As China battles US tariffs, India sees openings, and a few red flags

File photo of a blacksmith working with Indian-made steel at a factory in a suburb of Bengaluru.

The protracted and increasingly aggressive trade war between the US and China has laid a geopolitically and economically complex landscape for India. While New Delhi may not be directly caught in the crossfire of the tariff war between the world’s two largest economies, the standoff presents a strategic opportunity for India to step into the gap and expand its global trade footprint.

While that New Delhi could benefit from supply chain diversification and rerouted investments, experts suggest that it must tread cautiously. Aligning too closely with one side risks diplomatic fallout with the other. There’s also a real concern: India could become a dumping ground for diverted Chinese goods.

Moneycontrol's discussions with industry experts revealed that the tariff war has indeed positioned India as a potential alternative to China, while also underscoring the need for a cautious stance regarding Beijing's recent diplomatic overtures.

The existing trade dynamics

In the fiscal year 2024-25, the United States emerged as India's largest trading partner for the fourth consecutive year, with bilateral trade reaching a robust $131.84 billion. This signifies a strengthening economic partnership, with India enjoying a trade surplus of $41.18 billion with the US during this period, driven by exports like pharmaceuticals, telecom instruments, and precious stones.

On the contrary, India's trade relationship with China, its second-largest trading partner, presents a different picture. The total two-way trade in FY25 stood at $127.7 billion. However, this is overshadowed by a significantly widening trade deficit for India, reaching a record $99.2 billion. This substantial deficit, fueled by a surge in imports of electronics and consumer durables from China and a decline in India's exports to the country by 14.5% to $14.25 billion, underscores India's existing reliance on Chinese goods.

How the trade war opens doors for India

Electronics and consumer appliances: China dominates global electronics manufacturing. While India is gradually building its electronics manufacturing ecosystem, particularly in assembly and some component manufacturing, replacing China is a long shot. However, the opportunity may lie in specific segments like telecom instruments (where India's exports to the US reached $6.5 billion in FY25) and certain electronic components. Apple's increased iPhone exports from India to the US, bypassing tariffs, serve as a case study.

However, if India needs to fully leverage this opportunity, it will have to address the issue of its dependence on Chinese components for its own electronics manufacturing needs. Moreover, India still lacks deep capabilities in semiconductor fabrication and chip design.

READ MORE: China’s defiance explained: Why Xi doesn’t fear Trump’s trade war

Pharmaceutical ingredients and medical devices: India is a global pharmaceutical powerhouse and a significant exporter to the US ($8.1 billion in FY25). China is a major supplier of Active Pharmaceutical Ingredients (APIs) to India.

India already supplies 40% of generic drugs to the US. With Chinese API exports under watch, India could position itself as a more stable alternative. However, what concerns here is the fact that India still imports nearly 65% of its bulk drug requirements from China.

Textiles and apparel: The US imported nearly $22 billion worth of textiles and apparel from China in 2023. Rising tariffs could price Chinese goods out of the market, giving Indian exporters room to grow.

India’s textile exports to the US rose to $8.5 billion in FY24, and could surge further as Western buyers de-risk from China. For this, India would need to improve on speed, logistics, and high-value apparel segments where countries like Bangladesh and Vietnam often outcompete it.

EVs and batteries: China is a global leader in EV manufacturing and battery production. India's EV market is nascent but rapidly growing.

According to Fortune Business Insights, the Indian EV market is forecasted to expand from US$ 3.21 billion in 2022 to US$ 113.99 billion by 2029, with a 66.52% CAGR. Meanwhile, the Indian EV battery market is projected to surge from US$ 16.77 billion in 2023 to a remarkable US$ 27.70 billion by 2028.

According to NITI Aayog and Rocky Mountain Institute (RMI), India's EV finance industry is likely to reach Rs. 3.7 lakh crore (US$ 50 billion) in 2030.

India currently relies heavily on imports for EV components, including batteries.

The US is actively seeking to diversify its EV supply chain away from China. India, with its growing domestic market and government incentives like the Production Linked Incentive (PLI) scheme, can position itself as a viable alternative for EV and battery manufacturing for the US market. The Indian government is also pushing for increased domestic battery cell production, with projections indicating a capacity of over 150 GWh by 2030 from near-zero current capacity. This creates an opportunity for India to become a key player in the global EV supply chain.

Toy industry: China, which previously accounted for nearly 77 percent of US toy imports, is expected to see a significant drop in exports due to the high tariff, opening up space for alternate suppliers, an official said.

