India's China supply chain blip could be a big twist in the plot

Suddenly, India's long-term trade equation with China, where China exports far more than India's exports to China, has shown a small blip. India's exports to China rose almost 40% in the five months through August, as per government data. The big part of the spike was driven by electronics and engineering goods, traditionally part of China's main exports to India. Experts say the spike comes on a very low base and driven by demand created by the AI and data center build-out.

Yet, the blip could actually be a pointer to a long-term trend taking shape in India-China ties.

China may be starting to source selected intermediate electronics from India as its own manufacturers concentrate on more sophisticated parts of the value chain. This will make significance of the export numbers go well beyond a temporary increase in Chinese demand.


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The PCBA numbers

Before the nearly 40% increase in India's overall exports to China in the first five months of FY27, another number foreshadowed it.

India's PCBA exports to China rose more than 40-fold in FY26 to $1.5 billion, from just $36 million a year earlier. Nearly 80% of India's total PCBA exports went to China. Overall Indian PCBA exports rose more than 20-fold to $1.9 billion.

The numbers may indicate that Chinese manufacturers are increasingly sourcing simpler electronic assemblies from India as they move towards higher-value manufacturing at home.

However, the absolute numbers are still modest and the trade classification is messy. Chinese customs data does not show a matching increase in PCB imports from India, with some of the trade appearing under smartphones and telecom equipment instead. Differences in classification make it difficult to identify precisely what is driving the increase.

Still, the direction of the trend is notable. For decades, the familiar pattern was India importing components from China and using them to assemble products for the Indian market or export elsewhere. A meaningful flow of Indian-made electronic assemblies in the opposite direction suggests that part of the relationship may be changing.

China's manufacturing is changing

The argument becomes more plausible when viewed through the structure of China's manufacturing economy. China's earlier advantage was simply that it produced cheap goods. It has now developed an extraordinarily dense network of suppliers that allows manufacturers to divide production into increasingly specialised stages.

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As Chinese companies move into semiconductors, advanced electronics, AI servers, telecom equipment and other higher-value areas, there is little reason for every factory to retain production of every relatively simple subassembly if it can source it competitively elsewhere.

That is where India could fit. India has recently built substantial manufacturing scale, but its electronics manufacturing services (EMS) industry is still concentrated in lower-value activities such as PCBA and basic box-build manufacturing. More advanced activities such as design-led manufacturing and sophisticated electronics remain at an earlier stage.

India does not need to displace China in sophisticated electronics to become part of China's manufacturing system. It only needs to become competitive in selected intermediate stages.

India is creating huge capacity that China can use

While China moving up the value chain is one part of the story, the other part is happening inside India. The country is moving beyond the first phase of its electronics strategy, which was heavily focused on assembling finished smartphones. Government policy is now explicitly targeting components, sub-assemblies, materials and manufacturing equipment.

The Electronics Components Manufacturing Scheme (ECMS) is particularly important. The government has expanded its allocation from Rs 22,919 crore to Rs 40,000 crore. By August, 106 projects involving Rs 69,548 crore of investment had been approved, with 38 plants operational or in advanced stages of construction. The stated objective is to build domestic capacity in components and raw materials rather than simply assemble imported parts.

This is precisely the sort of capacity that could eventually generate exports to China.

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The evolution is already visible. Electronics production in India increased from Rs 1.9 lakh crore in 2014-15 to Rs 13.11 lakh crore in 2025-26, while electronics exports rose from about Rs 38,000 crore to Rs 4.24 lakh crore, according to the government data.

Domestic value addition has also risen, although it remains around 18-20%. India's electronics export story is still heavily dependent on imported inputs. China supplied at least 80% of India's imports across 71 electronics product lines in FY26, according to a recent study by the Koan Advisory Group and the Institute of Chinese Studies. The number of such product lines has risen from 44 in 2018-19.

So the emerging relationship is not yet one in which India has replaced China. It is much more complicated. Indian factories are increasingly making components and assemblies while simultaneously importing a large share of the upstream components from China. That is normal for an economy entering global value chains.

A two-way electronics supply chain?

The recent trade numbers might be pointing at an interesting trend taking shape. India could increasingly occupy the middle of an Asian production chain rather than trying to recreate the entire Chinese electronics ecosystem domestically.

China supplies India with sophisticated upstream components, machinery and production inputs. Indian manufacturers perform selected assembly or component manufacturing. Some of those products then move back to China, where they can be incorporated into more sophisticated products or exported onwards.

There is already evidence that such two-way integration is emerging. Electronics exports to China are growing even as India's dependence on Chinese components remains extremely high. India's electronics industry is therefore becoming more deeply integrated with China, not less.

Global value chains allow countries to specialise in particular stages of production rather than having to manufacture an entire product domestically. Integrating into such chains can increase value addition and employment, particularly for labour-abundant economies. That may be a more realistic path for India than attempting immediate self-sufficiency.

AI may be the catalyst, rather than the underlying trend

China's rapidly expanding AI infrastructure is generating demand for servers, networking equipment and other electronics. Indian industry representatives have specifically linked some of the recent export growth to demand associated with AI products and data centres. But AI does not explain why India suddenly has the manufacturing capacity to supply China.

That capacity has been accumulating through smartphone manufacturing, PLI incentives, contract manufacturing and now component-specific incentives. The AI buildout may simply have provided a large new source of demand at precisely the point when Indian manufacturers began acquiring the scale and capabilities needed to participate.

If AI spending slows, some of the current demand may disappear. But factories, supplier relationships, production know-how and certification do not disappear overnight. Once an Indian manufacturer becomes an approved supplier to a major Chinese or multinational electronics company, it has a chance to sell other products as well.

China can become a customer for India's manufacturing ambitions

India has spent years viewing China primarily as the source of its manufacturing deficit. That problem has not gone away. India imported $131.6 billion of Chinese goods in FY26 while exporting about $19.5 billion, leaving a bilateral deficit of roughly $112 billion. China also remains deeply embedded in India's electronics supply chain.

But the same Chinese industrial ecosystem could help create demand for Indian manufacturing.

ET reported in April that India's exports of Apple-related components to China had reached $2.5 billion. This marked the start of a reversal trend of the traditional process of Chinese vendors exporting parts to India for cellphones and other electronic items. This is another indication that Indian suppliers are beginning to send components into production networks centred on China.

However, China may not be deliberately transferring low-end manufacturing to India. There is not enough evidence for that conclusion. China's enormous domestic supplier ecosystem remains difficult to replicate, and companies trying to move production away from China continue to encounter problems with supplier depth, skilled labour and factory infrastructure.

But outsourcing selected stages is a different proposition from relocating an entire industry.

The next test will be components

The real test of this trend will therefore be whether India's exports to China continue to broaden from finished or assembled electronics into a wider range of components and industrial inputs.

With the help of ECMS, if Indian manufacturers can move from PCBAs into more sophisticated boards, connectors, camera modules, displays, passive components, materials and other inputs, the China market could become an important destination alongside the US, Europe and Southeast Asia.

The government's own policy is now aimed at precisely this deeper ecosystem. The Commerce Department has said global electronics production is increasingly organised around global value chains and that India needs a predictable policy environment if it wants those chains to expand in the country.

There is also a larger strategic opportunity. India does not necessarily have to beat China at the manufacturing activities where China has its greatest advantages. It could first become good enough at a narrower set of intermediate products that Chinese manufacturers find economical to source from abroad.

Ironically, if the trend persists, India's manufacturing ecosystem can find a place inside China's own industrial supply chain.