India in the GVC diversification strategy: A reality check

Source– The post is based on the article “India in the GVC diversification strategy: A reality check” published in the Business Standard on 5th January 2023.

Syllabus: GS3- Economy

Relevance– Issues related to the global economy and trade.

News– The article explains the restructuring of the global value chain(GVC) in recent times. IT also compare India and VIetnam on their GVC diversification

How is the restructuring of the global economy taking place?[Text Wrapping Break]The restructuring of global value chains and their resilience remained the dominant global concerns of 2022.

“China plus one” is now the predominant strategy of large MNCs as they face the consequences of the US-China stand-off.

Large MNCs have opted for friendshoring as their preferred relocation strategy. Among South and Southeast Asian economies, Vietnam seems to be the preferred location for regional shifts in GVCs.

What are the differences in trends of GVC diversification by India and Vietnam?

Between 2010 and 2018, Vietnam showed large improvement in the foreign value added component of its gross exports. It registered an annual increase of 17.3% in the FVA component over this period. It was less than 5% for Asia and India.

It helped to substantially increase Vietnam’s share in global exports. Vietnam’s share increased from 0.5% in 2010 to 1.6% in 2020. It is now the 20th largest goods exporter in the world. India’s share has remained stagnant at 1.6% during this period.

A further reflection of the difference in GVC participation is evident from the share of manufactured exports.

Both had equal share of manufactured exports in their total merchandise exports in 2010. It was 63% for both at that time. Vietnam recorded an increase to 86% in 2020 while India registered only a small increase to 71% in 2020.

How can India and Vietnam be compared on their trade arrangements?

Free trade agreements– In the case of Vietnam, the number of FRAs signed and their depth, nature of partner economies are conducive for trade. It has also Included WTO++ provisions on environment and labour issues in FTAs.

Vietnam’s FTAs include RCEP, CPTPP and the Indo-Pacific Economic Framework trade pillar as well as bi-laterals with the UK and EU. It is a party to the ASEAN FTA.

India has an almost equal number of FTAs. But, these are not deep trade agreements. India does not have FTA with developed economies except Japan and Korea. The FTAs with Japan and Korea are under review.

India  is not a member of any mega-regional trade agreement. India continues to be reluctant to include labour and environment-related issues in FTAs.

Tariff structure– Vietnam’s tariff structure is another indicator of its more open trade regime. Its average most favoured nation tariff for non-agricultural goods is much lower than India. A significantly higher number of tariff lines are included in the duty-free category and in the lowest bracket.

Logistics– Good logistics help in reducing trade costs and facilitate GVC operations. In the World Bank’s Logistics Performance Index, Vietnam has registered a significant increase in the last decade. In 2018, it ranked at 39 among 160 countries. It is a major improvement relative to its consistent ranking at 53 during 2007 to 2012.

In contrast, India was ranked at 44 in 2018. It was an improvement over its 2010 rank but of a much smaller magnitude.