Over the past two decades, production across the globe has been anchored by global value chains (GVCs). Through GVC participation, firms specialise in a specific task, and multiple firms across different countries coordinate to produce a product as opposed to the conventional way of producing a whole product.
This production arrangement enabled small and medium firms (SMEs) to internationalise. The story is no different for India since GVC participation is crucial in transforming India as a manufacturing hub. According to the Economic Survey (2019-20), the expansion of GVCs has the potential of contributing 25 per cent in value-added terms to the $5 trillion economy target by 2030.
Having previously missed the GVC bandwagon, India can still take advantage of the GVC phenomenon by fostering specialisation that aligns with the needs of the global economy. A crucial channel through which this could be achieved via the greening of the GVCs.
Energy costs
Given that production in GVC is geographically dispersed, intermediate products often cross borders multiple times. In the backdrop of rising energy prices, it not only results in an increase in explicit costs but also leads to greater carbon emissions to produce such products.
As consumers now increasingly prefer products with lower environment footprint, there is an incentive for firms to achieve environmental upgradation in GVCs.
Here India can present itself as a key GVC destination for firms by providing green infrastructure such as access to renewable energy, and emissions-free multimodal transportation systems.
Another strategy that can help greening of GVC is by leveraging smart manufacturing methods popularly known as Industry 4.0. For instance, digital technologies like IoT (Internet of Things) and AI can aid MSMEs keep track of shipments and reduce trade cost. From a greening perspective, smart manufacturing can help reduce ecological footprint of firms.
Net zero commitments
In this regard, the Budget’s provision of with $4.3 billion for achieving net-zero emission by 2070 assumes significance. Such policy measures are certainly on the right track, however, some key challenges remain.
To begin with, rolling out and adoption of Industry 4.0 may be more feasible in high-tech industries but may pose significant challenge for the likes of more labour intensive and low-tech industries.
Therefore, a greater emphasis on low-tech industries aimed at skilling the workforce will be vital. Finance is another hurdle since adoption of Industry 4.0 measures requires significant investment which will be challenging for small firms.
Hence, through right policy support, Indian firms could leverage its domestic capabilities and foster global competitiveness through greening of GVCs.
Reddy is an Assistant Professor of Economics at the IIM Raipur; Subash S is Professor (Economics) at IIT-Madras. Views expressed are personal.