When India debates Chinese investment, it is not merely weighing capital inflows against GDP growth. It is confronting a far deeper, strategic dilemma: how to reconcile economic interdependence with an escalating geopolitical rivalry. Can India accelerate its rise while deepening engagement with a power that simultaneously challenges its territorial integrity, constrains its strategic space, and backs its principal regional adversary with "all-weather" military support?
This is not an abstract question. It sits at the intersection of economics, national security, and sovereign ambition. It demands a clarity of vision—without which, the risks of Trojan-horse investments and supply-chain blackmail will only multiply.
A relationship defined by distrust
India–China ties have never been simple, but the veneer of ‘managed peace’ has thoroughly dissolved. Since the 1962 war, the boundary dispute has remained an open wound. The Line of Actual Control (LAC) is not a settled frontier but a volatile military interface. The 2020 intrusions in Eastern Ladakh, specifically the brutal clashes in the Galwan Valley, marked the gravest crisis in decades. It shattered the trust painstakingly built since the 1990s—trust that, in retrospect, appeared to have lulled New Delhi into a dangerous complacency while Beijing fortified the heights.
Under President Xi Jinping, China has adopted a "wolf warrior" posture across Asia. China’s military modernisation is no longer just about parity with the West; it is about dominance in the East. Along the Himalayas, analysts describe a pattern of incremental territorial assertion—often termed “salami slicing.” This tactic involves small, tactical advances and the construction of "Xiaokang" (well-off) villages in disputed zones. Cumulatively, these actions alter the status quo on the ground without reaching the threshold of full-scale war, yet they leave India’s forward positions increasingly vulnerable.
Beyond the mountains lies a maritime and regional encirclement. Through the Belt and Road Initiative (BRI), Beijing has financed a "string of pearls"—a network of ports and dual-use infrastructure from Myanmar to Djibouti. The most consequential is the China-Pakistan Economic Corridor (CPEC). By running through Pakistan-occupied Kashmir, CPEC is not just an infrastructure project; it is a violation of Indian sovereignty and a cementation of a pincer-like strategic axis. For New Delhi, this alignment forces a permanent "two-front" military posture, draining resources that could otherwise be diverted to economic modernisation.
The hard reality of economic dependence
Yet, despite this visceral strategic distrust, the two giants remain economically locked in a cold embrace. China remains India’s largest source of imports. The trade deficit is not just substantial; it is structural. India primarily exports raw materials while importing high-value manufactured goods, creating a value-gap that funds the very military machine India seeks to deter.
This dependence is granular and pervasive:
* Electronics: India’s massive smartphone and laptop market is a hollow shell without Chinese components.
* Green Energy: The solar transition hinges almost entirely on Chinese photovoltaic modules and lithium-ion cells.
* Pharmaceuticals: The "pharmacy of the world" relies on China for up to 70% of its active pharmaceutical ingredients (APIs).
* Telecommunications: Despite bans on 5G trials, existing 4G networks remain heavily reliant on legacy Chinese hardware.
This is not ideological dependence; it is a supply-chain trap. While India tightened scrutiny on Chinese FDI following the 2020 crisis, the economic logic remains a siren song. China offers scale, speed, and cost-competitiveness that no other nation can currently match. For an India seeking to become a manufacturing hub, the temptation to use Chinese ‘seed’ capital and intermediate goods is immense.
The case for engagement: Pragmatism over idealism
Proponents of calibrated engagement argue that India cannot afford to "cut off its nose to spite its face." Their case rests on three pillars:
* Industrial Seeding: Allowing Chinese firms to set up shop inside India, under strict joint-venture mandates, could force technology transfers and create local jobs. It is better to have Chinese firms manufacturing in Pune than exporting from Shenzhen.
* The "China Plus One" Window: Global firms moving away from China often still need Chinese sub-suppliers. By allowing these sub-suppliers into India, New Delhi can capture the final assembly stages of global value chains.
* The Competitive Edge: In sectors like EV batteries and high-speed rail components, China holds a decade-long lead in R&D. Ignoring this technology does not make India safer; it just makes India slower.
These pragmatists argue that even the U.S. and Japan, despite their intense rivalry with Beijing, maintain multi-billion dollar investment ties. Why should India, with a much smaller capital base, impose a total blockade?
