Modi 3.0: What does it mean for India’s integration into the global value chain?
India just announced its 2024 general election results with a stunningly weak victory for Prime Minister Modi. While a third mandate should be possible, it will be in a coalition government. This casts doubt on whether he can push forward more reforms and especially that in which he has fallen behind in his previous two mandates, namely creating enough jobs, and specially manufacturing jobs. Within that goal, India’s integration in the global value chains (GVC) is crucial, which is the topic of this note.
India has been growing rapidly but mainly driven by domestic demand while its share of global exports had stagnated. As such, massive potential remains in external demand if India can sharpen its competitiveness and become a manufacturing hub integrating in the GVC.
So far, data shows that India’s GVC participation declined in the past decade. The reason for this is the last drop in India’s imports of intermediated goods to re-export (so-called backward participation in GVC jargon). In other words, India has been substituting foreign inputs for domestic substitutes, a trend also confirmed by the narrowing of India’s current account deficit, which is happening due to the fall in imports, rather than an increase in exports. Intermediate manufacturing goods contributed to the lion’s share of this trend, which raises doubts as to whether India’s push for self-reliance will be successful. The reason is that India’s import tariffs remain elevated which offers protection to local - sometimes inefficient producers. For India to become a global player in the GVC, it would be really important to import the most competitive intermediate goods with lower tariffs rather than substitute them with more expensive local goods.
On the other hand, India has made progress exporting more original value to the GVC but mostly in services, especially ICT sectors, while manufacturing went flat. Most directly it may be related to the long plateaued FDI which is in stark contrast with other manufacturing centers such as China and Vietnam.
As such, India may need to continue pushing hard with its trade liberalization to attract more FDI in the manufacturing sectors, especially the labor-intensive ones, rather than higher-end services like ICT and business which absorb limited working-age population. Lowering international trade hurdles, especially the too high tariffs on intermediate goods, may also help India to improve its efficiency and competitiveness to stand out in manufacturing GVC. Moving forward, open trade and welcome for competition may do better than protectionism, as India is well-positioned in the reshuffling of GVC given its demographic endowment but also the geopolitical tailwinds.
*If you are interested in getting full report, please feel free to contact me.