The past few years have been turbulent for global merchandise trade, with multiple crises impacting its fundamental propelling mechanism — global value chains. While the global financial crisis and natural disasters in East Asia triggered the restructuring of global value chains last decade, the trend towards reshoring and near-shoring gathered momentum with the rise of US–China trade tensions in 2018.
Since then, the COVID-19 pandemic and the Ukraine crisis have introduced a stronger imperative for global value chain relocation that aims to deliver greater resilience and economic security. Achieving resilience through reduced single source import dependence or the China Plus One global value chain diversification strategy adopted by large corporations has created significant opportunities for other emerging market economies. India could tap into substantial benefits from these opportunities if it shifts its trade policy towards more openness.
India’s integration with global value chains was limited in the 2000s — and much lower than integration in ASEAN countries. This is true for both backward and forward global value chain integration and occurred despite an increase in the share of trade in India’s GDP. In the 2010s, relative to other emerging market economies like Mexico and Vietnam, India’s benefits in global value chain restructuring were small and mainly restricted to the machinery sector.
In the 2020s, there is a renewed and positive interest in the Indian economy as an alternative location in the China Plus One diversification by multinational corporations. This stems from both India’s good growth performance and global and regional conditions. These include increased competition in the trade and technology sectors due to the intensification of US–China tensions, the geoeconomic fragmentation following the Ukraine crisis and India’s strategic placement in the Indo-Pacific. Yet these factors alone do not imply definitive gains for India.
An open trade regime is essential to facilitate investment relocation and global value chain integration. India is relatively protectionist and less export-oriented compared to competing emerging market economies. India’s average applied most-favoured-nation tariff for non-agricultural goods is much higher than other emerging market economies like Vietnam, which has been a leading beneficiary economy from global value chain relocation.
Unlike Vietnam, India has seen a progressive increase in average applied most-favoured-nation tariffs in the manufacturing sector over the past decade. In global value chain sectors like electrical machinery and transport equipment, below average most-favoured-nation applied tariffs and a large number of duty-free lines allow imports of parts — for up to 89 per cent in electrical machinery in Vietnam, compared to 28 per cent in India — and facilitate efficient global value chain integration.
The number of free trade agreements (FTAs), the nature of partner economies and the depth and coverage of FTAs are among other elements that contribute to liberal trade environments that can support global value chains. While India has accelerated its pace of signing FTAs over the past couple of years, its tariff commitments in these FTAs have been less than the WTO-mandated liberalisation of ‘substantially all trade’. In its 2022 trade deal with Australia, India committed to liberalising around 70 per cent of tariff lines, in contrast to the 100 per cent committed by Australia.
India also includes a set of rules of origin based on the dual criteria of change in tariff heading and substantial value added in its FTAs. These strict rules of origin work against global value chain integration by restricting the preferential market access offered by an FTA. The change in the Customs Act in 2020 also makes the utilisation of FTAs more cumbersome by allowing for scrutiny by the Indian government regarding the origin of the imported product over the certificate of origin.
India’s FTAs are also not deep trade agreements. Inclusion of ‘WTO-Plus’ provisions on investment, intellectual property and environmental, social and governance issues signal a country’s commitment to upgrade its domestic regulatory policies to higher standards and undertake domestic policy reforms in these areas. But India is reluctant to include labour and environmental issues in its FTAs. Investment liberalisation in India’s FTAs draws upon its 2016 Model Bilateral Investment Treaty, which includes a complicated investor–state dispute settlement mechanism, making prior exhaustion of local remedies essential. Such provisions act as limiting factors in India’s attractiveness as a destination for relocating global value chains.
Other than Japan and South Korea, India does not have FTAs with developed economies. The FTAs with Japan and South Korea are under review and the FTA with Australia is only an early harvest trade deal. India is also not a member of any mega-regional trade agreements. India chose to withdraw from the Regional Comprehensive Economic Partnership negotiations, has not applied for membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and has opted to stay out of the trade pillar of the Indo-Pacific Economic Framework.
India introduced its Production Linked Incentive scheme in 2020. The scheme provides financial incentives to attract foreign investment and boost domestic manufacturing in 14 sectors for five years on an incremental basis. But the combination of financial incentives and protection through higher tariffs for both imported inputs and final goods in specified sectors is not likely to ensure an efficient outcome — in terms of either building complete supply chains or facilitating integration with global value chains.
This has been apparent in the electronics sector, which has seen some success in mobile handsets, particularly in the iPhone assembly units set up by Apple. Local content use in the sector remains small and contract manufacturers like Foxconn and Wistron have found it hard to negotiate joint ventures and survive in the Indian market. The November 2023 introduction of a monitoring system for imports of specific products in IT hardware manufacturing further adds an element of unpredictability to India’s trade policy.
India must substantially enhance its trade openness and trade policy predictability to take advantage of the relocation of global value chains.
Amita Batra is Professor of Economics at the School of International Studies, Jawaharlal Nehru University and author of India’s Trade Policy in the 21st Century.
