Context: Trade and Investment Ministers of G20 nations, which together generate 75% of the world’s trade flows, agreed to map global value chains, integrate small businesses with them and ease trade documentation.
What are Global Value Chains?
- GVCs refer to the full range of activities (design, production, marketing, distribution and support to the final consumer, etc) that are divided among multiple firms and workers in multiple countries to bring a product from its conception to its end use and beyond.
- The Global value Chains (GVCs) have been developed for a number of products such as Automobiles, Pharmaceuticals, Textiles, Electronics, Chemicals, Gold and Jewellery etc.
Why Should India Get Integrated Into GVCs?
- Economic Growth and Development: According to the World Bank, a 1 percent increase in the level of GVC participation increases average productivity by 1.6 percent and per capita Income by more than 1% in the long-run. This is on account of following reasons:
- Provides a fast track route to Industrialisation since there is no need to build the entire supply chain right from scratch.
- Better access to a greater variety of higher-quality or less costly intermediate inputs.
- No need for firms to focus on the entire supply chain and instead focus on specialised tasks leading to Hyper-specialisation.
- Transfer of technology and know-how from the foreign partners.
- Promotes collaboration rather than competition between Domestic and Foreign Firms wherein each of them focuses on specialised tasks in the production cycle. Both Domestic and Foreign firms collaborate with each other in order to minimise the costs and maximise the profits.
- Knowledge Intensive firms in other countries would share product innovations with Indian Firms and thus provide scope for the Indian firms to move higher up the value chain.
- Increase in Employment creation and Exports.
- Increased Job Creation and Labour Welfare:
- Potential to provide fillip to the Manufacturing sector leading to structural change in the Indian Economy.
- Shift in the Workers from agriculture to Manufacturing.
- Higher Paying Jobs accompanied by Social Security benefits.
- Induce shift in type of employment from Self-employed and Casual workers towards Salaried Workers.
- Socio-Economic Transformation: GVCs support employment of not just men, but also women. Notably in the apparel and electronics sectors, where assembly of many small parts must be done manually, firms report preferences for female employees because of the high levels of dexterity required. Thus, as seen in Bangladesh, higher employment creation for Women would have following benefits:
- Higher Expenditure on Girls’ Education.
- Decline in IMR and MMR.
- Political, Economic and Social Empowerment of Women.
- Doubling of Farmers’ Income: India is one of the largest producers of Agri-commodities, its share in global exports stands at merely 2.2% (9th Rank). This clearly highlights India’s poor Integration into Global agricultural supply chains. Hence, greater integration would translate into expanded market access and higher prices for the farmers leading to doubling of their income levels.
- Higher Resilience: According to OECD, Integration of economies into GVCs lead to resilience, stability and flexibility in their production network and hence capable of responding to domestic shocks. On the other hand, economies which are less integrated into GVCs are more vulnerable to shocks and hence may see decline in economic activity and fall in National incomes in response to domestic shocks.
India’s Poor Integration Into GVCs
- According to OECD-WTO’s TiVA (Trade in Value Added) database, India’s GVC participation index stands at 43, as compared to 52 for Vietnam and 60 for Malaysia. The GVC participation index displays a country’s integration into the GVC and is the sum of forward and backward linkages divided by total exports. The foreign value added of India’s Gross Exports (Forward Linkages) has reduced from 25% (2012) to 16% (2016).
- Some of the reasons for India’s poor Integration into GVCs are as given below:
- Historical Reasons: Inward-looking Industrial policies with focus on State-led Industrialisation, Import-substitution, Licence-raj System etc.
- Lack of Lead Firms in India: The lead firms are the firms that establish supply chains across the world and hence major drivers of GVCs. For example, in India, Tata Motors (Automobile) and Ranbaxy (Pharmaceuticals) have emerged as lead firms by attracting foreign Investment, transferring technology, establishing supply chains etc. However, there is a need to have such lead firms in almost all sectors.
- Higher Focus on Domestic Market: Indian Firms have traditionally focussed on Indian Domestic Market since it is quite large. However, they have failed to realise that integration into GVCs would give them a much wider market.
- Inward Oriented FDI Policy: Countries such as China and Vietnam have been inviting MNCs with GVC linkages to their countries leading to their Integration. However, India has so far not given due emphasis on this aspect of FDI policy.
- Lack of Focus on R&D leading to limited knowledge transfer.
- Lack of access to Finance– Higher Dependence of Banks, Under-developed Bond Market etc.
- Inability of the Government to bring about long-pending Labour Reforms.
- Lack of availability of skilled manpower in crucial sectors Electronics.
- Higher Logistics Cost (14%) as compared to USA (9%) and Japan (11%) – leading to Uncompetitive Indian exports.
- Poor Focus on Quality due to higher share of small-scale enterprises.
- Inverted Duty structure making import of Finished Goods cheaper.
- Government should address the various constraints highlighted above in order to successfully integrate the Indian Economy into GVCs. India should target the entire production cycle in the Smile Curve of the Global Value Chains (GVCs).
- In some of the selected products such as Automobile, Pharmaceuticals etc, India needs to focus on high-end activities such as Conceptualisation and Design in order to reap its expertise in R&D, technology.
- India must also focus on the lower end of the curve (Production and Assembly) to give fillip to “Make in India” and “Assemble in India”.