The book throws light on the role played by Global Value Chains (GVCs). These have not only led to the growth of business, they have also changed its nature. A successful export strategy no longer involves producing a product made in one country on a large scale for export to consumers abroad. Instead, many of the components of a specific export product are produced by different companies, often located in developed countries, but based on that location’s competitiveness in producing that particular component, in developing countries’ locations. Components are often shipped to other locations for additional value addition. The final product is eventually assembled at centers of consumption for final shipment elsewhere. For example, the iPhone has 178 components that are sourced from 200 different suppliers in 26 countries!
This process of offshoring has reduced the share of developed countries in exports of manufactured goods and increased the share of developing countries which had the necessary human skills and physical infrastructure to enter the value chain. India has benefited from this new world thanks to the reforms of 1991. Our share of world exports of goods was declining before the reforms reached 0.5% in 1990. It rose to 0.7% in 2000 and 1.8% in 2021 in the post-reform period.
However, while our performance has improved in the past, it is China that made the most of the gains, increasing its share from 3.9% in 2000 to 15% in 2021. This star performance reflects the fact that it has shaped its trading strategy to take advantage of it. GVC event.
The Prime Minister has now set an ambitious objective: to integrate the country with global supply chains and in fact make it a hub as well. Designing policies that achieve this objective is the task before the Ministry of Commerce as it formulates new trade policy. It must begin with the recognition that there is a gap between what is happening and new goals.
Commenting on India’s backward integration with GVCs for manufactured exports – an important indicator of integration with global supply chains – Professor Batra found that this is not only lower than other regional economies, but, more worryingly, , it has declined in recent years. In fact, it is lower than it was in the early 2000s!
A policy weakness identified by Professor Batra is the increase in import duties implemented over the past four years. Reducing India’s high tariff levels was a key element of the 1991 reforms and the process was continued by successive governments. Those who feel they were greatly reduced should remember that despite the shortfall, our import duties remained much higher than in East and Southeast Asia. Professor Batra argues that if we want better integration with global value chains, we must revert to the old trend of gradually reducing customs duties prevalent in East Asia.
Another weakness in our policy is that our bound tariffs are much higher than the applicable tariffs. Our trade negotiators see this as an advantage because it gives us ‘policy space’ to raise tariffs if we want to. But as Professor Batra points out, it also adds uncertainty as investors can no longer be sure whether the duty on their inputs will be raised suddenly.
Looking ahead, East and Southeast Asia clearly has the greatest potential for expanding business and hosting GVCs. It makes sense for us to try and integrate as closely as possible with the region. This is also an area where the diversification of existing GVCs from geopolitical developments is likely to lead to a ‘China plus one’ policy, which will benefit us. In this context, Professor Batra noted that our decision to exit the Regional Comprehensive Economic Partnership (RCEP) after several years of negotiations was a missed opportunity.
We cannot undo the past, but perhaps the Indo Pacific Economic Framework (IPEF) agreement, which we have joined, offers a new opportunity. The trading column in IPEF is not yet related to market access. However, it may develop in that direction in the future, and if it does, it has the advantage of including the US, Japan and Korea excluding China, which is a major threat to our producers because of the fear of unfair competition. Is. We must work to push the IPEF towards a trade agreement.
More generally, we must recognize that future trade liberalization agreements will require a ‘behind the border’ integration of standards related to labor, the environment, intellectual property rights and even investment protection. We have traditionally opposed the inclusion of these ‘external issues’ in trade agreements, but we need to reconsider our position. Accepting such an alignment may be necessary if we are to attract investments directed at greater integration with GVC.
Significantly, China has applied to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership, a new incarnation of the old Trans-Pacific Partnership, which was trashed by former US President Donald Trump. It includes several provisions for deeper integration. If other developing countries are willing to enter into such agreements, there is no reason for us to back down. We can always negotiate a longer term for compliance.
Digital trade, e-commerce and digital payments are the new sectors that will play a major role in global integration in the coming years. We have enough strength in this area, but we seem to be vague about negotiating it. We must let go of this hesitation and become actively involved in the development of universal rules acceptable to all.
Indian industry needs to be more closely involved in the discussion on policy options. Industry groups do not speak with one voice, and often do not express their concerns transparently. But involving civil society groups and think-tanks in the process, there is no substitute for the full expression of the pros and cons seen by the industry.
Finally, the trade policy needs to be supported by other policies that are outside the purview of the commerce ministry. Providing better infrastructure and easier procedures is a no brainer. The Production Linked Incentive (PLI) scheme of the Government is a new initiative in building a competitive domestic industry. Since the scale of such assistance will inevitably be limited by available fiscal space, it should be limited to new sectors with high potential. Equally important, it should be provided on a clear understanding that the beneficiary must compete with imports subject to reasonable tariffs. The need to keep Indian access open to imports is particularly important in areas where technology is rapidly changing (as in green energy). New and more efficient technologies may come in and keeping such products out by raising import barriers will make the domestic economy more uncompetitive. PLI beneficiaries should not be allowed to advocate for an increase in import duty beyond the threshold level.
Montek Singh Ahluwalia is a former Deputy Chairman of the Planning Commission and is currently a Distinguished Fellow at the Center for Social and Economic Progress.
catch all business News, market news, today’s fresh news events and breaking news Updates on Live Mint. download mint news app To get daily market updates.