Protect India’s Manufacturing Base First

MSME Briefing Bureau

India-China talks must put domestic factories and MSME suppliers first

India’s China problem is not confined to a widening trade deficit. It is about what happens inside Indian factories when imported kits displace investment in production. An assembler can enter a market faster and with less capital than a manufacturer building motors, tools, pumps or electronic controls. That may be rational for an individual business; repeated across an industry, it can hollow out suppliers, skills and productive capacity. India’s trade talks must recognise that distinction.

The trade deficit is the warning. Manufacturing is the real concern.

India’s merchandise trade with China reached ₹14.35 lakh crore (US$151.10 billion) in FY2025-26. Imports stood at ₹12.50 lakh crore (US$131.63 billion), against exports of ₹1.85 lakh crore (US$19.47 billion), leaving a record trade deficit of ₹10.66 lakh crore (US$112.16 billion).

The imbalance has widened considerably. India’s deficit increased from ₹4.18 lakh crore (US$44.02 billion) in FY2020-21 to ₹9.42 lakh crore (US$99.21 billion) in FY2024-25, before reaching its latest record.

The growth in exports during FY2025-26 is encouraging: shipments to China increased 36.62 per cent. But imports also grew 16.03 per cent. The underlying imbalance remains substantial.

The composition of imports is more revealing than the headline deficit.

India imports Chinese machinery, electrical equipment, electronics, integrated circuits, lithium-ion batteries, chemicals, industrial components and intermediate goods. These are inputs into Indian manufacturing, not merely finished consumer products.

A distinction must be made here. Importing a machine, specialised component or raw material that enables an Indian factory to manufacture competitively is economically different from importing a substantially finished kit that replaces investment in an Indian manufacturing operation.

The first can strengthen domestic production. The second, when it becomes a permanent substitute for manufacturing, can weaken it.

This is the distinction New Delhi must carry into its discussions with Beijing.

India-China trade talks: put manufacturing interests on the table

The September 2026 engagement between Commerce and Industry Minister Piyush Goyal and Chinese Commerce Minister Wang Wentao, held during the BRICS Summit in New Delhi, has opened an opportunity to address bilateral trade concerns.

On 15 September, Commerce Secretary Rajesh Agrawal described the discussions as an initial engagement covering structural trade imbalances and supply-chain issues, with further meetings expected.

These are appropriate subjects, but the negotiations must go deeper.

India should not approach China merely seeking a larger market for Indian exports or asking for easier access to Chinese industrial inputs. It must also assess how the present structure of trade affects domestic manufacturers.

The negotiating priority should be to preserve India’s manufacturing capacity while securing commercially viable access to global supply chains.

India must identify sectors where domestic manufacturing already exists, where MSMEs have invested in machinery and tooling, and where a sudden expansion of imported CKD/SKD products could undermine the economics of those investments.

There is a legitimate place for imported components. There is also a legitimate case for protecting domestic manufacturers from unfair competition, circumvention of trade rules and import practices that cause demonstrable injury.

These two objectives are not contradictory.

The changing economics: manufacturing versus assembly

A manufacturer investing in a factory has to commit capital to land, machinery, tooling, dies, moulds, testing equipment, skilled employees, product development and quality systems.

The investment is made before the first commercial order is secured. The entrepreneur carries the risk of capacity utilisation, working capital, technology obsolescence and market acceptance.

An importer-assembler follows a different economic model.

It procures a CKD or SKD consignment, installs an assembly line, undertakes selected operations, tests and packages the product, and sells it in the domestic market.

Such operations can create employment and genuine domestic value addition. They can also be a sensible first stage for a new manufacturer.

The concern arises when limited assembly becomes a permanent business model because it offers better commercial returns than investing in domestic production.

Consider two Indian businesses competing in the same market. One invests in motor winding, precision machining and gearbox manufacturing. The other imports the motor and gearbox from China and undertakes final assembly.

