Trade matters. Gearing up for a GVC era

India’s Global value chain (GVC) participation has been slow even when several parts of East Asia integrated deeply into the global GVC network over the period starting 1980s. However, India has begun to make steady shifts in its GVC participation. These shifts align with the policy priorities of ensuring economic resilience (Atmanirbharta) while maintaining robust trade relationships with the rest of the world.

We explore some of the aspects of the evolving GVC trade in India. Increased GVC participation promotes growth, boosts productivity, and enhances job creation. According to the World Bank, a one per cent increase in GVC participation is estimated to boost per capita income levels by more than one per cent — about twice as much as conventional trade.

In what has now come to be termed as a period of ‘hyperglobalisation’, the early 2000s saw rapid GVC expansion worldwide. This led to exponential gains in trade, reductions in supply chain costs and deep interlinkages in trade across nations.

However, a dramatic shift occurred from “hyperglobalisation”, a term coined by Subramanian, A. and others in their PIIE Working paper, to “slowbalisation” (The Economist 2019) when the world dealt with the vestiges of the 2008 global financial crisis (GFC).

Concerns about the risks and uncertainties surrounding GVCs were further amplified with shocks such as the China-US trade war, the Covid-19 pandemic and Russia-Ukraine conflict.

More recently, this trend has begun to see a reversal. WTO’s GVC Development Report 2023 highlights signs of recovery in GVCs as reflected in the growing share of foreign inputs in exports and the increasing participation rates of economies worldwide.

In line with the global trend, India’s GVC participation rose steadily through the 1990s and 2000s before the GFC in 2008, after which it started declining. After the lull seen in the years succeeding the GFC, India’s GVC participation has begun to rev up again.

Key products driving India’s GVC participation include coal and petroleum, business services, chemicals, and transport equipment. The GVC-related trade as a percentage of gross trade increased from 38.9 per cent in 2020 to 40.3 per cent in 2022. This rise in participation is possibly being incentivised through export-linked schemes such as the Production Linked Incentives, One-district-One-Product and Make-in-India.

An examination of the WTO’s WITS database highlights that India’s GVC-related trade increased by more than 3.5 times from $62.9 billion in 2010 to $233.1 billion in 2022. A large part of this rise has happened over the recent past. Over the years, the sectoral composition of India’s GVC-related trade has also changed markedly.

Within the manufacturing sector, the share of low-technology manufacturing in GVC trade has declined over the years, while the share of medium and high-technology manufacturing has been rising. The increase in medium technology manufacturing is corroborated by the shift toward industries such as coke and petroleum, transport equipment and basic and fabricated metals.

In line with the manufacturing sector, the services sector has also witnessed a change in sectoral composition. GVC participation in services has shown a gradual maturing from low-value-added business process outsourcing (BPO) services to high-value-added services, such as those provided by global capability centres (GCCs). There has been an upstream movement in India’s services GVC production in recent years, reflecting an increase in GCCs.

Forward participation of a country refers to producing and shipping raw materials and intermediate inputs (for example, yarn) for further processing and exporting by other countries (fabric), while backward participation refers to using imported intermediate inputs (imported fabrics) to produce goods that are exported (apparels).

Downstream shift

Previously, India’s GVCs involved a higher level of forward participation which resulted in lower value-addition for exports within the country. However, in recent years, India has begun to move downstream, and engage in export of finished goods to the rest of the world. This can be seen in the rise in share of pure backward GVC participation from 13.8 per cent in 2019 to 16.3 per cent in 2022.

Sectors such as food and beverages, electrical and optical equipment and financial intermediation, among others, have witnessed a remarkable increase in backward GVC participation.

In contrast, the share of pure forward GVC participation (or upstream participation) in trade has declined from 19.1 per cent in 2016 to 17.6 per cent in 2022 in sectors such as retail trade; coke, refined and nuclear fuel; chemicals and basic and fabricated metals, among others.

Rising backward GVC participation bodes well for India. Latest research by Professor Veeramani and Dhir (https://shorturl.at/jixnb) shows that greater backward GVC participation results in higher absolute levels of gross exports, domestic value-added, and employment.

Despite so much progress, India’s GVC participation (GVC-related trade as per cent of gross trade at 40.3 per cent in 2022) is still lower not only in comparison to large economies such as the US (43.7 per cent), UK (47.8 per cent) and Japan (46.6 per cent), but also its Asian counterparts, such as South Korea (56.2 per cent) and Malaysia (60 per cent).

To further embrace GVCs and enhance participation, there is a need to continue spending towards the development of quality trade infrastructure, integrating micro, small and medium enterprises in the GVC network, further simplifying procedures for entry and exit of small businesses; and work towards further trade facilitation measures.

Finally, it is worthwhile to note that India’s GVC expansion is taking place in an era which is not exactly conducive to GVCs. Countries worldwide are embracing mercantilism. Even the EU, which was once the touted beacon of free markets, is now persuaded by protectionist policies.

For instance, in a recent address at Sorbonne University and an interview with the Economist, French President Emmanuel Macron called for reduced dependence on foreign trade. Similar sentiments have been echoed by the US, Japan, and Korea.

Nonetheless, despite the rise in mercantilism, there is scope for collective country blocs to trade intensively with one another. In this context, GVCs will help build self-reliance and promote shared trade gains amongst these country blocs.

The writers are officers in the Economic Division of the Department of Economic Affairs, Ministry of Finance. Views are personal