In an important diplomatic move, India and China are embarking on a big reset of the bilateral relationship, the first time a high level of engagement between the two has been made since the border disputes in 2020. The move is an indication of a possible improvement in relations that were tense over the last five years.

The breakthrough was made during a visit of Chinese Foreign Minister Wang Yi to India where he had meetings with Prime Minister Narendra Modi, External Affairs Minister S. Jaishankar and National Security Advisor Ajit Doval. This is the follow-up to a meeting between Prime Minister Modi and President Xi in Kazan, Russia in October 2024, since then there had been no incidents of border violence. Also, Prime Minister Modi recently traveled to China to attend the SCO Summit, which is the first trip to the country in seven years.

Key Agreements Reached

Due to the high-level discussions, a number of major agreements have been achieved to normalize economic and people-to-people relations such as Trade across the border will restart through the Lipulekh, Shipki La, and Nathu La passes. Direct air travel between the two countries will resume.

Visa services for tourist and media personnels and will be restarted. China will also resume supplying India with much needed essential goods, such as urea, rare earth elements, and tunnel boring machines.

Aspects that Drove the Rapprochement

A number of geopolitical and economic forces are driving the shift in the policy. Since the Trump administration has imposed 50% tariffs to Indian exports because India imports Russian oil, the nation has been seeking new trading partners. The fact that India has a trade deficit of $99.2B with China highlights that a full economic decoupling is not feasible. This deficit has continued to be at $99B, despite bans on imports.

Nine months of border-related events after the Modi-Xi meeting in October 2024 has created a base on which to restart engagement.

Implication of the Diplomatic Thaw

This reset in relations has serious lessons and consequences across different sectors. The high cost associated with completely cutting off the trade-connections with China especially in such crucial fields as electronics, drugs and solar energy reveals the natural contradiction between the national security interests and economic development. The future policy will have to create a delicate balance between the two.

The persistent trade deficit indicates that the import bans are not the solution. The long-term solutions will involve paying attention to the diversification of supply chains and the active increase of exports. The re-opening of trade routes, flights, and visa services will likely reduce geopolitical risk. This may mean a lower risk premium to the investors, a stronger rupee, and an optimistic market sentiment. The resumption of flights is an announcement of policy which is known to cause immediate reactions in the equity market, bond and foreign exchange.

The development supports the ‘China Plus One’ strategy

The multinational corporations have diversified their production bases into India, Vietnam and Mexico. The resumption of Chinese exports opens up new developments in sectors like venture capital, private equity and M&A in areas like fertilizers, EV minerals, renewable energy, and electronics.

The re-established trade is likely to favour the Indian rupee by cutting expensive foreign currency outlays indicating the direct role of the trade policy on exchange rates and national reserves.

Although some of the short-term advantages are cheaper imports and greater growth, the long-term risk of being over-reliant on Chinese technology and minerals exists. This highlights the importance of regular scenario-testing in case of impending border tensions in the future.

The restoration of flights, visas and border passes functions as a reminder that these forms of soft infrastructure are an engine of economic development, albeit most often invisible. Such actions have the potential to give greater economic payoffs than the hard infrastructure.

Finally, the recent events between India and China show how economic imperatives may be used and even supersede any political determinants when the stakes are high enough.