Bloomberg Economics: Modi and Xi Meeting Indicates Tactical Change Rather Than Strategic Shift

SadaNews - Indian Prime Minister Narendra Modi's visit to China for the Shanghai Cooperation Organization summit and planned talks with Chinese President Xi Jinping indicates a cautious thaw in their relationship, which has been strained by border clashes over the past five years.

Both sides recognize the importance of stability amid adverse economic winds and uncertainty regarding U.S. tariffs; however, in New Delhi's view, the reset is tactical and does not reflect a fundamental shift.

Modi seeks to achieve short-term economic gains while managing competition with China, even as his relationship with Washington is complicated by trade frictions and India's ties with Russia.

The thaw has been gradual since Modi and Xi agreed to disengage troops along the Himalayan border during the BRICS summit in October 2024. Nevertheless, the relationship remains constrained by a stubborn border dispute and deep-seated distrust.

India has little interest in a block led by China and supported by Russia. New Delhi prefers to contain its competition with Beijing while maintaining space for stable relations with the United States. This creates room for opportunistic cooperation; steps to ease tensions and extract economic benefits without changing the fundamentals of competition.

For India, improved border management and a return to pre-2020 positions are essential in light of its struggle with increasing instability in South Asia. New Delhi also wants to selectively leverage Chinese investment and industrial expertise to enhance domestic production.

Beijing is likely to see diplomatic and economic benefits in improving relations with New Delhi, especially if the economic cost is limited.

Inflated Trade Deficit

Since 2020, India has restricted Chinese foreign direct investment and tightened scrutiny on imports. However, the trade deficit with China has ballooned. This was driven by imports of intermediate goods and essential inputs for the production of electronics and pharmaceuticals, and the transition in the energy sector. Continued reliance on these supplies, along with Chinese expertise in electronics and battery technology, remains a key driver of engagement.

In recent months, Beijing has also slowed exports of rare earth metals, tunnel drilling machines, and urea while restricting the travel of Chinese "Foxconn" employees involved in Apple production in India. Although rare earth and fertilizer exports have rebounded since then, this episode has highlighted New Delhi's vulnerabilities.

Indian companies and government sectors have called for easing restrictions on Chinese firms, arguing that replacing targeted imports with Chinese investments could help build local expertise. The improved stability of the border has given Modi the political space to test this approach, while tensions in relations between the U.S. and India have added further incentives.

Economic potentials are a key factor for Beijing in seeking to reset relations with New Delhi. India's huge consumer base is a significant advantage for Chinese companies facing pressure to find new markets amid ongoing slowing domestic demand.

State-backed production in key technology sectors has led to a surplus of goods—especially those related to renewable energy—that could have customers in India. Renewed engagement also seems rooted in diplomatic opportunism, as Beijing hopes to leverage the increasing tensions in India-U.S. relations regarding trade to further disrupt consensus.

The close ties between New Delhi and Washington and the growth of the Quad, which brings the United States, India, Japan, and Australia together, pose risks to China's geostrategic position. Beijing is eager to seize any opportunity to undermine this effort.

Potential Announcements

Modi's visit is expected to lead to the resumption of direct flights and the easing of visa rules for Chinese executives, along with talks on reopening cross-border trade. However, further trade and investment opportunities are likely to unfold gradually.

Facilitated travel will immediately benefit companies like "Vivo," "Oppo," and "Xiaomi," which have a significant footprint in India. New Delhi has started to expedite visas for technical staff involved in its manufacturing incentive programs, indicating openness as local priorities support.

Regarding investment, India is not likely to backtrack on regulations that tightened scrutiny on Chinese investments but may ease them for non-strategic sectors. Approvals for joint projects with Indian companies in sectors such as batteries, clean technologies, and electronics are likely to accelerate. Beijing is also expected to pressure India to relax quality control rules that have stifled its Chinese imports. New Delhi views these measures as tools to boost local manufacturing and exports, particularly in low-cost goods like toys, where production has surged since the imposition of restrictions.

Deep Economic and Strategic Differences

India remains cautious about excessive reliance on Chinese inputs, fearing that close engagement could slow its efforts to localize vital supply chains. Increased reliance on China may provide Beijing with greater coercive leverage in the broader relationship, which New Delhi seeks to avoid. Meanwhile, Beijing imports very little from India, and it remains unclear whether renewed ties, along with possibly some limited purchase agreements, will help narrow the trade imbalance.

New Delhi wants Chinese expertise, investment, and ultimately access to Chinese markets, but this ambition could pose risks for Chinese manufacturers in the long term.

Apple's shift of iPhone production to India is likely to have raised concerns in Beijing regarding competition in the supply chain, although uncertainty regarding U.S. tariffs makes it more difficult for India to replicate such moves.

India and China have agreed to explore delineating their disputed borders, but the process is likely to be long and arduous, with no quick breakthroughs expected. India remains wary of building Chinese infrastructure at the border and skeptical of Beijing's intentions to withdraw front-line troops.

The close military partnership between Beijing and Pakistan also fuels Indian security concerns, as does the proposed expansion of the China-Pakistan Economic Corridor (which penetrates the disputed Kashmir region) into Afghanistan.

Other points of tension include China's construction of the world's largest dam near the Indian border, the large Tibetan diaspora in India, uncertainty regarding the Dalai Lama's succession, and New Delhi's increasing engagement with Taiwan.

All of this suggests that rivalry and distrust will continue to define the relationship even as limited cooperation is resumed.