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India must achieve self-sufficiency through value chains

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India must achieve self-sufficiency through value chains

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The Covid-19 pandemic has put several countries, including India, in a situation where supply chains are being reconfigured. Globalization includes an element of volatility, and as a result, when things go wrong, a nation’s economy is bound to take a hit.

India’s GDP, according to the IMF, is expected to have declined by 8 percent in fiscal year 21. Merchandise exports, which are an important segment of the economy, also fell by more than 7 percent. in fiscal year 21. India’s target of US $ 5 trillion, a component of 20 percent, is tied to exports of goods and services.

The Government of India’s self-reliance program aims to “make the country and its citizens independent and self-reliant in every way”. Five pillars, namely Economy, Infrastructure, System, Vibrant Demographics and Demand, have been outlined for this campaign to be successful.

However, what is essential to understand is that in the modern world, where India is integrated with the outside world, true and sustainable growth cannot emerge without being strategically aligned with the Global Value Chains (GVCs).

India GVC Scenario

The OECD’s Trade-in Value Added (TIVA) database provides information on global supply chains, beyond traditional trade figures. India’s backward share, which is the foreign value added share of gross exports, was estimated at 19.1 percent in 2015, down from 18.8 percent in 2005. It had reached 25.1 percent. in 2012.

China saw some similar trends. The TIVA decreased from 26.3 percent in 2005 to 17.3 percent in 2015, but China’s exports are 9 to 10 times compared to India. Nations like Vietnam have a backward share of more than 40 percent.

On the anticipated share front, which is an indication of how India is adding value to foreign exports as part of its own gross exports, India’s anticipated share is revealed to have decreased from 16.6 percent in 2005 to 14.9 percent. percent in 2016. For China, this increased from 15.6 percent to 17.5 percent, during the same period.

However, one parameter on which India has been increasingly compared to countries such as China and Vietnam in recent years is “domestic value added in foreign final demand”. This parameter means the links that are direct with the final consumer, such as the assembly of a final product.

In industries such as textiles and clothing, where India is competitive, its domestic value added in foreign final demand as a proportion of gross exports is 36.4 percent. The same for China and Vietnam is 50.8 percent and 89.2 percent, respectively.

Furthermore, the same benchmark for the “computer, electronic and optical products” industry, which includes various high-tech products, is only 22.2 percent for India. China (55.4 percent), Vietnam (87.7 percent) and Malaysia (88.5 percent) are far ahead.

How to balance self-reliance and integration in global value chains?

Advancing the integration of self-reliance in global value chains would require a balanced approach. As India increasingly focuses on being self-sufficient while producing for the world, it also shouldn’t be growing in a way where it limits itself to being an assembly center.

They should focus on other areas of GVCs, such as design and research and development. These are initial stages of production and are high-value stages and, in the long run, contribute to making India a self-sustaining producer.

In addition, India should effectively use its MSMEs, which are very talented in doing business but face a plethora of challenges somewhere. GVCs are nothing more than a highly decentralized process of doing things.

When processes such as production, design, etc. are decentralized, MSMEs have a significant scope to be part of this chain. Given their contribution to India’s GDP, exports and employment, MSMEs tick all the boxes when it comes to growing sustainably.

India should also use its forums like BRICS to promote these MSMEs in the start-up space, preparing them to be part of GVCs.

India is already in the process of renegotiating the scope of some of its trade agreements that, again, may allow Indian companies to contribute directly to the nation’s GVCs and exports. But at the same time, challenges such as low rates of preference utilization must be addressed.

In conclusion, when a country like India wants to become self-sufficient, it must realize that today’s Indian companies meet the demands of the world. In addition, Indian consumers look widely for variety when choosing products.

This process, which benefits Indian businesses and consumers, cannot be carried out without giving adequate weight to value chains. Ultimately, a balance must be struck and maintained.

Rahul Mazumdar and Mayank Khurana are economists at India Exim Bank. The views are personal.

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India must achieve self-sufficiency through value chains

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