Editorial Notes

[Editorial Notes] Why integrating with global value chains is crucial for India

Instead of a piecemeal approach, India needs to adopt a holistic perspective focused on ‘whole of the supply chain’ and through greater integration into GVCs.
By IASToppers
July 25, 2020

Contents:

  • Introduction
  • Global Value Chains
  • Recent Trends
  • Benefits of widening GVCs
  • Challenges
  • Conclusion

Why integrating with global value chains is crucial for India

For IASToppers’ Editorial Simplified Archive, click here

Introduction:

The ongoing COVID-19 pandemic led to major demand- and supply-side shocks to value chains. The lack of redundancy planning in such networks, have posed considerable challenges to manufacturing activities, underlining the economic vulnerabilities for countries, including India. It has triggered a debate as to whether global value chains (GVCs) may lead to increased fragility of economies actively participating in them.

Global Value Chains:

  • GVCs refer to international production sharing i.e. a process where production is broken into activities and tasks carried out in different countries.
  • The emergence of GVCs has occurred, with the fragmentation of production, whereby value is added in multiple countries, leading to an increase in trade in intermediate parts and components.
  • GVC participation is driven by many factors: size of the country, level of industrialisation and its structure, composition of exports, and positioning in value chain, as well as the policy climate.
  • Individual economies participate in GVC:

a) Backward GVC participation: Importing foreign inputs to produce the goods and services they export.

b) Forward GVC participation: Exporting domestically produced inputs to partners in charge of downstream production stages.

Recent Trends:

  • The graphic shows the overall GVC intensity across selected economies and groupings in terms of percentage share of the total value added in gross exports.
  • It is clear that between 2005 and 2015, there has been a steady decline in GVC intensity across all major economies.
  • For India, GVC participation peaked at 41.6% in 2008, but has dropped ever since, hitting a low of around 34% in 2015.
  • There has been a stagnation of GVC trade since the global financial crisis (2008).
  • The system of international production is grappling with challenges arising from Industry 4.0; growing economic nationalism, and sustainability concerns.
  • The ongoing pandemic has fueled calls for further de-globalisation of such production networks to reduce industry- and economy-level vulnerabilities.

Benefits of widening GVCs:

  • There are substantial merits of widening and deepening link to GVCs, particularly for a developing country like India.

1. Augments growth:

  • The World Bank’s World Development Report 2020 suggests, depending upon deeper reforms in developing countries and policy continuity in industrial economies, GVCs can help reduce poverty, and continue to augment growth and employment.
  • Cross-country estimates suggest that a 1% increase in GVC participation can boost per-capita income by more than 1%, particularly when countries engage in limited and advanced manufacturing.
  • The growth is much higher than the 0.2% income gain from standard trade.

2. Enhances productivity:

  • GVC participation can precipitate significant firm-level productivity improvements.
  • WDR 20 suggests that GVC firms engaged in manufacturing activities show higher labour productivity than one-way traders or non-traders.
  • In particular, firms that engage in both import and export are 76% more productive than non-trading firms, compared with a 42% difference for export-only firms and a 20% difference for import-only firms.

3. Benefits economy:

  • 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%.
  • China has seen a rise in its forward GVC participation and a corresponding drop in the backward participation.
  • India’s share of foreign value-added content in total GVC trade has steadily increased from 53% in 2005 to 61% in 2014.
  • If India can seize FDI looking to relocate from China, and create conditions for firms to leverage the labour-cost arbitrage opportunities, it can capture much of the value addition at the midstream stages.

4. Resilient to shocks:

  • The localised regimes (less reliant on foreign suppliers) are more vulnerable to shocks, result in a lower level of economic activity and fall in national incomes as compared to the interconnected regimes.
  • While interconnected regimes build resilience, stability and flexibility in the production networks, localised regime offers fewer channels for adjustment to shocks.
  • 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.
  • Recent policy pronouncement for an Atma Nirbhar Bharat may be antithetical to the spirit of efficiency-seeking economic interdependence typified by GVCs in the long-term.

Challenges:

  • Post pandemic, Regional value Chains (RVCs) are expected to gain momentum to strike a balance between localisation and globalisation.
  • Facilitating RVCs is difficult and requires intense regional coordination, geopolitical stability and conducive systemic conditions.
  • If India intends to strike a balance between managing vulnerabilities in GVCs, and building resilience, it may need to reassess its regionalisation strategy to take advantage of the accelerated momentum towards RVCs.
  • This will necessitate deeper reforms in labour markets, trade infrastructure, and improvements in the overall business environment.

Conclusion:

The long-term gains from globally connected value chains can far outweigh the benefits of RVCs. This can be seen when much of the recovery post-Global Financial Crisis was led by GVC-intensive exports. RVCs could be stepping stone and enabler for more global participation.

India needs to adopt a holistic perspective focused on the whole of the supply chain, by driving strategic changes in its investment-development paradigm, dismantling bottlenecks and through greater integration into the GVCs.

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