Monday 25 / November / 2024
New Delhi: A global realignment of Global Value Chains (GVCs) has emerged as countries are recovering from the aftermath of Covid-19 pandemic, resulting in changes in their functioning. Countries have realised their vulnerability due to heavy reliance on single suppliers, leading to a focus on diversifying suppliers to de-risk their economies.
These changes have thrown a spotlight on India that can serve as effective alternatives. India possesses unique capabilities and resources that can contribute to its role in GVCs.
These include a large domestic market driven by a rising middle class and a growing digital economy, Indian government’s drive to encourage manufacturing through ‘Make in India’, Production Linked Incentive’ scheme and ‘Atamnirbhar Bharat’ etc., along with a demographic advantage with a skilled workforce, a new Foreign Trade Policy emphasizing trade facilitation and e-commerce, and the potential to build an integrated industry ecosystem. Leveraging its federal structure, India can also benefit from state-level policies to attract investments and promote exports.
These factors highlight the distinct value propositions that will position India well for a larger role in GVCs and the time is ripe for India to reorient its policies accordingly
The Covid-19 pandemic and the Russia-Ukraine war have led to a significant realignment of Global Value Chains (GVCs). This realignment is the result of a changing perception about GVCs as these global events unfolded and has resulted in several changes in the functioning of GVCs. The first noticeable change is a realization among countries that their economies rely heavily on single suppliers that increases their vulnerability.
Therefore, diversity in suppliers is important to de-risk their economies and make them more resilient. In the recent G7 summit held in Hiroshima, Japan in May 2023, the constituent economies of the G-7 group have agreed on de-risking and diversifying their supply chains.
The recent agreement on IPEF (Indo Pacific Framework for Prosperity), with its supply chain agreement, including logistics and connectivity improvements, investments in critical sectors, and cooperation among its 14-nation bloc members (including India), further offers a solution to future supply chain crises.
The second development is an increased awareness among countries to ensure supply chain security, particularly for critical materials such as energy and semiconductors. With Europe reeling under the effects of disruptions in its energy supply needs due to the ongoing Russia-Ukraine war, and the COVID-19 pandemic underscoring the importance of critical raw materials such as APIs (Active Pharmaceutical Ingredient), the reality of geopolitics affecting the security of critical supply chains has exacerbated.
Therefore, in times to come, GVCs would not only be determined by cost competitiveness but also by geopolitics, security as well as resilience of supply chains.
This changed perception and consequent realignment of GVCs has created opportunities for countries in the Global South where India can emerge a dominating country along with Vietnam, Indonesia and Bangladesh, as these can serve as effective alternatives. Among these economies, the Indian sub-continent has shown the most positive outlook in terms of growth trajectory, exports and global trade.
With India harbouring ambition to become a dominant part of GVCs, it should focus on its indigenous capabilities and its unique assets that can be leveraged towards this objective. Let’s take a look at some of these unique capabilities and resources of India that can create a greater role for it in GVCs.
First, India promises a large domestic market and with it comes the potential to expand manufacturing in India, both for India and for the rest of the world. According to a report by World Economic Forum, consumer market is projected to grow to about $6 trillion by 2030, with a rising middle class shaping this growth in domestic consumption.
Almost 80% of Indian households will be in the middle-income bracket in 2030. This income bracket is also adopting digital economy at a fast pace further bolstering India’s prospects in becoming a potential partner in GVCs.
As per the RBI’s Annual Report 2022-23, UPI (Unified Payment Interface) led digital retail payments grew at a compounded annual growth rate (CAGR) of 50 per cent in the last five years. Retail digital transactions have grown exponentially in India in the last five years, surpassing major developed economies like the US, the UK, and Europe.
With the dynamic growing consumer market combined with robust digital economy, global firms can expect sufficient incentive and scale economies to locate their manufacturing facilities in India for supplying to the domestic market as well as export to other countries.
Second, India is presently offering a conducive business environment with Government’s drive to encourage manufacturing through flagship programmes such as ‘Make in India’ and ‘Atmanirbhar Bharat’.