Akshay Binjrajka, President of the Toy Association of India, told PTI that India is well-positioned to fill the emerging vacuum.

"The US toy market, valued at around USD 41.7 billion, offers a massive opportunity for Indian manufacturers," he said, adding that Indian products can now compete with Chinese offerings on both quality and price.

Agriculture: India’s exports reached USD 778.21 billion in 2023-24. This marks a 67% increase from USD 466.22 billion in 2013-14. In 2023-24, the top merchandise export destinations for India included the USA (17.90%), UAE (8.23%), Netherlands (5.16%), China (3.85%), Singapore (3.33%), UK (3.00%), Saudi Arabia (2.67%), Bangladesh (2.55%), Germany (2.27%), and Italy (2.02%).

The US-China trade war could open up opportunities for India to increase its exports of specific agricultural commodities to the US. For instance, if tariffs on Chinese fruits, vegetables, or processed foods increase, India could potentially fill that gap, provided it meets US quality and regulatory standards. Notably, exports of basmati rice, spices, coffee, and tobacco from India are expected to reach record highs in FY25.

Sector-by-Sector Summary: Where India Can Gain

The tightrope walk: Navigating geopolitical and economic risks

‘Overfriendly’ China: China has recently made subtle overtures towards India, expressing a desire for improved bilateral relations and even suggesting measures to address the significant trade imbalance. These gestures, often framed within the context of the 75th anniversary of diplomatic ties, come at a time when China is facing considerable economic headwinds, including the impact of the ongoing trade war with the US and domestic economic challenges. While seemingly positive, India needs to approach these overtures with considerable caution.

READ MORE: Dumped cargo, vanishing orders, tech turmoil: How China is feeling the heat of Trump's tariff tsunami

Speaking to Moneycontrol, former diplomat Naveen Jindal and senior economist Akash Jindal echoed similar sentiments, suggesting New Delhi to avoid being seen close to Beijing.

“China is now trying to be overfriendly towards India. We shouldn't forget that while business and economy are important for us, beyond that is sovereignty. Today, they say Indians are their friends, but we should not forget that there was a time -- 1961-62. Now just three years ago, what they did at our borders, plus the way they have been supporting Pakistan in all their terrorism activities. So, doing business with US is much better for us than doing business with China,” Akash Jindal told Moneycontrol.

Meanwhile, Naveen Jindal said, “India has to be careful not be seen on China's side because that's exactly what China wants. China's strategy always been that when it has good relations with the US, then it ignores India and starts becoming tough on India. But when its relations with the US become difficult, the it starts looking for friends, and one of these is India.”

“Jinping won't like to be shown that he is isolated in the world, so he would like to show that Russia is on his side and so is India. Geopolitically, he would like to show to the US that they are isolated and not China. What we have to realise is that our problem is not the US, it's China. US is our largest market, it's our largest source of foreign investment... We cannot just afford to jeopardize that relationship, certainly not for China,” he added.

Akash Jindal, however, suggested that the deals offered by China in future could help India negotiate with the US. “Going ahead, this tariff war is going to have more Indo-US trade and bring India closer to US as far as business is concerned. Of course, whatever China is offering, that can be a good basis to negotiate terms with US, we should keep on listening to China,” he told Moneycontrol.

The dumping risk: As China faces higher tariffs in the US, there's a risk that it might divert its surplus goods to other markets, including India, at subsidized prices. This could harm India's domestic industries. The recent surge in India's trade deficit with China, reaching a record $99.2 billion in FY25, already raises concerns about this possibility. Imports from China to India increased by 11.52% in FY25, totaling $113.45 billion.

“we are a large market for Chinese goods, and if the Chinese goods are not able to enter the US or the US market shrinks for China, then China has a large amount of goods to dumb elsewhere. India is already a dumping ground for chinese goods, we may see more such dumping taking place in India. That is the biggest fear that we have. We have to gear up for that...” Naveen Jindal told Moneycontrol.

Supply chain resilience: India's manufacturing sector relies on China for a significant portion of components, particularly in electronics and pharmaceuticals. Disruptions in these supply chains due to the trade war could negatively impact Indian industries. Diversifying supply chains and boosting domestic component manufacturing are crucial for long-term resilience.

India’s ambition to replace China in global supply chains is not new, but the latest round of US-China tariffs provides a fresh push. However, this moment demands nuanced strategy — not just rhetoric. India must make sure it doesn’t become a passive beneficiary or a collateral victim.