A look into the Global Value Chains and India's participation in the same

1. Global Value Chains and India – The Changing Scenario
Global value chains have become a dominant feature of world trade and investment,
encompassing developing, emerging, and developed economies. The process of producing
goods, from raw materials to finished products, is increasingly fragmented and carried out
wherever the necessary skills and materials are available at competitive cost and quality.
Companies, both large and small, can participate in GVCs by engaging in one of the many types
of activities performed in a coordinated fashion across a number of countries to bring a product
from conception to end use. Depending on the type of product and geographical location of
different activities, some value chains will be regional, while others will have a truly global
nature.
It is worth recalling that firms – not countries or governments – are the main actors in value
chains. However, the policies of the country play a vital role in giving an enabling environment
for the firms to participate in the GVCs. Perspectives on the benefits of GVC participation
naturally differ between policymakers and firms. Policymakers attach weight not only to capital
gains, but also to labour gains and other social or environmental outcomes. They are likewise
concerned with the policy environment in which their firms operate, looking at the economic,
social, and environmental outcomes of GVC participation at the country level. Policymakers can
therefore try to correct market failures and externalities related to firms’ participation in GVCs in
order to attain economically and socially superior outcomes.
A number of factors can influence the degree and type of integration into GVCs, in terms of both
backward and forward engagement. These factors can be broadly grouped into two categories:
non-policy factors, or factors that are not easily influenced by policy, at least in the short to
medium-term; and policy factors that can be reflected in measures such as trade and investment
openness.
Non-Policy Factors:
The main determinants of GVC participation are structural in nature, and their relationships with
backward and forward engagement are diverse. The following elements are most important:
1. Market size: The larger the size of the domestic market, the lower the backward
engagement of a country, and the higher the forward engagement. Countries with a larger
market are able to draw on a wider array of domestic intermediates both in terms of
purchases and sales;
2. Level of development: The higher the per-capita income, the higher the aggregate
forward and backward engagement. Developed countries tend to source more from
abroad and sell a higher share of their gross exports as intermediate products;
3. Industrial structure: The higher the share of the manufacturing sector in GDP, the
higher the backward engagement, and the lower the forward engagement;
4. Location: GVC activity is organised around large manufacturing hubs – the larger the
distance to the main manufacturing hubs in Europe, North America, and Asia, the lower
the backward engagement, suggesting that there is a premium to locating close to large
“headquarter” economies.

2. Policy Factors:
Trade and other policies can also play a significant role. In particular:
1. Trade policy: Low import tariffs, both at home and faced in export markets, and
engagement in regional trading agreements (RTAs) can all facilitate backward and
forward GVC engagement;
2. Inward FDI openness tends to have a significant association with both backward and
forward integration;
3. Other GVC-related policies, including trade related policies, such as: trade facilitation,
intellectual property protection, logistics performance, infrastructure, and the quality of
institutions.
India & GVCs:
India did integrate into the GVC considerably and this integration peaked at 41.6% in 2008, but has
dropped ever since, hitting a low of around 34% in 2015. The reason given to back out from GVC
after the Global Financial Crisis was to reduce shocks from global phenomenon as much as
possible. Surprisingly, according to OECD METRO Model, localised regimes (less reliant on
foreign suppliers) are more vulnerable to shocks, and result in a significantly lower level of
economic activity and fall in national incomes as compared to the interconnected regimes.
Estimates for India suggest that a shift towards a localised regime can decrease real GDP by 1.1%,
and reduce import and export demand by 11.4% and 14.8%, respectively. While interconnected
regimes build resilience, stability and flexibility in the production networks, localised regime offers
fewer channels for adjustment to shocks. Hence, there should be no doubt that GVC integration is
extremely useful for India. With its low labour and land costs, it can effectively enter the cycle at
various stages, both backward (Importing foreign inputs to produce the goods and services they
export) and forward (Exporting domestically produced inputs to partners in charge of downstream
production stages). In fact, the backward participation in GVCs can be particularly beneficial for
economies. A 10% increase in the level of GVC participation could increase average productivity
by close to 1.6%.
Cross-country estimates suggest that a 1% increase in GVC participation can boost per-capita
income by more than 1%. The growth is much higher than the 0.2% income gain from standard
trade. If India is to become a $5 trillion economy by 2024, the performance of the manufacturing
sector will be key. However, the sector is held back by its low integration in global value chains
(GVCs), suggests research. India’s GVC integration, measured as the foreign value-added to
India’s exports and domestic value-added to India’s intermediate good exports, remains weak.

