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Up Front

Fractured Global Value Chains post COVID-19: Can India gain its missed glory?

I. Economic Growth and Trade

Covid-19 has hit the world hard. As on May 11, 2020, there have been a total of 4,215,274 positive cases across the world with 284,672 reported deaths. The U.S. has suffered the highest number of 80,800 deaths. India has reported 67,724 Covid-19 positive cases and 2,215 deaths.[1]

The global economy is facing an unprecedented crisis of COVID-19, which might impact the world in terms of deteriorating human health, worse than the Spanish Flu pandemic of 1918 (till 1920) and the Great Depression of 1929 (till 1939). There is no way yet to compute the peak and duration of health and economic downturns. As the IMF World Economic Outlook (WEO), April 2020, puts it, “Depending on the duration, global business confidence could be severely affected, leading to weaker investment and growth than projected in the baseline. Related to the uncertainty around COVID-19, an extended risk-off episode in financial markets and tightening of financial conditions could cause deeper and longer-lasting downturns in a number of countries.”

Rajesh Chadha

Program Director, Natural Resources - Brookings India

In January 2020, the IMF WEO Update had projected the 2020 world economy to grow at 3.3%, advanced economies at 1.6%, emerging markets and developing economies at 4.4%, India at 5.8% and China at 6.0%. It didn’t have any mention of the novel coronavirus. Covid-19 has seriously impacted these growth numbers. The corresponding numbers, as per IMF WEO (April 2020) are projected at -3.0% (world), -6.1% (advanced economies), -1.0% (emerging markets and developing economies), 1.9% (India) and 1.2% (China). The world trade volume, which, in January 2020, was expected to expand by 2.9% is now estimated at a decline of 11.0% (-11%). The drastic downward revision within one quarter must be a record slippage in the history of IMF.[2]

The Indian economy has already been facing serious deceleration in economic growth, quarter after quarter, since Quarter-1 of 2018-19 when it posted a growth of 8% in GDP at market prices. The decline has been sharp with expected growth in Quarter-2 of 2019-20 estimated at 4.5%.[3] The aftermath of Covid-19 might put India’s growth rate for 2020-21 anywhere below 2%, or even lower. These are guess-estimates and would very much depend on the peak, length and the likely returning waves of Covid-19 after its first phase gets flattened. However, it is just not feasible to put economic cost to the human lives lost.

India must consider various options to invigorate the domestic economy in the coming months/years. One of the options lies in strengthening its manufacturing sector through greater participation in the fractured global value chains (GVCs). Such participation is expected to boost jobs and income. China is currently the most important hub of GVCs for many multinational enterprises (MNEs). While the SARS coronavirus had impacted GVCs in 2003, the impact of Covid-19 in 2020 is going to be much worse. India has great awaited potential for attracting investment from MNEs which may now be looking for diversifying/shifting their production facilities away from China. It should make the best use of this opportunity which has evaded it during the last two decades.

II. Covid-19 disequilibrium of Global Value Chains

China gained the maximum advantage from the process of production fragmentation since the early 1990s and could attract investments into manufacturing via the global value chains. Of course, while China facilitated the assembly for many MNEs. These MNEs as well their home countries benefited from having their production platforms located in China. The U.S. has been one of the top beneficiaries.

Wuhan in Hubei province of China was the epicentre of the novel coronavirus outbreak. By February 2020, the virus had spread to 18 additional provinces (Dun & Bradstreet, 2020). Over 90% of all active businesses in China are located in these provinces. More than 51,000 companies across the world, including 163 Fortune 1000 companies, have one or more direct or Tier-1 suppliers in the impacted region. The number of companies having one or more Tier-2 suppliers in the impacted region exceeds five million including 938 Fortune 1000 companies.[4]

The big MNEs relying on “just in time” deliveries through GVCs have faced serious supply chain risks. The after-effects of the SARS outbreak in 2003 were much less severe. China’s share in world GDP, which was 4% in 2003, has quadrupled to 16% now. Its exports of textiles and apparel account for 40% of the world exports. China now is a major importer of metals and minerals. Its share in world mining imports has risen to 20% compared with 7% in 2003 (The Economist, February 15, 2020).[5]

