India and China: Economics After Galwan

How India responded economically to the 2020 border clash with China - app bans and investment restrictions - and why trade between the two kept growing anyway.

In June 2020, Indian and Chinese troops clashed in the Galwan Valley in Ladakh, the deadliest border clash between the two countries in decades. India responded not only militarily but also economically.

Economic measures

Investment screening: in April 2020, even before Galwan, India required government approval for foreign investment from countries sharing a land border with India, a rule aimed mainly at China. This rule is known as Press Note 3.
App bans: from June 2020, India banned TikTok and dozens of other Chinese apps, citing security and data concerns, eventually covering hundreds of apps.
Procurement limits: restrictions on Chinese companies in some government contracts.
Telecom: Chinese equipment makers were effectively excluded from India’s 5G rollout.

Trade kept growing

Despite tensions, trade between India and China grew, reaching record levels. India’s imports from China, especially electronics, machinery, chemicals and pharmaceutical ingredients, far exceed its exports, creating a very large trade deficit.

Why? Indian manufacturers, including those making smartphones and medicines, depend on Chinese components and inputs that are hard to replace quickly.

The dilemma

Security: reducing dependence on a strategic rival.
Economics: Chinese inputs and investment are cheap and help Indian manufacturing grow.

Some Indian industry groups argued that investment restrictions slowed partnerships needed for electronics and solar manufacturing. The government considered easing approvals for some Chinese investment in manufacturing joint ventures.

Economic security

India’s approach reflects a global trend toward economic security: screening investments, protecting data and diversifying supply chains away from rivals, while trying not to harm growth.

The phone factory

An Indian phone assembly plant imports most of its components from China. After the border clash, the government encourages local sourcing, but alternatives are limited. The factory keeps importing Chinese parts while slowly developing Indian suppliers.

Thinking tensions stopped India-China trade

Despite political tensions and restrictions, trade grew, driven by India's reliance on Chinese inputs.

Key takeaways

The 2020 Galwan clash prompted Indian economic measures against China.
Press Note 3 required approval for investment from land-border countries.
India banned TikTok and hundreds of Chinese apps.
Trade still grew, with a large deficit due to reliance on Chinese inputs.