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The World Trade Organization in a recent report suggests that global trade volumes would grow by around 3% in 2022 and then see growth decline to just 1% in 2023.This tardy pace is attributed to uncertainties in the global economy driven by multiple macroeconomic factors, such as monetary tightening in the US and high energy prices in Europe as a result of the Russia-Ukraine crisis. Global trade is undergoing a significant downturn, which means that avenues for export-led growth would be limited for emerging economies such as India, though our medium-term outlook remains positive. We therefore need to gauge the present global situation and look beyond conventional export-led growth strategies. An equal emphasis needs to be placed on finding avenues for enhancing domestic demand to propel growth. This will require calibrating supply chains in a way that incentivizes domestic consumption. It is here that developing and deepening regional production networks (RPNs) assume significance. There has been a retreat in the discourse on the RPN framework needed to tap regional capacity and facilitate robust supply chains, but RPNs must be revisited and institutional capacity should be leveraged to generate more functional networks of production.

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RPNs are essentially ecosystems of regionally coherent production units which produce a commodity by achieving synergy among these units and reducing transaction costs, thereby optimizing the capacity of all stakeholders in its production. RPNs offer higher efficiency and lower marginal costs. They also lead to a number of positive externalities in terms of employment creation, local-market vibrancy and infrastructure growth in those regions. They let us leverage regional capacities and generate economic multipliers for the region by creating new production units made viable by access to other elements of the production chain.

There are two facets to RPNs: the supply side and the demand side. On the supply side, they reinforce supply chains by minimizing turnaround time and optimizing utilization of the components of the commodity being produced. Successful RPNs are designed around such an analysis, which can go a long way in exploiting a region’s comparative advantage. By reinforcing supply chains, RPNs also allow for a competitive pricing strategy, enabled by the lower marginal costs achieved by optimal restructuring of the production chain. On the demand side, competitive pricing incentivizes consumption demand, allowing firms to benefit from this even if per-unit profit margins drop low. This is the mechanism by which RPNs can generate demand within the country.

One of the key questions that emerges is what are the necessary preconditions for active and functional RPNs? The most important one is the identification of a regional comparative advantage, on the basis of which suitable products for local production can be identified. Geographically linked pockets of necessary endowments required for producing a commodity need to be mapped and institutional mechanisms need to be put in place that can reap benefits from the synergy achieved as part of this process. The role of the state in facilitating this synergy and the necessary institutional capacity is critical. One of the most important roles which the state can play in generating productive RPNs is by creating the infrastructure required to reduce transaction costs. This will not only incentivize businesses, but also create positive developmental outcomes for the areas that are linked as part of these RPNs.

At a time when the global trade outlook does not look promising, RPNs are important vehicles for accelerating economic activity in emerging economies. They are necessary for tapping regional capacity and deepening the roots of economic performance across areas which have abundant untapped potential.

In a large federal structure such as India’s, this is in line with the vision of a bottom-up approach to industrialization and economic growth where the Centre and individual states have important roles to play. We can rely on the collective efforts of the Centre and states in identifying potential businesses and providing the ecosystem needed to create growth nodes for these RPNs.

In general, then, RPNs can be a game-changer when it comes to incentivizing local businesses to tap domestic demand and generate employment opportunities.

However, they must be seen as a cog in the larger wheel of industrial policy interventions, where the question of subsidies versus performance must take centre-stage. A coherent policy framework for enabling catalysts for the success of RPNs would synthesize the state’s ability to provide preconditions for exploiting a regional comparative advantage with the ability of businesses to optimize their production chains and drive down marginal costs. This requires a fine blend of import-substitution with export promotion. A tilt towards one or substituting imports alone would not create the necessary conditions, as maintaining trade openness imparts vibrancy to RPNs. A first step in this direction would be to revitalize and link some of our existing industrial clusters. As some of these are already embedded in regional economies, they could reap early-mover advantages. However, resource flows within and across clusters need to be scaled up.

RPNs could give emerging economies a shield from the global uncertainties and exogenous shocks that have the potential to lower their growth trajectories.

These are the authors’ personal views.

Mausam Kumar & M. Suresh Babu are, respectively, researcher at the Economic Advisory Council to the Prime Minister (EAC-PM); and advisor to EAC-PM and professor of economics at IIT Madras.

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