India’s evolving trade relationship with China, the United States, the European Union and Russia offers a revealing window into the deeper structure of the South Asian economy. The Gulf region, meanwhile, has increasingly posed challenges for the energy security of South Asia.

At first glance, the numbers from FY 2025–26 appear straightforward: India runs a massive trade deficit with China, enjoys a surplus with the United States, maintains a more balanced and diversified relationship with Europe, and records a trade deficit with Russia. Yet beneath these figures lies a much larger story about industrialisation, global supply chains, regional asymmetries and the changing geography of world production.

The pattern is not accidental. It reflects both the industrial policies of India’s major trading partners and the trajectory of India’s own economic development since liberalisation in 1991. More broadly, it mirrors the structural position of South Asia in the global economy: dependent on imported industrial inputs while exporting services, garments, labour-intensive goods and selective manufactured products to advanced Western markets.

India today is far more diversified than many commodity-exporting and smaller developing economies. However, energy imports remain critical, while dependence on advanced technology from the West continues.

The China Factor

At the centre of this picture stands China.

Despite years of geopolitical tension, border disputes and strategic mistrust, China has once again emerged as one of India’s largest trading partners. Bilateral trade has crossed levels unimaginable two decades ago. But the relationship remains deeply asymmetrical. India imports far more from China than it exports, producing one of its largest bilateral trade deficits.

The composition of trade explains why. India imports electronics, telecom equipment, industrial machinery, chemicals, active pharmaceutical ingredients, solar components and numerous intermediate goods essential for manufacturing. These are not merely finished consumer products; they are the building blocks of industrial production itself. Indian factories, pharmaceutical firms, renewable-energy developers and electronics assemblers often depend on Chinese supply chains for competitiveness.

This dependence reveals something fundamental about India’s industrial structure. While India has developed strengths in software services, pharmaceuticals, finance, business outsourcing and selective engineering industries, it still lacks the manufacturing depth and supply-chain integration achieved by East Asian economies. Capital goods production remains limited, electronics ecosystems are incomplete, and industrial clusters are less integrated than those found in China, South Korea or Taiwan.

China’s dominance, meanwhile, is the result of decades of deliberate industrial policy. Beijing pursued export-led industrialisation through massive infrastructure investments, manufacturing incentives, state-supported finance, industrial clustering and integration into global value chains. Over time, China became not only the “factory of the world” but also the central node in Asian manufacturing networks. Even countries seeking to reduce dependence on China frequently remain tied to Chinese intermediate goods, machinery and components.

Where the US Comes In

India’s trade relationship with the United States presents a striking contrast.

Unlike the China relationship, India enjoys a substantial surplus with America. Indian exports to the US are concentrated in information technology services, pharmaceuticals, engineering products, consulting, business-process outsourcing, and gems and jewellery. These sectors reflect India’s comparative advantages: a large English-speaking workforce, technical education capabilities, competitive labour costs and a globally integrated services sector.

The US economy itself helps shape this pattern. America is heavily consumption-driven, innovation-intensive and increasingly services-oriented. Many labour-intensive manufacturing segments migrated overseas decades ago. As a result, the US imports goods and services that India can competitively provide while exporting advanced technology, aircraft, energy products and sophisticated equipment.

The India-US economic relationship is therefore not simply commercial; it is also strategic. Washington increasingly sees India as part of a broader diversification strategy intended to reduce excessive dependence on China in global supply chains. This does not mean the US expects India to replace China entirely. Rather, India is viewed as one of several alternative production centres within a more distributed global manufacturing system.

India-EU Economic Engagement

Europe occupies an intermediate position between these two poles.

India’s trade with the European Union is comparatively balanced and diversified. Engineering goods, automobiles and auto components, chemicals, textiles, machinery and IT services all feature prominently. European markets are highly regulated and standards-driven, pushing Indian exporters toward higher-quality production. At the same time, Europe’s own industrial structure — focused on advanced manufacturing, green technology and precision engineering — creates complementarities with India’s emerging industrial ambitions.

The EU’s efforts to reduce strategic dependence on China, especially after the pandemic and geopolitical disruptions, have added new momentum to India-Europe economic engagement. Trade negotiations and investment discussions increasingly reflect a shared interest in supply-chain diversification, renewable energy cooperation and technological partnerships.

Taken together, these three relationships reveal the hybrid nature of India’s economy. India is neither a classic export-manufacturing powerhouse like China nor a post-industrial economy like the United States. Instead, it occupies a transitional position: globally competitive in services, increasingly capable in selected manufacturing sectors, but still reliant on imported industrial ecosystems.

Russia: The Emerging Strategic Commodity Partner

An important new dimension in South Asia’s trade future is the growing role of Russia after the Ukraine conflict reshaped global energy markets.

Before 2022, Russian influence on South Asian trade outside defence was relatively limited. By 2025–26, however, Russia had become a critical energy supplier to India.

Discounted Russian crude transformed India’s energy economics through:

• lower import costs,
• reduced inflationary pressure,
• higher refinery margins, and
• increased export competitiveness for refined petroleum products.

India’s refineries emerged as important processors of Russian crude for both domestic use and export markets.

This influence extends indirectly across South Asia because countries such as Nepal, Bhutan, Bangladesh and Sri Lanka are linked to Indian fuel and logistics networks.

Russia’s role is also significant in fertilizer exports, nuclear energy cooperation, defence technology, alternative payment systems and Eurasian connectivity initiatives.

Projects linked to the International North-South Transport Corridor may gradually connect India more closely with Central Asia, Iran, Russia and parts of Europe.

This reflects a broader geopolitical trend: South Asia is seeking diversification rather than alignment with any single economic bloc.