If the latter can consistently sell at a lower price without carrying comparable investment costs, the domestic component manufacturer faces a structural disadvantage.

Over time, investment decisions change. Entrepreneurs may choose trading and assembly over manufacturing. Component suppliers lose orders, capacity utilisation declines and specialised skills become harder to retain.

The damage is cumulative. Once a domestic supplier closes, rebuilding its tooling, workforce and customer relationships can take years.

India must not create a market in which the entrepreneur who invests in manufacturing is commercially penalised while the entrepreneur who imports and assembles is consistently rewarded.

The dependence is visible in the component trade

A September 2026 study by Koan Advisory Group and the Institute of Chinese Studies, examining electrical and electronic equipment under HS Chapter 85, provides an important indication of the concentration.

China supplied at least 80 per cent of India’s imports in 71 electronics product lines during FY2025-26. The number had increased from 44 product lines in FY2018-19.

Of these 71 tariff lines, 46 crossed the 80 per cent dependence threshold only after FY2018-19.

The same study estimates that electrical machinery accounted for ₹4.09 lakh crore (US$43.1 billion) of India’s total trade deficit with China in FY2025-26.

India’s imports of lithium-ion batteries from China reached ₹37,050 crore (US$3.9 billion), with China accounting for 83.6 per cent of the import value. China also supplied 48.9 per cent of India’s semiconductor imports.

These figures do not establish that every import is an assembly kit. They demonstrate something more fundamental: India’s dependence is concentrated in the upstream components that feed its own manufacturing operations.

The Confederation of Indian Industry (CII), in its 2024 report on electronics components and sub-assemblies, identified the need to move from “import-dependent assembly-led manufacturing” towards “component-level value-added manufacturing”.

CII estimated that demand for electronics components and sub-assemblies stood at ₹4.32 lakh crore (US$45.5 billion) in 2023, supporting electronics production worth ₹9.69 lakh crore (US$102 billion).

By 2030, component demand could reach ₹22.80 lakh crore (US$240 billion) to support electronics production of ₹47.50 lakh crore (US$500 billion). Priority components, including printed circuit board assemblies, are projected to reach ₹13.21 lakh crore (US$139 billion).

This is the scale of the opportunity India must not surrender.

Power tools: a ₹19,000 crore manufacturing market at stake

India’s power-tool industry illustrates the commercial consequences of the assembly model.

The domestic power-tools market is estimated at ₹16,000–19,000 crore (approximately US$1.68–2.00 billion) for 2025-26. Industry estimates used for this analysis place the imported SKD/CKD share, predominantly sourced from China, at approximately 60–65 per cent by value.

That implies an import-exposed market of approximately ₹9,600–12,350 crore (US$1.01–1.30 billion).

These are indicative industry estimates, not a customs-derived measure of Chinese kit imports. Nevertheless, the scale of the potential exposure deserves attention.

Power tools require motors, armatures, stators, rotors, batteries, switches, gearboxes, bearings, electronic controllers and precision-machined components.

These are precisely the areas where Indian engineering MSMEs can develop manufacturing capabilities.

NITI Aayog’s April 2025 report, Unlocking $25+ Billion Exports: India’s Hand & Power Tools Sector, provides a useful assessment of India’s competitive position.

The global power-tools market, including accessories, was estimated at approximately ₹5.99 lakh crore (US$63 billion). China accounted for around 40 per cent of global power-tool exports.

India’s power-tool exports were recorded at approximately ₹4,038 crore (US$425 million) in the NITI report, representing just 0.7 per cent of global trade.

The report identifies a 15–17 per cent overall cost disadvantage for Indian power-tool manufacturers compared with China, including the additional disadvantage arising from smaller operating scale.

Its component-level cost comparison is particularly revealing:

Tool components: approximately 15 per cent costlier in India.
Motors: approximately 10–15 per cent costlier.
Electronics: approximately 5 per cent costlier.
Plastic components: approximately 12 per cent costlier, partly because of import duties.

