Why global value chains matter to India

While the Government is working to resolve the working capital blockage issue of exports caused by the GST, a simultaneous effort is on to find new ways to export more.

Active participation in global value chains (GVCs) is one sure way. Inputs and products manufactured in GVCs account for two-thirds of world trade.

The GVC model breaks the product life-cycle into many tasks. Participating countries complete each task sequentially under ‘Just in Time’ conditions.

The iPhone is a good example to understand how GVCs work. The US prepares the iPhone design and prototypes, while Taiwan and South Korea produce critical inputs such as integrated circuits and processors. Final assembly takes place in China from where the iPhones are marketed all over the world.

Why is India out of GVCs? Everyone understands that poor trade infrastructure increases cost and time of export operations. But that it can also almost prohibit a country from participating in GVCs is not sufficiently known.

India’s current export product profile confirms the poor trade infrastructure hypothesis.

To understand the impact of poor infrastructure on India’s current export profile, let us divide world merchandise trade of $16 trillion into two baskets, small and large. The small basket contains products that account for 30 per cent or $4.8 trillion worth of world trade. The large basket holds the remaining 70 per cent.

A country that exports products that belong to the large basket will have higher chances to grow.

Ironically, 70 per cent of India’s export earnings come from the small basket products. India has a high share of world exports in the following such products: small diamonds (19.8 per cent), jewellery (12.9 per cent), rice (39.3 per cent), buffalo meat (19.1 per cent), shrimps (17.7 per cent). Other major products are petroleum, cotton, yarn, ladies’ suits, medicines, auto components.

The small size of the global basket limits the potential for future growth. Also, most products face intense competition from low-cost countries such as Bangladesh and Vietnam.

Small basket products are tolerant of less efficient trade infrastructure. Firms export most goods more on price than on delivery considerations. Some delay in shipment does not result in order cancellation.

An exporter may get away with offering a discount to the buyer in most cases.

Then come the large basket products that contribute to 30 per cent of India’s export earnings. Electronics, telecom, and high-end engineering products are important large basket items.

India has a weak global export share in these commodities. Mobile phones (0.19 per cent), integrated circuits (0.01 per cent), computers (0.04 per cent), solar-powered diodes, transistors (0.14 per cent), LCDs (0.04 per cent).

Compare these shares with India’s 1.7 per cent share of global merchandise exports. India has an insignificant presence in large basket products that have become important in world trade.

Most large basket products are infra critical products whose parts are manufactured in several countries.

An anchor firm manages the process through GVCs. Fast entry/exit through port/customs is a precondition to making such products as delay may disrupt the entire value chain. China, Japan, South Korea, Thailand and Malaysia have become part of GVCs through the quality trade infrastructure route. India could not as it does not meet the benchmarks for efficient entry/exit at the most ports/customs.

India needs to take four steps in order to participate in GVCs:

l Policy initiative to target all parts of the GVC smile curve. The smile curve represents stages of a product life-cycle in the GVC, from conceptualisation, development of a prototype, to manufacturing, to after-sales service. Countries at the high end of the curve earn the most from GVC participation.

The US, Germany, Japan, Taiwan and South Korea with R&D expertise occupy the high end of the curve while China, where final assembly takes place, is at the bottom.

India should target all parts of the curve for selected product groups — high left end because of its expertise in R&D, system design, the low-end segment of manufacturing to provide jobs and the high right-hand section on account of being a large market.

The necessary policy package for attracting investment needs to be drawn.

Set up a National Trade Network (NTN) to enable all export-import related compliance online. NTN will allow exporters to file all information/documents online at one place; there will be no need to deal with customs, DGFT, shipping companies, sea and air ports, and banks separately.

The inbuilt system intelligence will route the required information to the appropriate agencies.

A service agreement will bind all organisations to respond within 2-5 hours, and enable users to receive permissions online. Department-centric systems improve slowly and cannot take care of end-to-end processes. India needs an NTN with a new business design and process flow.

Automate port and customs operations and allow green channel clearances for most consignments. Match the turnaround time of the ships with the global best parameters. This will shorten queues, ensure quicker transactions and allow better use of infrastructure. Trader interface with shipping companies, port operators, and CFS also needs urgent attention.

Exporters complain that many shipping companies load new charges and delay the release of cargo till these are paid.

A regulation nudging shipping companies to notify all charges at the port of loading will ensure transparency.

Indian firms need to upgrade production processes and product quality to meet the requirements of GVCs. India needs to create an institution to develop standards, set up globally accredited testing laboratories, and sign Mutual Recognition Agreements (MRA) with partner countries.

These steps will reduce the cost and time of exporting and increase competitiveness. This will nudge domestic and foreign firms to invest in facilities needed for participation in GVCs. In the medium term, it will decrease India’s dependence on the import of electronic and telecom goods and increase overall exports from India.

The writer is an Indian Trade Service officer. The views are personal