Trade, terror and the trust trap: Can India afford a reset with China?

On 6–7 July 2025, the expanded Brics+ leaders will convene in Rio de Janeiro; however, the summit’s choreography has already been disrupted. Beijing has confirmed that Premier Li Qiang—not President Xi Jinping—will lead the Chinese delegation, while Indian Prime Minister Narendra Modi will attend in person. Xi’s absence throws a spotlight on the still-delicate reset that New Delhi and Beijing began in late 2024. Whether the Rio summit can consolidate that tentative détente—or expose its limits—will shape both the tone of the meeting and the broader credibility of Brics as a platform for emerging-power coordination.

Between late 2024, India and China began cautiously resetting their strained relationship, marked by a partial border agreement and a renewed focus on diplomatic and economic engagement. It aimed to de-escalate military tensions stemming from the deadly 2020 Galwan Valley clash, with both sides agreeing to reduce troop presence at select friction points. This was followed by foreign minister-level talks, working-level dialogues, and backchannel efforts to revive economic ties, under pressure from regional actors to avoid further escalation.

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Trade and investment re-emerged as key areas of re-engagement, highlighting deep but asymmetric interdependence. Bilateral trade remained high, with Indian imports of Chinese intermediate goods dominating the market, while India’s trade deficit with China widened significantly. India’s vulnerability to supply chain dependencies has become increasingly evident, particularly in sectors such as electronics, pharmaceuticals, and solar equipment. India also voiced its long-standing concerns over limited market access in China. It responded by selectively reopening its economy to targeted Chinese investments, especially in the electronics and infrastructure sectors.

However, strategic mistrust persisted. On April 22, 2025, India was struck by a major terrorist attack in Kashmir’s Pahalgam, killing 26 civilians. India accused Pakistan-based militants of responsibility and, within two weeks, launched “Operation Sindoor” on May 7, 2025 – strikes on nine terrorist camps in Pakistan and Pakistan-occupied Kashmir. The ceasefire on May 10 ended the immediate violence, but tensions have remained high since then. The timing of the attack—during an India-China rapprochement—reignited India’s security calculus and raised doubts over whether such diplomatic efforts could be meaningfully sustained.

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Blood and Bailouts: Chinese Dollars, Deadly Dividends?

Amid the India-Pakistan flare-up, Beijing has been overt in its backing of Islamabad. In a high-profile visit to Beijing in May 2025, Pakistani Foreign Minister Ishaq Dar met with Chinese Foreign Minister Wang Yi, who publicly reaffirmed China’s “ironclad” support for Pakistan’s security. China simultaneously urged both sides to dialogue, but its message was clear: Pakistan is a close ally. For New Delhi, this duality—preaching restraint while funding and shielding Pakistan—undermines China’s credibility as a stabilising actor. This diplomatic posture reinforces China’s “all-weather” friendship, even as India views Pakistan as a security threat.

At the United Nations and other forums, China has also shielded Pakistan. For example, a March 2025 report noted that Beijing blocked India’s UNSC proposal to sanction five Pakistan-based terrorists, including a key Lashkar-e-Taiba (LeT) figure, and similarly blocked India’s call to designate the LeT’s proxy “The Resistance Front” (behind the Pahalgam attack) as global terrorist group. The consistent veto of counter-terror measures at multilateral platforms adds another layer to India’s frustration with the international rules-based order.

China’s economic investment in Pakistan underscores its strategic bond. Beijing is now Pakistan’s largest bilateral creditor, with roughly US$29 billion in loans (~22 per cent of Pakistan’s external debt). The flagship China–Pakistan Economic Corridor (CPEC), a Belt and Road Initiative (BRI) project, channels tens of billions more into Pakistani infrastructure; the latest figures top $60 billion in investment commitments. Chinese spending on power plants, railways, and the Gwadar port has become a mainstay of Pakistan’s fragile economy.

In key sectors such as energy, logistics, and telecom, Chinese capital has translated into strategic leverage, blurring the lines between commercial partnership and geopolitical patronage. In fact, in February 2025, Pakistani President Asif Ali Zardari’s visit to China culminated in new agreements to expand trade and investment, accelerate China-Pakistan Economic Corridor (CPEC) projects, and deepen security cooperation, including in the areas of technology and education. These developments further anchor the China–Pakistan alliance at a time of rising India–Pakistan tensions.

Subsidising Instability: IMF, Investments, and Islamabad’s Asymmetry

Pakistan’s stability now depends heavily on Chinese financing and the International Monetary Fund (IMF) bailouts more than ever. This pattern of external financing is not limited to China. Just a day before the Pahalgam ceasefire, the IMF approved a $2.4 billion bailout for Pakistan—$1 billion under the Extended Fund Facility and $1.4 billion via its climate-focused Resilience and Sustainability Trust. While framed as support for macroeconomic stability and climate resilience, the timing raised serious questions in India. It reinforced a perception that Pakistan, despite its sponsorship of terrorism, continues to receive lifelines from global institutions without accountability or behavioural change.

The sequence—from terror attack to retaliatory strikes and then IMF disbursement—seemed to reward belligerence rather than deter it. Critics argue that even if the IMF or Chinese funds are not directly used for military purposes, they ease budgetary pressure and free up resources that could be redirected toward defence and potentially militant infrastructure—in 2025, Pakistan’s defence budget was set to rise by 18 per cent, even as it secured international financial support ostensibly for economic recovery.

The IMF’s long-standing technical neutrality in its engagements with Pakistan has become increasingly controversial. Despite 24 bailouts since 1958, meaningful reform remains elusive, mainly due to entrenched elite resistance, military dominance, and weak civilian oversight. Repeated IMF programmes have focused on macroeconomic stabilisation, while structural dysfunction has been left unaddressed. For India, the implications are grave: international financial institutions may be inadvertently subsidising a security threat. Pakistan’s chronic crisis-response cycle—backed by both Chinese investment and Western liquidity—has not reduced its reliance on strategic proxies, but instead, risks sustaining them under the guise of economic stabilisation.

Finally, Brics+ risks mirroring South Asia’s own “weaponised-bailout” paradox, where development rhetoric co-exists with permissive financing that enables destabilising proxies. The convergence of capital, conflict, and geopolitics in South Asia presents a dangerous paradox. As Pakistan leverages its strategic location to court both Chinese money and Western aid, India faces an increasingly asymmetric security landscape—one where conventional deterrence is undermined by financial impunity.

The author is a research fellow at Observer Research Foundation. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.