Despite the unresolved territorial dispute and emerging challenges between the two Asian powers, Sino-Indian economic ties have witnessed significant expansion over the three decades since Indian Prime Minister Rajiv Gandhi’s historic visit to China in 1988. While the world’s two most populous countries registered a paltry $113 million in bilateral trade, and little investment in the early 1990s, two-way trade in recent years has reached $95 billion, making China India’s second largest trading partner after the United States, while India is China’s 12^th. Chinese investments in India have also grown over the past few years.

In comparison to those between India and Pakistan, where longstanding tensions over disputed territories have basically ruled out any meaningful economic exchanges, economic ties between China and India have experienced relatively steady growth, albeit at a rather slow pace. Until the last few years, and most prominently since the BJP government under Modi came into power in 2014, Beijing and New Delhi had more or less managed bilateral relations and kept potential conflicts under control.

The expansion of bilateral economic ties and shared interests have also seen China and India cooperate in various multilateral economic forums and institutions such as the BRICS New Development Bank, the Asian Infrastructure Investment Bank and, in principle at least, the BCIM Economic Corridor (Bangladesh-China-India-Myanmar). At the same time, a number of bilateral economic dialogues have also been set up to help strengthen trade, investment, education and technology cooperation.

While economic ties have been a bright spot in bilateral relations over the past three decades, Beijing and New Delhi have nonetheless faced serious challenges and problems that  impede further growth and suppress potentials. These are of both an economic and non-economic nature and even before the Galwan Valley clash, required both sides to manage and find ways to resolve them. One of these has been the perennial and ever-growing trade deficits incurred by India. In recent years, the deficits have reached the $50-60 billion range.

Despite efforts from both sides, these deficits have remained and continued to increase, partly due to the structure of bilateral trade where India largely exports commodities such as iron, ore and agricultural produce, whereas Chinese exports concern machinery, electronics, and consumer goods. Other impediments include barriers to market access, in particular where Indian IT, service, and pharmaceuticals are concerned, and restrictions on investments in sensitive, national security related sectors.

The deadly Galwan Valley clash in June 2020, along with the outbreak of SARS-COV-2, has significant implications for Sino-Indian relations, including their economic ties. Bilateral trade and investments had already experienced a decline in recent months as a result of China’s economic slowdown, and  New Delhi’s introduction  of new rules for  foreign investments coming from countries sharing borders with India (read: China) and into particularly sensitive sectors has also suppressed Chinese FDI lately. SARS-COV-2 has had major disruptive effects on supply chains as countries close borders in order to stem the spread of the pandemic.

Immediately after the mid-June clash with China, the Modi government introduced bans on 59 Chinese apps, which were later expanded to 118. These  include such popular and widely used apps as TikTok, UC Browser, Weibo, WeChat, among others. The ban was partly driven by the need to address mounting nationalist sentiment, after 20 Indian  soldiers  reportedly  lost their lives during the clash, with Indian citizens smashing Chinese-made products and demanding a boycott of Chinese goods. In addition, New Delhi was also concerned over the potential, albeit yet to be verified, threats to privacy and national sovereignty the Chinese apps could pose. Understandably, Beijing expressed concerns and reportedly  will take its complaints to the World Trade Organization.

What impacts, and the extent to which these punitive economic  measures against China  will have on bilateral relations  have yet to be determined. Clearly, the Modi government seized the opportunity to address a number of its concerns. Appeasing nationalist sentiments aside, concerns over privacy, sovereignty and national security explain why these bans were adopted. However, the medium- to longer-term implications for bilateral economic ties specifically and the overall relationship in general will need to be understood and assessed.

For New Delhi, the key questions to address would be how much dependence on China should concern it, what alternatives are available and can be explored, and at what short-term costs. While still small in scale and certainly so compared to its investments in its ambitious Belt and Road Initiative projects, Chinese investments  (about $4 billion) are critical financial resources for  many of India’s start-ups, including a large portion of its unicorn projects. Many of the parent companies of the banned Chinese apps, such as ByteDance, Tencent, Alibaba, also happen to be the ones that have invested or plan to invest in India given the country’s market potential. It is difficult, if not impossible, to find domestic and other foreign alternative sources of capital to support Indian start-ups.

Likewise, for China, the bans and increasingly other restrictions on Chinese investments would have negative impacts on specific Chinese companies looking for expansion, potential markets  and future earnings as India’s middle class continues to grow. However, compared to China’s outward foreign investments globally, its Indian share remains extremely small so the short-term loss would not have a significant impact. Similarly, with Sino-Indian bilateral trade of $92-95 billion in recent years only accounting for about 2% of China’s total foreign trade, any contraction there, as called for by Indian proponents of boycotting Chinese trade, would not have any noticeable impact  on China either.

The likely scenario in the coming months would be for New Delhi to maintain the current ban and to become more vigilant in scrutinizing Chinese investments, especially those aimed at acquisitions and in sensitive sectors. Meanwhile, the Modi government will likely look for alternative trading partners to diversify and lessen its dependence on China. Even discounting the security considerations, the emergency-induced measures have already caused major disruption in the supply chains where Indian manufacturing of finished goods such as generic drugs depends on supplies of Chinese active pharmaceutical ingredients (APIs).

Clearly, any escalation beyond the current ban on Chinese apps and better scrutinizing of foreign investments for national security considerations to include additional punitive measures by New Delhi would be ill-conceived, ineffective, and most likely counterproductive. Sino-Indian economic ties, despite some serious issues and problems, have by and large served to advance the interests of both countries over the past three decades. While Beijing and New Delhi will continue to manage their differences and disputes, and face emerging challenges, both also recognize that at the end of the day, bilateral trade and investment have rarely been root causes of their existing disputes and, through careful nurturing and better management, they can actually contribute to building a stable bilateral relationship over the long run.