The report also records the difference in selected raw-material prices. Steel ingots used in the hand-tool industry were estimated at ₹55,000 per metric tonne in India against ₹46,000 per metric tonne in China. Nylon-6 was approximately ₹1,54,000 per metric tonne in India against ₹1,46,000 per metric tonne in China. PVC resin was estimated at ₹82,000 per metric tonne in India against ₹69,000 per metric tonne in China.

The cost disadvantage is therefore not simply the result of Chinese manufacturers selling cheaply. Indian manufacturers face higher input costs, financing costs, infrastructure constraints and insufficient scale.

NITI Aayog’s report also points out that Indian manufacturers producing ratchet spanners import the ratchet mechanism from China. That imported component accounts for 20–30 per cent of the finished spanner’s value.

This is an unusually clear example of the problem. India manufactures the spanner but depends on another country for a component that carries a substantial part of its value.

The report’s proposed export opportunity is equally significant: India could target a combined hand and power-tool export opportunity of ₹2.38 lakh crore (US$25 billion) by 2035, potentially generating approximately 35 lakh direct and indirect jobs.

Protecting this industry is not an exercise in defending an inefficient business model. It is about creating the conditions for Indian manufacturers to compete in a global market.

Water purifiers: protect the component ecosystem

The water-purifier market provides a second example.

The 2025-26 domestic market estimate used for this analysis is ₹21,000–23,000 crore (US$2.21–2.42 billion). The estimated imported component share is 45–50 per cent, predominantly through Chinese supply chains.

On that basis, the import-exposed component opportunity is approximately ₹9,450–11,500 crore (US$0.99–1.21 billion).

The opportunity for Indian suppliers extends well beyond plastic housings and final assembly.

Reverse-osmosis systems require membranes, booster pumps, power supplies, electronic controllers, filters, filtration assemblies and precision-moulded parts.

World Bank WITS data, based on UN Comtrade, offers a useful indication of the imported parts market.

In 2024, India imported approximately ₹5,038 crore (US$530.37 million) worth of parts under HS 842199, covering parts for filtering or purifying machinery. China supplied approximately ₹1,260 crore (US$132.67 million).

The corresponding physical imports were approximately 15,671 metric tonnes, including 3,920 metric tonnes from China.

Under HS 842121, covering filtering or purifying machinery and apparatus, India’s imports were approximately ₹1,797 crore (US$189.11 million), of which China supplied ₹329 crore (US$34.62 million).

These tariff classifications cover broader filtration and purification equipment, not exclusively household RO systems. They should not be confused with a complete import bill for individual RO components.

Nevertheless, they establish that a substantial domestic supplier opportunity exists.

Indian manufacturers can develop membranes, pumps, controllers, filters and electronic systems. But such investments require reliable demand and protection against unfairly priced imports.

The objective should be to develop competitive Indian suppliers, not to make water purifiers more expensive for consumers through indiscriminate import restrictions.

Kitchen appliances: the localisation question

The third segment is modular kitchen appliances, particularly hobs and chimneys.

The 2025-26 industry estimate used for this analysis places the domestic market at ₹15,000–17,500 crore (US$1.58–1.84 billion). Imported components and OEM supply are estimated to account for 55–60 per cent.

That represents an estimated import-exposed value of ₹8,250–10,500 crore (US$0.87–1.11 billion).

The manufacturing ecosystem includes sheet-metal fabrication, glass processing, blowers, motors, electronic controls, filters, switches and plastic components.

Indian manufacturers have already demonstrated that domestic production processes can be developed in this category. Sheet-metal processing, CNC cutting, bending, glass processing and tooling are not beyond the capabilities of Indian enterprises.

But the presence of an Indian factory does not establish that its critical components are manufactured domestically.

