Manufacturing – India’s improving position in Global Value Chains

The five-year Foreign Trade Policy (FTP) announced by Government of India in April 2015  aims to grow India’s participation in world trade and increase domestic value-added content in India’s exports. Following a dip in exports during financial years 2014-15 and 2015-16, India’s merchandise exports have been on a growth trajectory over the past two years, reaching US$303.4 billion in 2017-18. Together with services exports of US$174.8 billion in 2017-18, India’s total exports are still a long way off from the target of US$900 billion by 2020. Considering that about two-thirds of world trade is contributed by products manufactured in Global Value Chains (GVC), it is imperative for India to integrate into GVCs to achieve the FTP objectives and targets. Several initiatives to boost indigenous manufacturing–such as Make in India, Skill India and Startup India–have steadily improved India’s participation in GVCs.

Meanwhile, increasing “servification” of manufacturing to offer smart solutions and products has given India a distinct advantage due to its proven software capabilities. As a result, India’s GVC participation index rank improved from 57th in 1995 to 45th in 2009, according to the OECD Trade in Value Added (TiVA) statistics, which ranks the biggest players in global commerce. The OECD WTO Report – Trade in Value Added: India (October 2015) highlights that India has improved its integration into global value chains over the past two decades with the foreign content of its exports more than doubling from less than 10 per cent in 1995 to 24 per cent in 2011, second highest among BRICS economies, after China. Further, the report also points out that the export orientation of Indian manufacturers (27.1 per cent) in 2011 was nearly double the rate in 1995, and now ranks third among BRICS economies.

Of the total value of India’s imports of intermediate products and services, 27.5 per cent has subsequently been embodied in exports, higher than 23.5 per cent as recorded in 2009. The products with the highest shares were Manufacturing not elsewhere classified (which includes gems and jewellery), Information and communication technology and Electronics as well as Other Transport, at 48.3 per cent, 37.7 per cent and 36 per cent, respectively. Textiles, a labour-intensive sector where Indian exports have traditionally flourished, continues to perform strongly, placing India at 13th position in textile value-chain participation. A 2016 study by the Trade Competitiveness Section of the Commonwealth Secretariat, commissioned by Government of India, promoted opportunities for setting up of GVCs to not only increase India’s share in world trade, but also increase its global competitiveness.

India’s growth in Global Value chains (GVC) will be crucial as the nation targets double-digit GDP growth to establish a US$5 trillion economy

The study identified 35 products in top 50 markets, where India can increase its exports by US$23 billion by forming its own GVCs through linkages for competitive sourcing of 129 inputs from 20 least developed countries (LDCs). Furthermore, the commerce ministry is preparing an agriculture export policy to integrate Indian farmers into the global supply chain, to achieve the Government’s target of doubling farmers’ income by 2022. Another approach suggested by experts has been for India to promote Regional Value Chains (RVC) with neighbouring countries, by leveraging the Free Trade Agreements with countries within the region. For example, in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) sub region, there can be cooperation between Myanmar, India, Sri Lanka and Thailand in Gems and jewellery production given the region’s strength in the sector.

Similarly, in production of bamboo items which can include furniture, cloth and artefacts, there could be an RVC between the Northeastern region of India and Myanmar, Thailand and Bhutan. In herbal products, there could be RVC between Nepal, India and Bhutan. For garments, there is a big potential for RVC between Sri Lanka, Bangladesh and India. In leather goods, there is potential for RVC between India, Bangladesh and Thailand. Once RVCs are established, the end products can be exported globally. Upgradation of technology, production processes and trade infrastructure through participation in RVCs can be the enabler for India to take the next step of meeting the more stringent requirements of GVCs. The urgency of the matter is further underlined by the possibility that some of India’s major markets may soon be part of large regional FTAs that do not include India such as the Trans-Pacific Partnership (TPP) agreement.

India’s improved ranking on World Bank’s Ease of Doing Business index has provided a fillip to the nation’s efforts to position itself as an attractive hub for trade and investment. However, to become a significant player in GVCs or even RVCs, more needs to be done on several fronts, such as provision of world class trade-related physical infrastructure, trade logistics and support services, tariffs, compliance with standards, among others. Greater integration into GVCs and RVCs will not only help in increasing exports, but also boost the Micro Small and Medium Enterprises (MSME) sector and strengthen the economy as a whole. This has been established in a study by the United Nations which demonstrated a positive correlation between participation in the GVC system and per capita GDP growth rates. India’s growth in GVC will be crucial as the nation targets double-digit GDP growth to establish a US$5 trillion economy.