'India has become excessively dependent on China': Top economist calls for 'carefully tailored policy' for trade with Beijing

India needs a carefully calibrated trade policy that recognises both economic opportunity and strategic vulnerability in its relationship with China, former Planning Commission Deputy Chairman Montek Singh Ahluwalia has said. "India has become excessively dependent on China for supplying active pharmaceutical ingredients," Ahluwalia warned, adding that the issue was not about rejecting imports altogether, but reducing strategic exposure through domestic capacity and diversified sourcing.

In an interview with The Indian Express, Ahluwalia outlined three core concerns in framing India's trade posture towards China — unfair trade practices, strategic dependencies, and cybersecurity risks from compromised equipment. "China is the second-largest economy in the world and under normal circumstances, we should view it as a potentially important trade partner. However, it is also true that we have serious security concerns about China,” he said.

His first concern focused on non-transparent subsidisation of Chinese exports that could hurt Indian industries. "This is best handled by an efficient and speedy system of imposing countervailing duties to counter unfair trade practices,” he noted.

The second issue, he said, was overdependence on China in areas where such reliance could be used as leverage. "We pride ourselves on being the pharmacy of the world because we have genuine strength in formulations and other products. However, we have become excessively dependent on China for supplying active pharmaceutical ingredients.” 

Ahluwalia advocated building domestic capacity and diversifying sourcing, including through production-linked incentives (PLIs) and partnerships in other countries. "This is not a case for rejecting Chinese imports as such but we should reduce dependence on them by developing our own sources domestically or if there are other supply sources available, we should diversify. There is a case for increasing domestic production, and introducing a PLI, if necessary. There is also a case for diversifying supply linkages to other sources."

A similar problem arises in the case of various rare earths and minerals, which are needed for our energy transition and where India does not have domestic reserves, the economist said. "China has already weaponised this monopoly. The solution in such cases clearly lies in building access to these items wherever they are available from other countries and perhaps encouraging our own industry to build production capacity elsewhere."

The third area of concern involves products that pose cyber threats due to embedded vulnerabilities, especially in critical systems. "The use of untrusted products in key systems...presents the possibility of a cyber attack which could impose serious damage," he said. In such cases, countries should “resort to some combination of relying on domestic supply or importing only from 'trusted sources'.”

Ahluwalia, however, cautioned against blanket bans or overreach. Citing solar cell imports as an example, he said: "Solar cells are a good example. Solar cells are not like chips in the sense that you cannot interfere with the functioning of a solar cell from the outside. China has built capacity more than double the world’s current demand for solar chips, as a result of which the price of solar chips has collapsed globally. Importing these chips will allow us to expand our solar generation capacity rapidly and reduce the cost of solar electricity."

"Should we benefit from this or insist on domestic production of chips at a higher cost? We need to evolve a carefully tailored policy that allows us to derive the benefits of trade with China, without making us vulnerable to pressure," he concluded.