The policy objective should be to encourage Indian suppliers to move up the value chain, rather than allowing the market to become permanently dependent on imported assemblies.

What the US-China trade negotiations teach India

India should study how Washington and Beijing have managed their trade relationship, particularly the 2026 US-China Board of Trade framework.

Following the May 2026 Trump-Xi engagement and subsequent September discussions, the two countries developed a reciprocal framework covering approximately ₹2.85 lakh crore (US$30 billion) of goods on each side, with the possibility of more favourable tariff treatment.

The Chinese product list included small appliances, toys, seasonal decorations and children’s car seats. These are consumer categories associated with large production runs, extensive supplier networks, factory employment and inventory cycles.

The agreement is reciprocal; it is not a blanket Chinese exemption from US trade measures. But it illustrates an important negotiating principle: trade concessions are negotiated around identifiable commercial interests, not simply around headline tariff percentages.

China has also used its position in critical minerals and industrial supply chains as an important negotiating consideration.

The US-China engagement demonstrates the value of managed trade: identifying which goods can receive tariff relief, which supply chains require stability and which strategic sectors remain subject to tighter controls.

India should approach its own discussions with Beijing with similar commercial discipline.

It must identify the Indian industries where domestic capacity, employment and supplier networks are worth preserving. It must distinguish imports that support manufacturing from those that displace it.

The absence of Chinese-scale factories in India is not a reason to abandon Indian manufacturers. It is a reason to build a realistic pathway towards scale.

What India must protect — and what it should not

India does not need blanket protectionism. Nor should every domestic manufacturer expect the government to shield it from competition.

What deserves protection:

Existing domestic manufacturing capacity where viable Indian producers face unfair import competition.
MSME component suppliers that have invested in machinery, tooling and skilled manpower.
Labour-intensive production clusters that support large networks of subcontractors and ancillary businesses.
Strategic components where excessive dependence on a single country creates supply-chain vulnerabilities.
Domestic engineering knowledge, tooling capability, product development and manufacturing skills.

What should remain open to imports:

Raw materials and specialised inputs that Indian industry cannot supply competitively.
Advanced machinery and technology that improve domestic productivity.
Components for which there is no viable domestic alternative.
Imported products that provide genuine price, quality or technological advantages without causing demonstrable injury through unfair trade practices.

The distinction is important. Protecting an uncompetitive manufacturer indefinitely can damage consumers and downstream industries. But allowing an established domestic manufacturing ecosystem to disappear because imported kits enjoy a persistent structural cost advantage can damage the country’s long-term productive capacity.

The national interest lies in building competitive manufacturing, not preserving inefficient production or subsidising superficial assembly.

A practical negotiating and industrial strategy

India needs a coordinated approach combining trade negotiations, domestic industrial policy and commercially realistic support for MSMEs.

1. Put vulnerable manufacturing sectors on the negotiating agenda.

India should prepare a sector-by-sector assessment of products where domestic manufacturers have established capacity but face growing dependence on imported CKD/SKD kits.

Power tools, water purifiers, kitchen appliances and selected electrical and engineering products should be examined first.

This should include the imported value of components, the number of domestic suppliers, existing manufacturing capacity, employment and the extent of import concentration.

2. Establish a manufacturing-depth test.

The government should distinguish between final assembly and the manufacture of critical components when awarding incentives, procurement preferences and industrial support.

An audited bill of materials should identify the origin and value of motors, controllers, gearboxes, pumps, circuit boards and other critical parts.

Local value addition should not be measured simply by the amount of labour, packaging or outer-casing assembly undertaken in India.

3. Correct the cost disadvantages of domestic manufacturing.

NITI Aayog’s tools-sector report has already identified the need to address raw-material costs, import duties, financing, power, logistics, land and machinery access.

It recommends developing three to four world-class hand-tool clusters covering approximately 4,000 acres, supported by common infrastructure, testing facilities and research capabilities.