3. A possible option is to look forward to deeper participation in the manufacturing Global Value
Chain (GVC). In the past, there has been a growing emphasis on playing a deeper role in the
GVC. Yet, hitherto nothing substantive has been materialized. As the cost of labour has been
rising in China, many labour-intensive industries such as textiles, leather, toys, processed food,
handicrafts, consumer electronics, etc are losing their competitive edge in China and looking out
for other alternative destinations. However, while countries like Vietnam, Bangladesh, and
Thailand emerged as net gainers, India mostly missed the bus. The crisis has further accentuated
in the wake of the pandemic, where most of the major global manufacturers are contemplating a
China+1 strategy. The current time is once again opportune for India to undo its mistakes from
the past and expand its foothold in the global trade and manufacturing supply chain. India with
its large labour force, plenty of land banks and vast domestic market can step up and fill the gap.
The country is already a major node in the service sector GVC. However, the time has come to
leverage its intrinsic strength and deepen its foothold in the manufacturing value chains as well.
India has faced a gamut of issues, ranging from lack of political will, resource (finance and skill)
constraints, mismanagement of resources, technological backwardness, and operational issues in
the past. These are also reflected in the trade restrictiveness and performance indicators
published every year by organisations such as the World Bank and the World Economic Forum.
Transportation and shipping costs and inadequate infrastructure were cited as major obstacles.
Across all sectors, customs procedures rank high as a particular obstacle in bringing developing
country suppliers into their value chains.
A big reason for this is India’s historical inward-looking industrial policies starting from import
substitution, the Licence Raj, and state-led industrialization. Because of India’s large market,
policies focused on the domestic market without considering the employment and technological
benefits of being part of a larger value chain. Recent policies such as industrial corridors, de-
licensing, and the Make in India initiative, are steps in the right direction but may not be enough.
Indian policies do not create enough lead firms, which are central to all aspects of a value chain