A survey of 628 U.S. companies, including 52% manufacturing and 48% non-manufacturing units, conducted by the Institute of Supply Management, reveals that the companies are seriously impacted due to the spread of Covid-19. Nearly three-fourths of the companies have reported disruptions in their supply chains. Close to 57% responses reported longer lead times for components sourced from Tier-1 sources in China. About 60% of the companies, which normally travel to China for business, don’t intend to travel over the next six months.[6]

There is intense discussion around the world about diversifying GVCs with many of the MNEs considering shifting parts of their production platforms away from China. The United States is contemplating creation of an Economic Prosperity Network through an alliance with trusted partners. The likely alliance countries include Australia, India, Japan, New Zealand, South Korea and Vietnam. The effort would be to move global value chains production away from China into friendlier countries.[7]

Japan has announced a $2.2 billion stimulus package to help its companies for shifting out their production bases away from China into other countries.[8] This would enable Japanese firms to move away from the risk of unexpected failures in dealing with China.

While many MNEs and countries might wish to diversify their production platforms away from China, it is easier said than can be done. Post Covid-19, many of the companies shall be starved of cash and may not be able to move away from China to invest in other countries in an abrupt short-term manner.

III. Can India gain its missed glory?

The Global Value Chain Development Report (2019) published by World Bank, jointly with WTO, IDE-JETRO, OECD and UIBE discusses technological innovation, supply chain trade, and workers in a globalised world. It states that the share of GVCs in global trade has declined since the financial crisis of 2008. Many of the developing countries have been able to integrate into the global economy with gains in jobs and income. While the GVCs have moved up the technological sophistication, the consumer demand has also grown, thus leaving scope for developing countries to participate in low-skilled labour-intensive tasks which need human dexterity. However, the new technologies are posing a challenge the impact of which is not yet known. Automation and digital technologies might disrupt the current GVC arrangements and widen disparities across countries. However, these provide SMEs to play a more active role. Trade openness continues to remain a facilitating route as compared to import-substituting efforts to raise the share of domestic value-added.[9]

Much of the extant literature has identified India as one of the major potential countries which could have participated actively in GVCs but couldn’t. Indian industry, as well as the government, have been quite keen to play a major role. It is unfortunate though that while labour-intensive manufacturing could have created many more jobs, the share of manufacturing in GDP has remained sticky at about 17% for more than two decades.

The US-China trade war tensions in 2019 led to some of the firms shifting production out of China. A Nomura study reported relocation of 56 firms, during April-August 2019, shifting production away from China. 26 of these firms went to Vietnam, 11 to Taiwan and 8 to Thailand. Only three companies came to India and two went to Indonesia.[10]

The World Bank’s flagship World Development Report (WDR 2020) is titled Trading for Development in the Age of Global Value Chains. It was released in mid-November 2019, the eve of Covid-19 crisis. It carried a clear message, “GVCs can continue to boost growth, create better jobs, and reduce poverty provided that developing countries undertake deeper reforms and industrial countries pursue open, predictable policies.”[11]

The share of GVC trade in world trade had increased from about 37% in 1970 to a little over 41% in 1990, a gain of about 4 percentage points in 20 years. The next 18 years witnessed an impressive rise of 12 percentage points and the share of GVC trade in world trade touched the peak of 52% in 2008, i.e. in the year of global financial crisis. It has been declining thereafter. The growth in trade has been sluggish with a slowing down of expansion of GVCs. India could have played a major role but it couldn’t due to its own lacklustre domestic reforms. A lot more yet needs to be done on logistics and infrastructure fronts.

Some of the poor countries, including Bangladesh, China and Vietnam, could take advantage of establishing manufacturing/assembly platforms of MNEs and could benefit from increased productivity and incomes resulting in steep declines in poverty. Much of the growth in GVCs came from trade-led comparative advantage originating from labour-intensive manufacturing/assembly.

The WDR-2020 highlights two major factors which can potentially threaten the GVCs growth model, viz. labour-saving technologies, including automation and 3-D printing, and trade conflict between the large countries, the U.S. and China in particular. Little did the world know that Covid-19 would take the intensity of trade and foreign policy conflict between the U.S. and China to an unprecedented threat level. Given that many other countries have also been affected seriously, all eyes are now on how the evolving global trade and foreign policy order would evolve with regards to their respective relationships with China. The realities would emerge as the world starts coming out of the Covid-19 fatalities.