The strategic risks: The military-civil fusion
The counter-argument is rooted in the unique nature of the Chinese state. In China, the boundary between private enterprise and the People’s Liberation Army (PLA) is non-existent. Under the Military-Civil Fusion (MCF) policy, every Chinese company is legally obligated to share data and technology with the state if requested.
The military risks of investment are threefold:
* Intelligence and Espionage: Chinese hardware in power grids or telecom towers can serve as "listening posts." Even ‘dumb’ infrastructure like cranes in ports can be embedded with sensors to track military movements.
* Kill Switches: In a high-intensity conflict, India’s power plants or digital payment systems—if built on Chinese backends—could be remotely throttled or shut down, creating domestic chaos and paralyzing the military's logistical tail.
* Economic Coercion: China has a history of ‘weaponizing trade.’ Whether it was blocking rare earth exports to Japan or salmon from Norway, Beijing uses market access as a cudgel. A dependent India is a constrained India in any diplomatic negotiation over the LAC.
Furthermore, Chinese FDI often brings with it a ‘closed ecosystem.’ They bring their own engineers, their own sub-contractors, and their own standards, which can prevent the development of a truly indigenous Indian industrial base.
India’s current approach: Managed rivalry
Currently, the response has transitioned from passive acceptance to ‘managed rivalry.’ The strategy is built on the twin pillars of Atmanirbhar Bharat (self-reliant India) and the production linked incentive (PLI) schemes.
The goal is not isolation, but resilience. By offering $26 billion in incentives across sectors like semiconductors and advanced chemistry cells, India is attempting to incentivise global and domestic capital to build local alternatives to Chinese imports. Simultaneously, India has weaponized its own market size by banning hundreds of Chinese apps (like TikTok) and excluding Chinese vendors from 5G rollouts, sending a clear message; the border and the market cannot be treated as separate silos.
Strategically, India is pivoting toward the Quadrilateral Security Dialogue (Quad). By aligning with the U.S., Japan, and Australia, India is seeking ‘trusted supply chains-networks of trade where the risk of political blackmail is mitigated by shared democratic values.
What lies ahead?
The trajectory of the next decade will be shaped by three unavoidable trends:
* Weaponised Interdependence: The world has entered an era where trade is a theatre of war. India is likely to continue to treat Chinese investment not as ‘money’ but as ‘influence,’ requiring a permanent security clearinghouse for every dollar that crosses the border.
* The Tech Cold War: As the world splits into ‘Clean Paths’ (Western-aligned) and ‘Sinic Paths’ (Chinese-aligned) for data and AI, India will have to choose a side. This choice will dictate everything from undersea cable routes to satellite standards.
* The Manufacturing Marathon: India’s ability to resist Chinese encroachment depends entirely on its own ‘Internal Strengthening.’ If India is not able to fix its land, labour, and power costs, the gravitational pull of cheap Chinese goods will remain irresistible.
A framework for the future: Defensive realism
India’s path forward must avoid the ‘reflexive hostility’ of the 1960s and the ‘naïve optimism; of the early 2000s. A mature framework would involve:
* Sectoral Red-Lining: Total exclusion from ‘Tier 1’ sectors: telecom, power, space, and defence.
* The ‘JV’ Requirement: Mandatory Indian majority ownership for any Chinese manufacturing in ‘Tier 2’ sectors like automotive or textiles, ensuring that the profit and control stay local.
* Counter-Encirclement: India must offer its own "Neighbourhood First" economic packages to Nepal, Sri Lanka, and the Maldives to prevent them from becoming Chinese military outposts via debt-trap diplomacy.
Conclusion: Growth without vulnerability
The debate over the "dragon in the marketplace" is ultimately linked to a question of national aims and strategy. Can India leverage global capital while preserving its strategic autonomy?
Historically, India has tried to build friendly relations with China and, in the past, had gone the extra mile towards that aim. Thus, economic engagement with China is not inherently an act of reversal of overall objectives. However, in an era where the PLA is fortifying the Himalayas, uncritical economic dependence is a form of unilateral disarmament. India’s objective must be ‘calibrated pragmatism’—engaging where it must, insulating where it can, and relentlessly building the domestic strength required to say ‘no’ when the stakes are highest.
National power is a function of GDP, but national survival is a function of resilience. For India, the challenge is to ensure that its intent to sustain its economic rise does not provide the very rope that its rival might use to constrain its future.
(The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK)
(The writer was Vice Chief of the Indian Army. He has authored the book ‘A National Security Strategy for India – the Way Forward’)
