What are Global Value Chains (GVCs)?
In this interconnected world, trade is now driven by multinationals operating in different countries. This is what forms the basis of Global Value Chains (GVCs). GVCs refer to interlinked production processes wherein stages of production are off-shored to other countries, that are able to undertake that particular task in a cost-effective way. Typically, in GVCs, less advanced tasks that require greater use of labour, like assembly of parts, are off-shored to developing countries, where wages are relatively lower. Thus, labour abundant countries often import parts and components (P&C), assemble them into the end product and finally export them to end-user countries. On the other hand, more complex tasks like R&D, branding and marketing are performed in head-quarter economies that are usually developed nations. This set-up implies that both developed and developing nations could be tied to the same value chain, albeit at different stages, making different level of contribution.
Importance of GVCs
Now, coming to the main question, why is so much importance given to GVCs? To find this, let’s concentrate on a product group called ‘Network Products (NPs)’. This is a sub-category within manufacturing where GVCs are most prevalent and comprises mainly of electrical, electronic, auto and photographic equipments & parts. Discussion on Network Products holds special importance as they contribute to nearly 30% of world exports. To put this in further perspective, NPs constitute nearly 71% of Hong Kong’s total exports, 66% of Philippines’ and 43% of China’s and Vietnam’s exports (Refer Figure 1).
Having said this, it is also important to identify the extent to which India is linked to the world GVCs. Based on WITS COMTRADE data for 2019 (estimates for 2020 are unavailable), NPs constituted only 11% of India’s total exports. Further, India’s share in world NP exports was only 0.6%, compared to China at 20% and the upcoming player in this field Vietnam at 2.1%.
Impact of COVID-19 on India’s Participation in GVCs
In this post-COVID world, it has almost become mandatory to analyze the impact that the pandemic had on the subject in question. We too, thus, embark on this journey, to the extent possible.
With COVID-19 leading to stringent lockdowns on one hand and decline in purchasing power on the other, GVCs across the world saw a severe slump. The same was true for India. Estimates based on the most recent Ministry of Commerce and Industry (MoCI) data for India’s export of NPs show that India’s total export and import of NPs went down by 22% and 12%, respectively, for the period April to November 2020, as compared to the same months in 2019. On contrasting the impact of COVID-19 on NPs vis-à-vis other merchandise commodities, it was found that exports of the latter went down by 11%, 0.5 times lesser than Network Products (Refer Figure 2).
Further, import of P&C of NPs and export of assembled end products (AEPs) (seen together as an indicator of GVC participation – countries like India, with low wages, typically import P&C, and assemble them into end products, which could be consumed by India or exported to other countries), declined by 13% and 35%, respectively in 2020. These numbers imply a reduction in India’s participation in GVCs in 2020, as a result of the COVID-19 pandemic. However, this trend is not particular to 2020 only and was also observed in the non-distressed year of 2019, albeit less intensive. This goes to show that India had already begun to move away from its participation in GVCs as an assembly centre and this was further intensified by the pandemic.
Even though world trade and GVCs have been impacted by COVID-19, WTO also projects a 7.2% rise in world merchandise trade in 2021, as the world tries to reach normalcy. Since NPs occupy a significant share in world exports, this will also have positive spillovers on the GVCs. However, it is expected that the nature of GVCs would undergo some change as MNEs are looking for alternate locations for their operations, outside of China. This is driven by the pandemic raising concerns for risk diversification, such that production centres are not concentrated in a single country. Long before the pandemic, rising wage levels and international trade frictions, particularly the U.S.-China trade war, had furthered the realignment of GVCs. While India naturally benefits from such a shift in manufacturing (given the labour abundance in the country and its market size), it could further increase its participation in GVCs, as done by Vietnam.
For India to do so, it would need to strengthen its ground on two fronts. One would be on the trade policy front and the other would be to make its labour force more employable. Talking about the first, the 7th Trade Policy Review (TPR) which started on 6 January 2021, at the World Trade Organization, demonstrated that between 2015 and 2020, India had implemented various measures like simplification of procedures, reduction in documentation and automation of custom clearances. However, it also points out that fluctuation in tariff levels creates uncertainty for investors. In this, it is particularly important for India to reduce its import tariffs applied on P&Cs in order to make sure that it is able to assemble and export final assembled products at competitive rates. On the contrary, only recently, the Union Budget 2021-22, announced a rise in tariff rates across various parts and components, particularly in the auto sector. The budget stated a removal on exemptions on parts of charges and sub-parts of mobiles. Further, certain P&C of mobiles which earlier attracted zero duty will now have an import tariff of 2.5%. Similarly, parts of automobiles have also seen an increase in customs duties, wherein, tunnel boring machines and its parts will attract a duty of 7.5% and 2.5% respectively. Additionally, customs duty on certain auto parts has been increased to 15%.
India is also in a dire need to expand investment in skills and education needed for jobs in the future. The country ranks 72 among 132 countries in the Global Talent Competitiveness Index (GTCI), 2020 with a low ability to match the market demand for skilled and semi-skilled labour. The report also shows that India lies in the 3rd quartile, with a 76th rank, in vocational and technical skills, with the country’s greatest challenge being its ability to both attract and retain talent.
Thus, India needs to take a hard look at the expected future demand arising from a shift in the nature of GVCs, its current ability to deliver on it and the changes required to meet the same. Timely action on these two fronts could help India strengthen its participation in GVCs and provide the requisite boost to its manufacturing sector.