The disruption in China’s exports and in turn, global supply chain, as a result of COVID-19 calls for a re-orientation of global supply chains entailing China plus One strategy. As a matter of fact, the rapid spread of the pandemic from China to rest of the world got aggravated due to over-dependence of global economy on China. This opens a door for nation such as India to push itself as a reliable alternative. Here is a look at how China succeeded and what India needs to do based on the recent Economic Survey.
The first wave of exports growth till about 2000 was driven by leveraging advantage arising out of low-cost unskilled labour. As per the Survey, China successfully benefitted from this with its share in China’s export basket increasing from 28% in 1980 to 46% in 1990. However, India could not leverage its capacities and the figure remained constant at around 30% during 1980-2000. More unfortunately, it suffered a premature decline after that to just about 16% in 2018 (non-oil exports).
The second wave of exports is driven by new age Network Products (NP) which refer to production chain of items such as computers, electronic & electrical equipment, telecommunication equipment etc. These products are manufactured by Multi-National Enterprises (MNEs) through their global production networks called global value chain (GVC). The survey raises a question as to whether it is in our interest participate in GVCs (Global Value Chains) or rely on local value chain to boost exports.
The importance of NPs is evident from the fact that these accounted for nearly 30% of world exports. Even as India’s export of NPs increased from about $2 billion in 2000 to $32 billion in 2018, its share is just 10% in India’s export basket. In contrast, these products account for about half of total exports of China, Japan and Korea. Furthermore, India is among the few developing countries who run a trade deficit in NP with imports of $68 billion. The paradox of India’s manufacturing policy is that even though MNEs have set up production base for these industries here, they have been largely catering to domestic market only. (Does a policy like mandatory sourcing from domestic MSMEs etc also play a role in this?)
Higher level of participation in GVCs implies that exports of these goods would have higher import content than other exports where inputs are sourced locally. This would imply lower net value addition; yet, because of scale of selling in the world market, would lead to higher gain on absolute basis. For instance, China’s share of value add in some NPs is only 3%. As per survey’s estimates, increase of 10% in value of imported inputs leads to 18% increase in total exports implying net additional exports of 8%.
Not only does the low participation in NPs affect the exports, it also implies lower share of markets of traditional rich country. The high-income OECD markets accounted for half of China’s exports in 2018 while the corresponding figure for India was 40%. Countries with low level of participation in GVCs, especially a developing nation, find it difficult to export capital intensive products to the quality/brand conscious markets in richer countries. This is borne by the fact that OECD countries accounted for only 22% of Indian exports of passenger vehicles in 2015 with the rest being exported to low- & middle-income countries. On the other hand, labour-intensive product such as apparel derived as much as 64% of exports from OECD countries. The survey quotes a regression analysis of Veeramani, Aerath and Gupta to analyse the impact of this. As per the analysis, China’s exports exceeded that of India by about 743% per year during the period 2000-2015 which reduces to just 37% if the difference in exports to OECD countries are removed.
So, where does this bring us to? First, India’s needs to become a part of GVC for new age NPs. Second, India needs to increase its share of total OECD market for traditional, unskilled, labour-intensive industries also such as textiles, clothing, footwear and toys by integrating with its GVC even if it involves some sacrifice in terms of playing second fiddle. GVCs for these industries are controlled by firms based in developed countries but actual production is carried out through sub-contracting arrangements. While India’s FDI and manufacturing policies also need to differentiate between export-oriented units and those catering to domestic market, it has failed in this so far. Whether this can be achieved in future would be a tough call.