Global Value Chains: Remedy for India’s slowdown blues

• Growth forecast of Indian GDP has plummeted below 7% and the Indian economy slipped down to 7th position at nominal price levels.
• Enervated consumer demand, slowdown in trade, liquidity crunch and slower growth in investments have been blamed for the slowdown in India’s economy.
• Given that the slowdown could be structural in nature, India needs to drive its presence in global value chains to usher in export-led growth.
• The focus for participation in GVCs should be sectors like mobile phones (0.19%), integrated circuits (0.01%), computers (0.04%), solar-powered diodes, transistors (0.14%) and LCDs (0.04%), where India has a low export share.

India’s economy is firmly in the grips of a slowdown, a fact that even the most optimistic commentators would now grudgingly admit. The trend has been evident ever since the fourth quarter of 2018-19, when India clocked a below-par GDP growth rate of 5.8%. At this juncture, when the government admits that India needs to push investment and export-driven growth, participation in global value chains (GVCs) could be one way to combat the challenge.

Enervated consumer demand, slowdown in trade, liquidity crunch and slower growth in investments have been blamed for the current slowdown in India’s economy. Consumption constituted about 60% of GDP (at current prices) during 2017-18 and 2018-19. A decline in consumption indicates that demand has dried up and needs to be revived immediately. Another parameter which needs to be given attention is investment, which is another major driver of economic growth, and has witnessed a jerky ride. Private investment grew 7.2% in the March quarter, down from 8.4% in the previous quarter, while investment growth slowed to 3.6% from 10.6%. The slowdown would put pressure on for fiscal stimulus, including tax cuts on fuel products to boost consumption

The growth forecast of Indian GDP has plummeted below 7% and the Indian economy slipped down to 7th position at nominal price levels. There has been a lot of activity going around over the past few weeks including a cut in repo rate to revive demand & tackle this deepening economic slowdown. Industry sops and tax cuts are being considered by the government to revive growth.  Also, Indian markers have been volatile for the past few weeks, caused by a high outflow of foreign and domestic investments. While external factors such as US-China trade tussle and negative US Fed Rate commentary have affected sentiments, weakness in demand and growth have also dampened investor sentiment. There are continuous layoffs in the automobile sector due to decline in demand, which is impacting the balance sheets of these firms. The malaise is now spreading to the services sector, as indicated by slowdown in credit to sectors like shipping, tourism, hotels & restaurants, computer services and commercial real estate.

In this scenario, India needs to take urgent measures to mitigate the impact of the global slowdown on its exports, which can be a catalyst for economic revival. Considering that the current slowdown is also seen to be structural in some sense, a shift to export-led growth would be necessary. Due to increased integration of world markets, transmission of economic slowdown from one country to the rest of the world has become quite seamless. The larger the country, where the crisis originates, the greater is the impact on other countries. India’s exports will be challenged by the global slowdown in demand and trade. We need to have a clear thought process and plan of action to revive our exports outlook.

It is a major challenge for India to implement strategies, which not only mitigate the adverse impact of the global slowdown on its exports but also build the resilience of the economy to such future shocks. However, for designing such strategies, there is a need to assess the extent to which the global slowdown may impact total exports and, more importantly, identify the sectors which are likely to be more adversely affected by it.

Export revival through Global Value Chains

Global value chains (GVCs) have become all the more necessary because selling products that are labour intensive is becoming difficult for many developing countries. They are facing declining returns unless the producers are able to upgrade the quality of products through higher value addition. This problem is particularly relevant to SMEs of developing countries, which generally have limited pricing power and limited capabilities and options for upgrading their products. They can link up with international production networks, but then they have to meet a wide range of increasingly stringent global standards with respect to quality, price, timely delivery and flexibility. Only some countries have been successful in integrating themselves into global value chains and China is at the forefront. Almost all big retail chains of the world get their products made in China even though shifts to other locations have been seen in recent times.

Ironically, 70% of India’s export earnings come from the small basket products. India has a high share of world exports in the following such products: small diamonds (19.8%), jewellery (12.7%), rice (39.1%), buffalo meat (19.1%), shrimps (17.7%). Other major products are petroleum, cotton, yarn, ladies’ suits, medicines, auto components. The small size of the global basket limits the potential for future growth. Also, most products face intense competition from low-cost countries such as Bangladesh and Vietnam.

Source: http://statisticstimes.com/economy/gdp-growth-of-india.php, 2019

India has a weak global export share in these commodities such as mobile phones (0.19%), integrated circuits (0.01%), computers (0.04%), solar-powered diodes, transistors (0.14%) and LCDs (0.04%). Compare these shares with India’s 1.7 per cent share of global merchandise exports. India has an insignificant presence in products that have become important in world trade. Most large basket products are infra critical products whose parts are manufactured in several countries.

According to the OECD TiVA database, the foreign value added content in India’s exports declined from 25.1% in 2012 to 16.1% in 2016, which is a sign of worry as it enervated the scenario of India’s GVC participation. India’s foreign value added content of gross exports are lowest for primary agriculture (3%), processed food (6%) and is highest for petroleum products (47%) and basic metals (39%). India has ended up importing more from the rest of the world rather than exporting to it. It is not the only economy, which is facing such problems. Unless India undertakes pragmatic reforms which equip its manufacturing sector to fully exploit the advantages of integration to the global economy, it is unlikely to realize the dreams of the becoming the next global factory, which is critical to achieving its economic goals.