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With the ongoing trade war between the US and China increasing the scope for diversion of global foreign direct investment (FDI) and manufacturing away from China, emerging market economies (EMEs) such as India can seize the opportunity by ensuring a conducive environment for foreign investors. It may, in turn, help strengthen domestic manufacturing base for exports and improve global value chain (GVC) participation, according to a Reserve Bank of India study.
Advantage India
The study referred to a recent UBS Evidence Lab CFO Survey (2019), which found India as a favoured investment destination for foreign investors, ahead of other Asian economies.
Recent measures announced to encourage FDI in contract manufacturing and single brand retail augur well for improving India’s GVC participation, the study said.
“Given the size and diversification of domestic economy as well as global opportunities, there is immense potential to improve GVC participation by moving up in the global value chain. This, however, needs to be realised by attracting further FDI and undertaking domestic structural reforms,” the study said.
Global value chain
The global value chain enables firms to optimise their production processes and reduce the cost of production by restructuring their operations internationally.
While backward linkage indicates the share of foreign inputs embedded in the country’s exports, forward linkage is the share of the domestic country’s exports used as an input for the importing country’s exports. Sum of these gives the GVC participation level of a country, which is considered an important indicator of the extent to which a country’s exports are integrated into international production networks.
Historically, India’s exports are dominated by domestically resourced inputs. With domestically produced wider set of intermediate goods and dominance of services exports, domestic value added to total exports is more dominant than foreign inputs.
Dwindling GVC
Composition of India’s export basket can explain India’s stronger forward linkages in the global supply chain relative to the backward linkage. This implies a smaller upstream component in India’s GVC participation.
India’s GVC participation rate improved during 1995 (33 per cent) to 2010 (43 per cent) but dwindled somewhat thereafter (to 38 per cent in 2018). India’s GVC participation level continues to be lower than other major economies (against global average of 53 per cent).
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