SOCIO-ECONOMIC VOICES

-Siddhartha Roy,Former Economic Advisor, Tata Group
Global Value Chain and Indian aspiration
Advanced economies are showing signs of revival, exports from India during April to August 2021 period have shown remarkable improvement

Advanced economies are showing signs of revival, exports from India during April to August 2021 period have shown remarkable improvement. Overall exports of merchandise products and services from April to August period touched $256.17 billion showing a growth of 44% and 16% respectively over 2020-21 and 2019-20 (the same period). Should one consider merchandise exports alone then the performance was even more striking, these touched $164 billion which was 67.33% and 23.5% more than that of 2020-21 and 2019-20 respectively.

Whether it can be sustained in the long run is the key issue. COVID-19 has shaken up the foundation of multilateralism in a multipolar world. Geopolitics has started dominating international economics in a way that has never been witnessed in recent years. Rule-based institutions like WTO, WHO, etc., have been silent spectator when discriminatory behaviour affected essential drugs and vaccine input availability. Most of the problems have been sorted out by the leadership of the countries bilaterally. Sovereign decision making ability and negotiating capability became the key drivers for resolving the issues, a public good platform like WTO was of limited utility. Today, the trust deficit between market-oriented liberal democracies and China have peaked. This has led to China plus one strategy by the countries and MNEs dependent on global value chain. This can provide an opportunity arbitrage for a country like India provided India can create the enabling conditions.

In market-oriented, liberal economies policymakers have always been clear about the need for trade openness. Anything to the contrary can adversely affect economic efficiency and competitive advantage. Trade helps in exploring new market opportunities through the process of competitiveness, which in its turn leads to higher employment, better wages, poverty reduction and firm-level innovation. Along with trade openness and improved foreign direct investment the export sector can become a crucial contributor to development. Competitiveness at the present juncture need not be restricted to an entire product category but to a part of the global value chain. According to the OECD TIVA database 2018, 70% of international trade “involves global value chains(GVCs), as services, raw materials, parts and components cross borders-often numerous times”. In the final stage, these components are assembled and the final product is made, which is then sent to the customer. There are other estimates by World Bank etc, which show a somewhat lower contribution of GVCs. However, even today (2020-21) GVCs contribution is highly significant.

The key question is why should an MNE or its subsidiary be interested in a particular country. The attractiveness will depend on the policies and institutions which can buttress competitiveness. These include macro-economic stability as demonstrated by its monetary, fiscal and exchange rates related policies, good governance measures which include ease of doing business and contract enforcement, superior infrastructure and availability of quality human resource who are either skilled or capable of getting trained in a short period.

A good education system is particularly important when India upgrades to 'network products' like electrical and electronic equipments, computers, road vehicle, telecom equipment, etc., all these have the potential for creating well-paid jobs.

China plus one is now a part of the risk mitigation strategy of many MNEs. This is an area where India has an opportunity to become an assembly hub. Given the recently introduced PLI schemes, some of the network product can become quite attractive. Another issue that needs to be borne in mind is the availability of a large domestic market unlike that of Vietnam or Malaysia. This market can provide necessary economies of scale in the production process.

Indian export thrust for future can be divided into two parts a) labour-intensive exports which can include footwear, toys, garments, gems & jewellery, auto components, etc., here India will have to compete with several emerging and developing countries with less restrictive labour regulations. India's participation can be either at the entire product level or at the GVC level. b) More complex products, like pharma, chemicals, road vehicles, electronics, computers and telecom equipment, here too the participation can be at the product level or in GVCs of 'network products'. India can either participate in a part of the value chain that is at the component level or can become an assembly hub, both options can be explored. In the economic survey of 2019-20 the potential of network products has been well recognised.

The basic question we need to ask is GVCs have been in existence for a number of decades, why is it that the Indian industry has not been able to garner a significant share? Is there a competitiveness issue either at the firm level or at the country level? The saving grace is the risk perception about China has gone up in many liberal democratic economies. Can we create an appropriate manufacturing environment to benefit from this geopolitical arbitrage. Finally, it is often pointed out that re-shoring by US and European MNEs could be an issue particularly if manufacturing automation costs come down. Looking ahead it appears that with introduction of 3D printing, robotisation and use of artificial intelligence a part of the complex product may be re-shored once again. Assuming that MNEs are investing in GVCs in this country this possibility they themselves would have considered and discounted before putting up the project. Lastly, in the area of digitisation India's competency is now globally well recognised.

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Socio-Economic Voices
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