To encourage large scale production, which is an essential condition for getting integrated in GVC, the Production linked Incentive (PLI) scheme provides incentives to manufacturers who engage in large scale production in ‘champion’ sectors of the economy.
Other reforms such as simplifying complex labour laws and infrastructure landscape transformation (through projects such as Bharatmala and policies such as National Logistics Policy) give an added advantage to foreign firms contemplating setting up manufacturing facilities in India. Recently, India improved in World Bank’s Logistics Performance Index by 6 ranks to become 38th among 139 countries as compared to 44th in 2018.
This is the result of both soft and hard infrastructure and investment in technology. Schemes like National Logistics Masterplan (NLP) and Gatishakti have been implemented with an aim to reduce logistics costs.
These achievements underline the stellar performance of the schemes and the fast rate with which India is integrating with existing GVCs thereby creating pathways into international markets. With the PLI scheme, firms not only get a one stop solution for their value chains but they are able to minimize risks, boost economies of scale and reduce their costs.
Third, India has the demographic advantage with a projected fastest-growing working-age population for the next 30 years. Further, the monthly wage rate in India is lower than competing offshore manufacturing destinations such as China and Malaysia. However, having the numbers alone won’t be sufficient to attract more investment in manufacturing. To turn the demographic advantage to a manufacturing growth opportunity, the working age population needs to be upskilled to conform to global skill requirements.
The Government of India has initiated a series of reforms in this direction including vocational training in schools under the National Education Policy (NEP), and skill development activities under the umbrella of the National Skill Development Corporation (NSDC).
The NEP has focused on providing basic education in areas like Artificial Intelligence, financial literacy and other vocational courses from early classes which can have a multiplier effect to build strong foundations in terms of skilled workforce in future. India needs to encourage the development of the research ecosystem in educational institutions by incentivizing partnerships between industries and educational institutions, as well as between Indian and foreign Universities and introducing research-intensive education programs.
The announcement of India’s new Foreign Trade Policy (FTP) 2023 further seeks its integration into global value chains and make India an export hub. The new FTP is a shift from an incentive-based approach and creates an enabling ecosystem for exporters, which is a move in line with India’s vision of becoming “Atmanirbhar” (self-reliant).
Broadly, the FTP lays great emphasis on trade facilitation through technology and digitization. It seeks to promote e-commerce, and aims to facilitate exports through various schemes and measures reflecting India’s ambition to become an export hub and increase its share in global value chains. The FTP’s emphasis on e-commerce and ‘Local goes Global’ also highlights the inclusive approach. The conducive policy and regulatory infrastructure is motivating multinational firms to go beyond basic offshoring services and perform their core activities in India.
Another pathway to transform India into a manufacturing hub for the world is to build an integrated industry ecosystem. India has traditionally placed substantial emphasis on a strong and thriving micro, small and medium enterprise (MSME) sector, which contributes to approximately 30% of India’s GDP and almost 50% of exports.
While MSME remains a priority sector, large scale manufacturing, that can ensure supply to the world, will increasingly need to be driven by large and medium sized companies.
The large and mid-sized players are better positioned to adopt economies of scale for global manufacturing and ensure conformance to world-class quality practices, as well as global environmental and sustainability standards. These large companies can also as catalysts for growth and up skilling of the MSME ecosystem around them, thereby generating all-round industry ecosystem growth.
Finally, for greater GVC integration, India needs to leverage its federal set up to its advantage. In India, the central government is a key player in policy formulation for improving the country’s exports. However, individual state governments can also play an equally important role as they are responsible for land, labour, and skill development. Presently, six states in India – Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh, and Uttar Pradesh – contribute to 70 percent of India’s overall exports.
In addition, these six states host more firms with foreign ownership, which leads to higher exports. Investors tend to prefer these states due to their well-defined industrial policies and good governance practices. Industrial reforms at state level and a more proactive role of other states in facilitating manufacturing and promoting exports can help reap maximum benefits of state level policies. These factors highlight the distinct value propositions that will position India well for a larger role in GVCs and the time is ripe for India to reorient its policies accordingly.