4. from sourcing supplies to the final product, in GVCs. For instance, Tata Motors in the
automobile sector and Ranbaxy in the pharmaceutical sector play key roles in transferring
technology, establishing supply chains, and attracting foreign investment. However, in general,
India has very few such sectoral lead firms. Skill shortage, lack of access to finance, custom
procedures, and high taxes all prevent lead firms from developing in India. Manufacturing and
trade policies thus need to focus on establishing stronger GVC linkages by attracting more global
lead firms to India.
India’s poor infrastructure and policy failures in the past have impacted its integration with the
GVC. However, despite visible loopholes persisting, India has made some incremental progress
in terms of developing its infrastructure and improving its overall business climate. Under the
Bharatamala project, wide networks of expressways and highways have been developed. More
than USD 11 Billion have been invested to create Dedicated Freight Corridors (DFCs) to boost
the railway network. Over 100 new greenfield airport projects have been announced and work
has begun in the USD 100 billion Delhi Mumbai Industrial Corridor (DMIC), also touted as one
of the largest industrial infrastructure projects in the world.
On the policy front, easier FDI frameworks have been put in place and an improved business
climate has been registered. Nevertheless, much more needs to be done if India wants to
materialize some big-ticket size manufacturing deals. A robust credit system needs to be
developed and there is a pressing need for more labour reforms.
GVCs will locate in countries with logistics and procedures that ensure fast turnaround of goods
and services. Alas, India’s logistics costs are double that of Bangladesh and triple that of China.
India fares poorly in the various logistics performance and efficiency indices compiled
internationally. In various indicators, it ranks behind many developed Asian economies such as
Japan, Korea, Taiwan, and even emerging markets such as China, Malaysia, and Thailand. This
explains India’s limited GVC participation. The WDR says that one day’s delay hits
competitiveness as much as a tariffof over 1%. India must reform its import and export
procedures, including goods and services tax (GST) rules, ensuring quick paperwork and trade
clearances. It must focus on trade facilitation, and invest in world-class ports, rail transport,
aircargo and electricity. Land acquisition difficulties and inflexible labour laws hinder GVCs.
Legal and tax disputes must be settled quickly, instead of meandering through the courts for
decades. India has improved its ‘ease of doing business’ ranking, but has a long way to go.
Some of the recent measures taken by the Government of India include implementation of The
Goods and Services Tax in 2017 and the Insolvency and the Bankruptcy Code, 2016. Other
measures to facilitate the ease of doing business include initiation and simplification of online
applications for the Industrial License and Industrial Entrepreneur Memorandum. Twenty
services were integrated with the eBiz portal so as to facilitate the smooth functioning of the
single window clearance for obtaining clearances from Government agencies. The number of
documents for exporting and importing was reduced to three (Economic Survey, 2017-18,
Ministry of Finance).
More recently, pro-industrial policy measures like the 2011 National Manufacturing Policy and
the 2014 Make in India initiative aimed at attracting MNCs to set up production and design
facilities through measures like further sectoral de-licensing, building of industrial corridors, and

5. facilitation of greater government–business cooperation (especially through the Investor
Facilitation Centre and the Invest India initiative) have become crucial for firm development.
While many of the recent changes in policy are a step in the right direction, the focus on
facilitating national champions or lead firms is still clearly missing. Most of the recent GVC
specific policies are increasing the cost of intermediates imports and can only be attributed to the
lack of a holistic approach to this issue.
However. the ongoing COVID-19 pandemic has triggered a debate as to whether the global
value chains (GVCs), which are production networks that seek to exploit gains from hyper-
specialization across countries, may lead to increased fragility of economies actively
participating in them. As the experiences during the ongoing pandemic suggest, major demand-
and supply-side shocks to value chains, and lack of redundancy planning in such networks, have
posed considerable challenges to just-in-time manufacturing activities, arguably accentuating the
economic vulnerabilities for countries, including India.
Conclusions
One of the reasons for India’s low integration in GVCs is its focus on the domestic market. In the
case of large markets like India, sometimes it is enough for firms to cater only to the domestic
market, especially if there are barriers to GVC integration. This rules out the possibility of the
country being part of any domestic or regional value chain and the associated loss of benefits in
the process. The need of the hour is to integrate into GVCs, to lift productivity levels across
sectors and create jobs. Greater participation in GVCs can help foster structural transformation,
for instance through export diversification, and the possibility to absorb technology and skills
from abroad.
The second reason for India’s limited role is the role played by the lead firms. While India has
several horizontal and vertical policies, there are fewer instances of GVC specific policies which
lead to the nurturing of lead firms. The policies followed by India have not been particularly
conducive to encourage GVC integration or the development of lead firms.
India can do a lot to facilitate GVCs simply by coordinating the activities of different policy-
making and implementation bodies. Important areas of reform are reduction of the administrative
burden associated with traceability of products by measures such as increasing the staff;
harmonisation/mutual recognition of standards along the value chains; and reduction of barriers
at the border, including customs and trade facilitation processes. The need for enhancing
investment in R&D was emphasised repeatedly by firms, particularly in the pharmaceutical and
specialty chemicals segments.
In an integrated approach to be a part of GVCs, the government needs to specifically select and
attract the GVC linked firms – the large sellers as well as large markets or buyers of the
produced goods. This kind of approach will forge links between local and global lead firms. A
second step in this would be ensuring inter-ministerial coordination in taking policy decisions
which stay aligned to the GVC integration priorities.
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