New Delhi: There is a number buried inside India’s FY26 trade data that deserves more attention than it has received. India’s trade deficit with China — the gap between what India buys from its northern neighbour and what it sells back — hit USD 112.16 billion in the financial year ending March 2026. That is an all-time record. It is larger than India’s entire annual defence budget. It is roughly the size of the entire economy of Morocco. And it did not happen by accident.
To understand why India’s China deficit keeps growing, you have to go back further than last year’s trade data. You have to go back 35 years — to 1990, when India and China were, by most measures, economic equals.
When both countries started from the same place
In 1990, India’s GDP per capita was approximately USD 370. China’s was USD 350. India was actually marginally wealthier on a per-person basis. Both countries were poor, agrarian, and largely closed to the world. Both were home to over a billion people. Both had everything in front of them.
Then they made different choices.
China, beginning in the late 1970s under Deng Xiaoping and accelerating through the 1980s and 1990s, threw its weight behind manufacturing. The state directed capital toward factories, infrastructure, and export capacity. It built ports, roads, and industrial zones at a scale and speed the modern world had not seen. It brought hundreds of millions of people from fields into factories, raised their productivity, and made Chinese goods the default input for the entire global economy.
India chose a different path. It opened its economy in 1991 following a balance-of-payments crisis, but the liberalisation was incomplete. Manufacturing never became the centrepiece of India’s growth story the way it did for China. Instead, India grew through services — IT, software, outsourcing, finance. These sectors created wealth for millions but did not absorb the vast low-skilled rural workforce the way factory floors would have. India’s manufacturing sector today contributes roughly 17 percent of GDP. China’s contributes around 28 percent. The gap between those two numbers represents roughly 28 years of divergence.
The numbers that show the distance
By 2025, the consequences of those choices had compounded into a chasm that is difficult to look at directly.
China’s GDP per capita is USD 13,806. India’s is USD 2,818. China is 4.83 times richer per person. To find a year when China had roughly the same per-capita income as India does today, you have to go back to around 2005. India is, on this measure, approximately 20 years behind.
On total GDP, China’s economy is USD 19.4 trillion. India’s is USD 4.1 trillion. China crossed the USD 4 trillion mark — India’s current size — around 2007. On urbanisation, India’s rate is 36 percent. China’s is 66 percent. China was at 36 percent urbanisation in the early 1990s. On FDI, China attracts roughly USD 180 billion annually. India attracts around USD 40 billion — where China was in the early 2000s. On foreign trade scale, China’s total trade is around USD 6.5 trillion per year. India’s is around USD 1.5 trillion — where China was in 2004.
Add all of these together and the average estimate holds: across the most important indicators of industrial economic development, India is roughly 20 to 30 years behind China, with the median sitting around 25 years. That gap did not stay on paper. It showed up in the trade data.
The FY26 trade figures and what they reveal
In FY26, China overtook the United States to become India’s largest trading partner for the first time in five years. Total bilateral trade reached USD 151.1 billion. India exported USD 19.47 billion worth of goods to China. India imported USD 131.63 billion from China.
The trade deficit — USD 112.16 billion — is the largest India has ever recorded with any single country, up from USD 99.2 billion in FY25. That deficit has now crossed USD 100 billion for the first time, a milestone no one in Indian policymaking circles found comfortable.
What does India buy from China? Electronics, solar panels, industrial machinery, chemicals, active pharmaceutical ingredients, telecommunications equipment, and the components that go into products Indian factories then assemble and export. In other words, India buys from China the outputs of the manufacturing base it never fully built. Chinese factories produce the inputs that Indian factories depend on. The 25-year industrial gap between the two countries does not just show up in GDP tables. It shows up every month on India’s import invoices.
What does India sell to China? Pharmaceuticals, chemicals, iron ore, cotton, and some engineering goods. India’s exports to China did rise sharply in FY26 — up 36.66 percent to $19.47 billion — and that is a genuinely positive sign. But for every dollar India earns by selling to China, it spends nearly seven dollars buying back. That ratio tells you everything about where each country sits in the global production hierarchy.
The US comparison makes it sharper
With the United States, the picture is the reverse. India exported USD 87.3 billion to America in FY26 and imported $52.9 billion. India runs a surplus with the US — it earns more than it spends. That surplus did shrink, from USD 40.89 billion in FY25 to USD 34.41 billion in FY26, partly because President Trump’s tariffs slowed India’s export growth to near-zero — up just 0.92 percent — while US imports into India climbed nearly 16 percent. Trade talks between India and the US were scheduled for Washington starting April 20 to try to recalibrate the relationship after the tariff disruptions.
But the structural contrast between the two relationships is clear. India sells finished goods — software services, pharmaceuticals, textiles, engineering products — to America and earns a surplus. India buys industrial inputs from China and runs a record deficit. The country India trades with on roughly equal terms is a democracy on the other side of the world. The country India owes USD 112 billion to every year shares a contested, militarised border with it.
The harder question
India is not standing still. GDP growth is running at 6.6 percent in FY26, faster than China’s 4.8 percent — the first sustained period of India outgrowing China since the 1960s. Brookings Institution researchers estimate that if India maintains this faster per-capita growth rate, the income gap with China could narrow significantly by the early 2040s. Production-linked incentive schemes are trying to pull manufacturing investment into India. The Semiconductor Mission is attempting to build chip capacity from scratch. Solar panel and battery manufacturing is expanding.
But the trade deficit tells a more immediate story. The factories that would make India a manufacturing peer of China have not yet been built. The industrial ecosystem — the supply chains, the skills, the infrastructure — takes decades to construct. China built it between 1980 and 2010. India is trying to build it now, in a more competitive world, with less state capacity and more democratic complexity.
Until those factories exist, India will keep buying what China produces. The USD 112 billion deficit is not just a trade statistic. It is a measure of the distance still to travel — and a reminder of what happens when two countries start from the same place and choose different roads.
