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How India can better integrate with global value chains

How India can better integrate with global value chains

Multilateral development banks have an important role in helping private-sector investors managing policy risks and facilitating sustainable investments along the value chains.

 Integration in GVCs will have to be in sync with India's responsibilities to protect the global commons, the most important one being climate. Integration in GVCs will have to be in sync with India's responsibilities to protect the global commons, the most important one being climate.

India aims to reach $2 lakh crore of exports by the end of this decade, equally shared between merchandise and services exports. 

This would require India's share of exports in GDP to increase from 18 per cent to 30 per cent and be on par with the Republic of Korea, Mexico, Turkey, and Spain. 

For India to achieve such an ambitious target, business as usual will not be enough. A decisive strategy shift is necessary. 

In a new report by the Asian Infrastructure Investment Bank on Sustaining Global Value Chains (GVCs) pathways for India to better integrate with GVCs are explored. 

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This is important for several reasons. First, with GVC exports accounting for more than 50 per cent of global exports, no country can maintain strong growth in exports without engaging deeper in GVCs. 

Second, GVCs offer the opportunity to engage in the most advantageous part of the value chain instead of producing a completed product. Instead of building infrastructure for the entire value chain, India could focus its efforts on the infrastructure to support that part. 

Third, GVCs bolster the capacity of local firms with the lead firm transferring knowledge, investment, management, and other global best practices, thereby improving the former's export potential. 

Currently, India is a small player in GVCs, accounting for only 1.3 per cent of the world's GVC exports. This is less than several smaller economies like the Republic of Korea, Russia and Malaysia. 

India's low GVC participation is reflected in its engagement in only a handful of sectors. Key products driving India's GVC participation include coal and petroleum, business services, chemicals, and transport equipment. 

However, India only accounts for a significant share (more than 5 per cent)of world GVC exports in only a couple of sectors, compared with major economies like China, Germany and the United States who may have more than a dozen. 

Furthermore, India's exports tend to be spatially concentrated. As highlighted in the Economic Survey 2017-18, 75 per cent of India's exports emanate from only six states, with share of exports ranging from 30 per cent in Gujarat to less than one per cent in Bihar. 

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This concentration of exports in a few states is significantly influenced by the quality of physical infrastructure to facilitate the easy movement of goods. 

States with better road density, multimodal logistic hubs, inland container depots, air cargo facilities and power distribution infrastructure have higher export orientation. 

This is not surprising as better connectivity infrastructure reduces the time taken to carry products across different locations and widens access to labour markets, thereby improving competitiveness. 

Similarly, a firm suffering from power disruptions is forced to rely on costly alternatives there by denting export competitiveness.

Infrastructure quality becomes even more critical in GVCs as they are predicated on timely production of products of international standards at a reasonable cost. Weak infrastructure dents firms' competitiveness reducing their ability to be a part of GVCs. 

Infrastructure needs to be complemented with strong institutions and an enabling policy environment. The former becomes more important in GVCs, which involve interdependent production across different jurisdictions. A breach of contract at any stage has repercussions for the entire value chain. 

Export-oriented states score higher on having a stronger institutional framework. Well-defined sector-specific export policies, especially those emphasising product quality, like in Tamil Nadu and Maharashtra, have helped augment an orientation towards exporting. 

The location of the states also influences export orientation. Consequently, improving port-hinterland connectivity becomes critical to bring inland states "close" to the port so they can benefit from the economic opportunity export orientation provides. 

For India to join other leading GVC countries, making it less costly for factories in inland states to engage in exports is necessary. Our research found that ports with better quality roads that serve a larger catchment area tend to have higher exports. 

Currently, the connectivity of India's ports lags other countries, which limits the potential opportunities of factories not located nearby. Greater investment to strengthen connectivity within India will address this issue. 

Lastly, integration in GVCs will have to be in sync with India's responsibilities to protect the global commons, the most important one being climate. 

Prime Minister Narendra Modi announced India's desire to achieve net-zero emissions by 2070. Decarbonising GVCs provides a great opportunity to bolster net-zero transition given GVCs rely on dispersed production requiring transporting products across borders. 

The lead firms will have to play a vital role in enabling investment and knowledge required for transition with many of them already having committed to becoming carbon neutral by 2050. 

Multilateral development banks have an important role in helping private-sector investors manage policy risks and facilitating sustainable investments along the value chains. 

Concurrently, public policy also must play its part by offering additional incentives for green infrastructure like access to renewable energy, emissions-free multimodal transportation systems and digital infrastructure. 

(The author is Senior Economist, The Asian Infrastructure Investment Bank.)