India’s trade landscape is undergoing a dramatic transformation as the country grapples with shifting global alliances, steep new tariffs from the United States, and a persistent trade imbalance with China. Recent months have seen Indian policymakers and exporters scrambling to diversify their markets, while experts urge a bolder approach to seizing overlooked opportunities—especially in China’s $161 billion import market.
It all came to a head in August 2025, when the Trump administration in Washington imposed a punishing 50% tariff on Indian goods, rolled out in two phases: an initial 25% from August 7, then doubled to 50% on August 25. According to Economic Times, this move sent shockwaves through Indian export sectors long reliant on American demand. By September, shipments to the US—India’s largest export destination, accounting for nearly a fifth of its merchandise exports—had dropped by a sharp 11.93% year-on-year, down to $5.46 billion. Cotton garment exports to the US fell 25%, marine products dropped 26.9%, and handmade carpets contracted by over 26%.
But adversity, as it often does, sparked innovation. As American doors seemed to close, Indian exporters turned their gaze elsewhere. Cotton garments found new homes in the UAE, France, and Japan, with exports to these countries rising even as US shipments slumped. Marine products, battered in the US, surged by more than 60% in China, Vietnam, and Thailand. Basmati rice exports to Iran skyrocketed six-fold to $41.07 million. Even handmade carpets, so dependent on US buyers, found new traction in Canada and Sweden. Across the board, Indian goods began to flow into alternative markets, a trend officials described as a healthy and necessary shift.
“Export diversification is visible and is supported by India’s free trade agreements, thrust on production-linked incentive schemes and the integration with global supply chains,” an official told Economic Times. Ajay Sahai, director general of the Federation of Indian Export Organisations, echoed this optimism: “Export diversification has started to happen and this is healthy for the growth of India’s exports.”
Yet, diversification is easier said than done. Despite these early wins, some sectors remain stubbornly tied to the US market. Around 60% of India’s carpet exports, 50% of made-ups, 30% of gems and jewellery, and 40% of apparel exports still depend on American buyers. The government is pushing to expand market share in textiles and apparel by targeting 40 major importing countries across North America, Europe, Asia, Africa, Latin America, and Oceania. These markets, collectively, represent nearly three-fourths of global demand for textiles and apparel, and India hopes to lift its current 5–6% share through targeted outreach and product innovation.
But while India’s pivot away from the US is grabbing headlines, a quieter, more complicated story is unfolding in its relationship with China. Despite border tensions and policy tightening, India’s imports from China have only increased, not decreased, since the Galwan border incident. According to economist Dr. Nisha Taneja, speaking on The Core podcast, India now imports $114 billion worth of goods from China—an 88% increase over the last decade—while exports to China remain stuck at $14 billion, up just 19% in the same period. The result? A yawning trade deficit and a growing sense of vulnerability.
“In 562 items, we import 80% or more from China alone,” Dr. Taneja explained. These are not trivial goods, but critical capital and intermediate products essential for Indian manufacturing—think penicillin (where dependence is 91%), data processing machines, and other top import items. The reason for this over-reliance, she argues, is not just price, but also the massive export credit insurance offered by China’s SinoShare, which insured $700 billion worth of merchandise in 2022. That dwarfs the $2.6 billion in export credit insurance offered by the US, making Chinese exporters far more competitive, especially for small and medium-sized importers worldwide.
India has tried to respond, offering rupees 20,000 crore under its export promotion mission, but the effectiveness of this initiative remains uncertain. Meanwhile, regulatory hurdles like Press Note 3—which requires investments from neighboring countries, including China, to go through government approval rather than the automatic route—have led to a steep drop in Chinese foreign direct investment (FDI) in India. Since 2020, less than $68 million in FDI has flowed from China, a fraction of the already low $1 billion over the past decade. Yet, 68% of what does come is in manufacturing—precisely the area where India needs to build competitiveness.
Dr. Taneja suggests that allowing more FDI in labor-intensive sectors like textiles and leather could help India reduce its dependence on Chinese imports and become more competitive globally. “The reason why we’re interested in attracting FDI is because it’s far more embedded in the real economy. It hooks us into global value chains,” she said. But she also cautioned that security concerns require careful guardrails, as many countries now do for strategic sectors like telecommunications and infrastructure.
Perhaps the most striking insight from Dr. Taneja’s research is the untapped potential for Indian exports to China. Despite being the world’s second-largest importer, China accounts for just 0.7% of India’s exports. “No matter how much we diversify, unless we tap into the Chinese market, we can never expand our exports,” she noted. Her study estimates a $161 billion opportunity in sectors where India is globally competitive—pharmaceuticals, machinery, shrimp, gems, and even tourism. For instance, while the US is India’s largest market for shrimp exports, China is also a huge importer, yet Indian shipments there are minimal, often rejected due to pesticide residues or regulatory hurdles. Addressing these issues, perhaps through better business-to-business dialogue and government support, could open vast new markets.
Other areas, like tourism and luxury goods, are similarly ripe for growth. China is the largest origin of tourist travelers in the world, but few visit India. Liberalizing visas and promoting Indian destinations could help correct the trade imbalance. Likewise, Indian gems, jewellery, and textiles—especially those with unique ethnic prints—could find a receptive audience in China’s booming luxury market, if only exporters better understood local tastes and standards.
All this, Dr. Taneja argues, requires a clearer institutional framework to separate politics from trade, encourage investment in manufacturing, and deepen business-to-business dialogue. “Diversification is the key. No country can survive today without diversification,” she said, emphasizing that both imports and exports must be spread across multiple partners to reduce vulnerability to geopolitical shocks.
India’s demographic dividend—its large, young workforce—remains its greatest asset, but leveraging it will require bold policy moves, a willingness to adapt, and a relentless focus on building global competitiveness. As the world’s trading order grows more fragmented and unpredictable, India’s ability to pivot, diversify, and seize new opportunities will determine whether it merely survives or truly thrives on the global stage.