Incidentally, India’s Economic Survey 2019-20 also has a chapter on exports of network products through global value chains (Chapter 5, Volume I).[12]

Post-liberalisation, India’s share in global merchandise trade increased three times, from 0.6% in 1991 to 1.7% in 2018. China’s share at 12.8% in 2018 is 7.5 times that of India. It is time that India must participate in GVCs through a sharp focus on labour-intensive “network products” for which the production processes of MNEs are globally fragmented. These products include equipment for IT hardware, electricals, electronics and telecommunications, and road vehicles.

India must integrate “Assemble in India for the world” into “Make in India” programme. The Survey estimates creation of 40 million well-paid jobs by 2025 and 80 million by 2030. However, the post-COVID estimates are likely to be at variance with these numbers.

India has potential to integrate with global trade through exports of traditional buyer-driven networks of labour-intensive goods including toys, footwear, textiles, garments, etc. (Veeramani and Dhir, 2016).[13] The examples include Walmart, Adidas, Nike, etc. India also has great potential to assemble and export “network products” (NP) through final assembly (Athukorala, 2014[14]; Veeramani and Dhir, 2017[15]). These are producer-driven GVC networks controlled by leading MNEs such as LG, Samsung, Apple, etc. These products have fragmented production across many different countries. Each country specialises in one or more fragments of the process with final sophisticated parts and components produced in capital and skill-intensive countries and final assembly done in developing low skilled labour-intensive countries like China and Vietnam. MNEs, headquartered in developed countries including Japan, South Korea, the U.S. and E.U. own the R&D and specialise in capital-intensive stages of fragments. Network products may be divided into two main categories, viz. parts and components (P&C) and assembled end products (AEP).

The Economic Survey predicts the NP exports to grow from US$5.6 trillion in 2018 to US$6.9 trillion in 2020, US$24.8 trillion in 2025 and US$49.1 trillion in 2030. The share of India’s NP exports in world NP exports is expected to rise from about 1.2% in 2020, to 3.6% in 2025 and up to 6.1% in 2030. However, these numbers have gone through a drastic revision post-COVID-19.

What is the way forward for enabling new opportunities to succeed in GVC integration? It is time to undertake deeper domestic policy reforms, particularly the factor market reforms, land, labour and capital. Focused attention must be given to the ease of doing business, efficient logistics and infrastructure. India must also get future-ready for greater participation in technology and capital-intensive sectors of GVCs through upgradation of requisite skills, and R&D on patents and designs. Looking only at labour-intensive sectors would be a rather short to medium-term effort. The longer-run success lies in paying attention to trade in sophisticated network products. One of the most important enablers is international cooperation and keeping the trade open.

[1] https://www.worldometers.info/coronavirus/

[2] https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

[3] https://www.indiabudget.gov.in/economicsurvey/

[4] https://www.dnb.com/content/dam/english/economic-and-industry-insight/DNB_Business_Impact_of_the_Coronavirus_US.pdf

[5] https://www.economist.com/international/2020/02/15/the-new-coronavirus-could-have-a-lasting-impact-on-global-supply-chains

[6] https://www.instituteforsupplymanagement.org/news/NewsRoomDetail.cfm?ItemNumber=31171&SSO=1

[7] https://www.reuters.com/article/us-health-coronavirus-usa-china/trump-administration-pushing-to-rip-global-supply-chains-from-china-officials-idUSKBN22G0BZ

[8] https://www.businesstoday.in/current/world/coronavirus-impact-japan-to-offer-22-billion-to-firms-shifting-production-out-of-china/story/400721.html

[9] https://www.worldbank.org/en/topic/trade/publication/global-value-chain-development-report-2019

[10] https://economictimes.indiatimes.com/news/economy/indicators/trade-war-why-manufacturers-are-not-rushing-into-india-indonesia/articleshow/71474941.cms?from=mdr

[11] https://www.worldbank.org/en/publication/wdr2020

[12] https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf

[13] Veeramani, C and Dhir, Garima. 2016. “India’s export of unskilled labour-intensive products: a comparative analysis” in C. Veeramani and R Nagaraj (ed) International Trade and Industrial Development in India: Emerging Trends, Patterns and Issues, Orient Blackswan.

[14] http://testnew.ncaer.org/image/userfiles/file/IPF-Volumes/Volume%2010/2_Prema%20Chandra%20Athukorala.pdf

[15] Veeramani, C and Dhir, Garima. 2017. “Make What in India?” in S Mahendra Dev (ed), India Development Report 2017, Oxford University Press, New Delhi.

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