Russia is unlikely to rival China or the US economically, but it may become an important stabilising partner in energy, commodities and strategic industrial sectors.

The Iran Conflict and the Strait of Hormuz

The Iran conflict could significantly reshape global and South Asian trade structures because it affects one of the world’s most important energy and shipping chokepoints.

Nearly one-fifth of global oil trade and a major share of LNG shipments move through the Strait of Hormuz. Even partial disruption can alter shipping routes, energy prices, insurance costs and supply chains.

Shift from Efficiency to Security

Before major geopolitical disruptions, global trade was organised mainly around:

• lowest cost,
• fastest delivery, and
• just-in-time supply chains.

The Iran conflict accelerates a transition toward:

• energy security,
• strategic stockpiling,
• diversified suppliers,
• safer shipping routes, and
• political reliability.

Trade patterns are increasingly becoming geopolitically driven rather than purely market-driven.

Energy Returns to the Centre

The biggest impact is on energy trade.

The Strait of Hormuz carries Gulf crude oil, LNG exports from Qatar, petrochemicals and fertilizer feedstocks. Any disruption raises oil prices, freight charges, marine insurance costs and inflation globally.

Countries highly dependent on imported energy — including India and much of South Asia — become vulnerable to imported inflation and currency pressures.

Regional Trade Integration Remains Weak

One of the most striking features of South Asian trade is how little the region trades internally. Intra-regional trade within South Asia remains among the lowest in the world relative to geographic proximity. Political tensions — especially between India and Pakistan — have prevented the emergence of a deeply integrated regional production system comparable to ASEAN or the European Union. East Asian-style manufacturing networks are still largely absent in South Asia.

This is a major missed opportunity. If South Asia improved border infrastructure, customs integration, energy grids, rail connectivity and digital payment systems, the region could unlock enormous efficiencies and emerge as a much larger collective market.

Trade patterns therefore reveal that South Asia’s future potential remains under-realised because political fragmentation continues to constrain economic integration.

Strategic Autonomy and Multi-Alignment

Another major trend emerging from trade data is South Asia’s attempt to maintain strategic autonomy amid intensifying global rivalry.

India, in particular, is attempting to:

• expand trade with the US,
• maintain energy ties with Russia,
• compete economically with China,
• strengthen links with Europe, and
• build partnerships in the Middle East and the Indo-Pacific.

This multi-alignment strategy reflects a broader regional instinct to avoid overdependence on any single power centre.

South Asia increasingly appears to be moving toward a “multi-vector” economic model in which different external powers serve different functions:

• the US for technology and markets,
• China for manufacturing inputs and infrastructure,
• Russia for energy and defence,
• the Gulf for remittances and energy finance, and
• Europe for high-value trade and sustainability investment.

What the Patterns Ultimately Reveal

South Asia’s trade patterns reveal a region in transition rather than one that has fully emerged as a unified economic power.

The future likely includes:

• faster integration into global supply chains,
• continued export growth,
• rising geopolitical importance,
• gradual manufacturing expansion, and
• increasing diversification of strategic partners.

However, the region also remains constrained by energy dependence, infrastructure gaps, limited intra-regional trade and external market reliance.

Technological Dependence and the Development Challenge

The most probable outcome is not domination by any single external power, but a competitive coexistence of multiple economic influences.

The United States will remain critical for markets and technology. China will remain central to manufacturing ecosystems. Russia will likely continue as a strategic energy and commodity partner. Gulf economies will remain vital through remittances and investment flows.

Ultimately, South Asia’s economic future will depend less on choosing between competing global powers and more on whether the region can build productive capacity, regional connectivity, technological capability and institutional stability of its own.

This broader pattern is visible across South Asia.

Countries such as Bangladesh, Sri Lanka, Nepal and Pakistan also exhibit strong dependence on Chinese industrial goods while maintaining export ties with Western markets. Bangladesh exports garments to Europe and North America but relies heavily on Chinese machinery, textiles and industrial inputs. Sri Lanka and Nepal import infrastructure, machinery and financing linked to China while maintaining limited industrial export bases. Pakistan’s engagement with China is strongly shaped by infrastructure investment through the China-Pakistan Economic Corridor rather than large-scale export manufacturing.

In this sense, South Asia differs significantly from East Asia.

East Asian economies — including South Korea, Taiwan, China and, more recently, Vietnam — generally pursued export-led industrialisation strategies focused on manufacturing competitiveness, high savings rates, industrial coordination and integration into global supply chains. Governments actively nurtured domestic industries while building infrastructure and export capacity.

Among South Asian countries, India is clearly the largest potential beneficiary of the “China Plus One” strategy because of its market size, labour force and digital infrastructure. Bangladesh may gain selectively in garments and labour-intensive manufacturing, but its industrial base remains narrower. Sri Lanka and Nepal have received infrastructure investments but have not emerged as major manufacturing alternatives. Pakistan’s industrial transformation remains constrained by macroeconomic instability and structural weaknesses.

The current trade pattern therefore tells a complex story. It reflects China’s manufacturing supremacy, America’s consumption-oriented and innovation-led economy, Europe’s advanced industrial structure and Russia’s role as a strategic commodity partner.

The post-Cold War era of hyper-globalisation centred overwhelmingly on China may gradually be giving way to a more distributed system of production across Asia. Supply chains are becoming more diversified, geopolitics is reshaping economic strategy, and industrial policy has returned as a central instrument of national power.

For South Asia, this transformation presents both opportunity and challenge. The opportunity lies in attracting investment, building manufacturing ecosystems, and integrating more deeply into global value chains. The challenge lies in avoiding continued dependence on imported industrial capabilities while failing to develop domestic technological and manufacturing depth.

(The writer is a retired Special Secretary, Government of India. Views expressed are personal.)