYD's interest in entering the market following VinFast's approval. Recent diplomatic overtures, such as the resumption of direct flights and potential corporate partnerships involving Reliance and Adani, signal a tactical warming. However, persistent issues like border disputes and China's strategic alliance with Pakistan temper expectations, suggesting any cooperation will remain transactional and subject to geopolitical volatility, with the upcoming SCO summit serving as a key litmus test for the relationship's trajectory.

Key Decisions for Investors

• Investors should closely monitor Indian sectors with high dependency on Chinese inputs, particularly pharmaceuticals, electronics, and the EV supply chain, as they remain highly vulnerable to disruption from any geopolitical deterioration.
• The potential market entry of major Chinese companies like BYD into India presents a competitive threat to domestic incumbents but could offer opportunities in Chinese equities positioned to capitalize on India's large consumer base.
• The upcoming SCO summit is a critical near-term catalyst; any concrete agreements on market access or de-escalation could positively impact sentiment, while a lack of progress would reinforce the cautious outlook on bilateral trade stability.
• Given the structural nature of the trade deficit and deep-seated mistrust, investors should treat positive developments as tactical and be wary of building long-term strategies that assume a stable, cooperative India-China relationship.