India needs to reorient its trade policy, with emphasis on developing its own global value chains, an economist has said in a recent article.
“A potential pathway through which India can accomplish this is by leveraging its growing trade with partners in the Global South to establish its own GVCs, through outward FDI joint ventures that can supply intermediate inputs at competitive rates,” Karishma Banga, a Research Fellow in the Digital and Technology Cluster at the Institute of Development Studies, United Kingdom, said in an article on Ideas for India.
The discussion also needs to shift from how India links into global value chains to how the county can leverage these for economic growth and job creation, Banga said.
“There is an urgent need to reorient India’s trade specialisation towards labour-intensive sectors, but this would require a targetted approach, based on traditional sectors and sectors with high participation in GVCs,” she added.
India is expected to unveil its new foreign trade policy at the end of September. India’s Foreign Trade Policy 2015-20, which was announced for a period of five years, has been extended several times due to impact of Covid-19 and global supply chain uncertainties in the wake of conflict between Russia and Ukraine. The trade policy is currently in effect until September-end.
Despite its proximity to the so-called Factory Asia - a regional supply chain comprising of Singapore, Malaysia, Indonesia, Philippines, Thailand, China, South Korea, Taiwan and Japan - India has failed to integrate into global value chains, according to the article.
Banga attributes India’s failure to integrate into global value chains to lack of well-developed, labour-intensive industries, the large domestic market, labour market rigidities and inability to attract foreign direct investment into the manufacturing.
India's links into global value chains are mainly through forward participation, domestic value added in exports of intermediate goods, rather than backward participation. This indicates its relatively higher engagement in upstream production activities, she added.
Despite having comparative advantages in unskilled labour-intensive manufacturing activities, India’s commodity composition of exports is biased towards capital- and skill-intensive products.
Moreover, six sectors account for nearly 60 percent of India’s manufacturing global value chain exports – coke and petroleum, renting of machinery, chemicals, basic and fabricated metals and transport equipment.
In 2020, the manufacturing value added share of India’s gross domestic product was only 13 percent, much lower than other Asian countries.
Also, India’s manufacturing global value chains trade has also gradually shifted from the Global North to countries in the Global South, according to the article.