India's low score on GVC a starting point for recovery from pandemic: AIIB

India rated 7.4 percentage points below the average global value chain participation rate for emerging economies

A report from the Asian Infrastructure Investment Bank (AIIB) has rated India at 7.4 percentage points below the average global value chain (GVC) participation rate for emerging economies.

The highest contributor among emerging economies, that on an average have 50 per cent participation in GVC, is Malaysia. Among advanced economies that have an average 60 per cent participation, it is Norway.

India scored low on the scales of productivity, innovation and role of foreign subsidiaries in trade. Hong Kong, China, Republic of Korea and Singapore scored high on most parameters and had high backward linkages. The Republic of Korea, however, scored low on the role of foreign subsidiaries.

For countries looking to maximise the economic potential of GVCs, the 2021 Asian Infrastructure Finance Report emphasises on digitisation, competing by offering opportunities to decarbonize GVCs and promote inclusive development.

The report said India can capitalise on a higher participation rate in global value chains (GVC) to accelerate the country’s recovery from the pandemic. AIIB’s 2021 Asian Infrastructure Finance Report said GVC participation across India would largely rely on a combination of improving infrastructure, strengthening institutional quality and increasing port efficiency, capacity and connectivity with the hinterland.

“Greater participation in global value chains is a proven development pathway for emerging economies. Government investments in transport, electricity and connectivity infrastructure can help close the gap, but these investments must incorporate both digital and net-zero elements to compete on the world stage,” said the report. According to Erik Berglof, chief economist, AIIB, the value chain currently is about information which can be standardised.

Berglöf said there was immense opportunity for India to grow its economy and create wealth by investing in road networks and power infrastructure to underpin increased participation in GVCs. “By targeting activities with the greatest potential to improve productivity, connectivity and green the value chain, India will improve their overall competitiveness in the region,” he said.

Covid-19, the biggest peacetime shock to the global economy, was a major stress test for GVCs, said the report. “The initial impact was dire, with the effects of work stoppages and lockdowns in China rippling across GVCs, from automobiles to electronics. Yet, GVCs held up and performed remarkably well despite the initial shock. China’s containment of COVID-19 is an important part of the resilience, but so are adaptation and innovation by companies in China and elsewhere,” it said.

Though India has steadily expanded its share in global value chains with its share in global exports more than tripling from 0.5 per cent in 1990 to more than 1.7 per cent in 2018, exports tend to be highly concentrated across only a few states. “Clearly, location plays an important role in four of the six states—Maharashtra, Gujarat, Karnataka and Tamil Nadu are coastal states. The easy access to port facilities is likely to attract firms that intend to export,” said the report.

“The competitiveness of exports depends on whether cargo can reach its destination on time at a reasonable cost, which is even more important for GVC exports. What is clear is that there is ample room to improve the road network to bring inland states “closer” to the ports. What is also clear is the mutually reinforcing nature of infrastructure development and exports,” said Berglof.

The report said India steadily increased its GVC participation since 1990 but it has come down slightly since the global financial crisis of 2008. The economy relies more on exports of domestic raw materials and intermediate products and less on exports based on imported materials. Since the early 2000s, India has moved downstream by strengthening its backward linkages and shifted toward high-technology exports. Exports have traditionally been concentrated in a few coastal states but, over time, more states have engaged with GVCs.

“Infrastructure quality, not least the reliability of power supply, is strongly correlated with propensity to export, but so are broader institutional quality measures. An analysis of important ports suggests that investments in hinterland transport would have high returns,” it suggested.