Why India link in global value chains is weak

If India is to become a $5 trillion economy by 2024, the performance of the manufacturing sector will be key. However, the sector is held back by its low integration in global value chains (GVCs), suggests research. In their study, Saon Ray and Smita Miglani highlight that India’s GVC integration, measured as the foreign value-added to India’s exports and domestic value-added to India’s intermediate good exports, remains weak.

A big reason for this is India’s historical inward-looking industrial policies starting from import substitution, the Licence Raj, and state-led industrialization. The authors suggest that because of India’s large market, policies focused on the domestic market without considering the employment and technological benefits of being part of a larger value chain. Recent policies such as industrial corridors, de-licensing, and the Make in India initiative, are steps in the right direction but may not be enough. Indian policies do not create enough lead firms, which are central to all aspects of a value chain from sourcing supplies to the final product, in GVCs, according to the authors. For instance, Tata Motors in the automobile sector and Ranbaxy in the pharmaceutical sector play key roles in transferring technology, establishing supply chains, and attracting foreign investment. However, in general, India has very few such sectoral lead firms. Skill shortage, lack of access to finance, custom procedures, and high taxes all prevent lead firms from developing in India. Manufacturing and trade policies thus need to focus on establishing stronger GVC linkages by attracting more global lead firms to India, the authors contend.

Also read: India’s GVC integration: An analysis of upgrading efforts and facilitation of lead firm

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