In her first post Budget interview, Finance Minister Nirmala Sitharaman offered a candid assessment of India’s trade engagement with China, admitting that efforts to secure better market access for Indian goods are moving slowly. The remarks come at a time when India’s merchandise trade deficit with China has widened sharply, touching a record $116.12 billion in 2025.

The comments are significant because they place India’s ongoing manufacturing push and trade policy in a clearer context. While India has sought to expand exports and reduce dependency on imports, access barriers in the Chinese market continue to limit reciprocal trade flows. This imbalance, as highlighted by the minister, is one of the reasons the government continues to stress the importance of Atmanirbhar Bharat and Make in India.

Sitharaman acknowledged that India cannot immediately restrict imports of several raw materials and intermediate goods from China because domestic capacities are not yet adequate. “We are doing a fine balancing act,” she noted, explaining that while import dependence continues in certain areas, efforts are underway to accelerate domestic production capabilities for essential goods.

This position reflects the structural reality of India’s manufacturing ecosystem. Several sectors including electronics, pharmaceuticals, chemicals, and engineering goods rely heavily on Chinese inputs. Abrupt import restrictions would disrupt domestic production. Instead, the government appears to be pursuing a gradual strategy of building capacity at home while keeping supply chains functional in the interim.

The widening trade deficit has therefore become more than just a trade statistic. It has turned into a policy driver reinforcing the need for capacity creation in critical sectors. The emphasis is not only on finished goods manufacturing but also on intermediate products, raw materials, and components where China currently dominates global supply chains.

The finance minister’s remarks also touched upon potential discussions around changes to Press Note 3, a key part of India’s foreign direct investment policy introduced in April 2020. Press Note 3 mandates that any investment from countries sharing a land border with India must come through the government approval route. This provision was introduced to prevent opportunistic acquisitions of Indian companies during the pandemic period, and it significantly increased scrutiny over investments from China.

Sitharaman confirmed that discussions on possible modifications to this rule have taken place, although she did not indicate whether any decision is imminent. This signals that the government is weighing the trade-off between safeguarding domestic companies and attracting foreign capital into sectors where India needs rapid capacity expansion.

The dual reference to trade deficit pressures and potential flexibility in FDI rules suggests a nuanced policy approach. On one hand, India is trying to reduce strategic dependence on China through local manufacturing. On the other, it recognises that capital, technology, and investments may still be required from global players, including those currently subject to stricter scrutiny.

From a policy standpoint, this highlights a broader shift in India’s economic strategy. Trade, industrial policy, and investment rules are increasingly being viewed as interconnected levers rather than isolated frameworks. The objective appears to be to gradually reduce structural trade imbalances without triggering supply shocks or discouraging investment into priority sectors.

For businesses and markets, the message is that import substitution will be a gradual process rather than an abrupt shift. Sectors dependent on Chinese imports are unlikely to face immediate restrictions, but over time, incentives and policy support may favour domestic alternatives.

The comments reinforce the long-term structural theme of domestic capacity building across manufacturing sectors. Companies involved in import substitution, intermediate goods manufacturing, and local supply chain development may see policy support over time.

Industrials, electronics, chemicals, pharmaceuticals, and engineering goods sectors are central to this strategy as they form the core of India’s import dependence on China.