The report proposes approximately ₹12,000 crore (US$1.26 billion) for cluster development, with additional private-sector investment.

It also estimates that, if structural reforms are delayed, conditional bridge support of ₹5,800 crore (US$611 million) over five years could be required.

These are recommendations in the NITI report, not approved government allocations. The important point is that support should address identifiable cost disadvantages rather than become a permanent subsidy for inefficient production.

4. Make shared infrastructure accessible to MSMEs.

Small manufacturers cannot individually finance advanced tool rooms, precision machining facilities, injection-moulding infrastructure, motor-winding equipment and testing laboratories.

Common facility centres in Rajkot, Ludhiana, Ahmedabad, Pune and Coimbatore can reduce investment barriers and help smaller suppliers enter component manufacturing.

Such facilities must be commercially accessible, professionally managed and linked to actual orders from anchor manufacturers.

5. Use trade remedies where evidence supports them.

India should strengthen customs valuation checks, rules-of-origin enforcement and anti-circumvention measures.

Where investigations establish dumping or subsidised imports causing material injury, India should use appropriate trade remedies under its domestic law and international obligations.

But low prices alone should not be treated as proof of dumping. The objective is fair competition, not the exclusion of every Chinese product.

6. Make technology and investment partnerships conditional on industrial outcomes.

Where investment from Chinese manufacturers is legally permitted, India should encourage genuine manufacturing partnerships rather than assembly operations that simply relocate the final fitting process.

Investment proposals should be evaluated on technology development, domestic supplier participation, skilled employment, local sourcing and export potential, subject to India’s investment-security rules.

The objective should be to embed manufacturing capabilities in India, not merely import another country’s production system.

7. Negotiate reciprocal market access.

India should seek better access for its engineering products, pharmaceuticals, chemicals and manufactured goods in China.

It should also pursue transparent customs procedures, predictable regulatory approvals, standards recognition and reliable supplies of essential industrial inputs.

Trade talks must produce measurable commercial outcomes for Indian manufacturers, not just diplomatic announcements.

The final test of Make in India

The Confederation of Indian Industry has identified the transition from import-dependent assembly to component-level manufacturing as a central requirement for the electronics industry.

NITI Aayog’s tools-sector report makes an equally important observation:

“The industry is not just about economic output; it’s about jobs, innovation, and global competitiveness.”

A hand-tools manufacturer in Punjab, quoted in the NITI report, also described the difficulty of meeting export obligations under the EPCG scheme:

“Average Export Obligation is risky and difficult to obtain. Requirements are difficult to meet at times with market fluctuations.”

These are not abstract policy concerns. They are the realities of entrepreneurs who invest in manufacturing and then compete in markets shaped by input costs, financing, regulations and international supply chains.

The Chamber of Industrial and Commercial Undertakings (CICU), Ludhiana, has similarly urged the government to strengthen tooling infrastructure, pointing to approximately ₹2,000 crore (US$210.5 million) of annual imports in automotive and lighting-reflector categories despite domestic demand and manufacturing potential.

The message is consistent: India’s manufacturing ecosystem needs investment in capabilities, not merely more assembly capacity.

India-China trade negotiations should therefore be guided by a clear principle.

A country must not sacrifice its domestic manufacturing ecosystem in pursuit of cheaper imports or a larger volume of assembled products.

Imports that improve productivity, provide essential inputs and make Indian exports competitive are economically useful. Imports that systematically displace viable domestic manufacturing, undermine investment and create excessive dependence deserve a different policy response.

India does not need to replicate China’s mega-factories in every sector. It does need to protect and develop its own network of manufacturers, component suppliers, skilled workers and engineering MSMEs.

The choice is not between China and India as trading partners. It is between a trade relationship that strengthens Indian productive capacity and one that gradually makes domestic industry dependent on imported manufacturing.

Make in India must mean making products, making components and building manufacturing capabilities — not merely assembling what somebody else has manufactured.