India’s manufacturing sector relies on foreign countries: It’s time to put a figure on India’s exposure to global value chains

Source: The post India’s manufacturing sector relies on foreign countries has been created, based on the article “It’s time to put a figure on India’s exposure to global value chains” published in “Live mints” on 19th March 2024.

UPSC Syllabus Topic: GS Paper 3- economy-Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth.

News: This article explains how India’s manufacturing sector relies on foreign countries, especially China, for key materials. It shows that India is more dependent on China than it appears because even products from other countries often have Chinese components. Manufacture Sector in India relies on foreign countries.

How does reliance on global supply chains, especially China, affect India’s manufacturing sector?

Rising Trade Deficit: India’s industrial sector trade deficit with China reached $84.4 billion in 2022, a 27% increase from 2021, highlighting growing reliance.

Complex Global Value Chains: India’s dependence on China is more intricate due to global value chains; parts and components are often sourced from multiple countries.

High Look-Through Exposure to China: On average, 23% of India’s foreign-sourced manufacturing inputs are indirectly from China, revealing a deeper reliance than apparent at first glance.

Increased Dependence Over Time: India’s reliance on Chinese inputs has risen sharply from 5% in 2000 to 23% in 2022, indicating growing vulnerability.

Critical Sectors Affected: Key Indian sectors like basic metals, transport, and electrical equipment are significantly dependent on foreign, especially Chinese, inputs.

What research method was used to analyze how much a country relies on foreign inputs in manufacturing?

Replicating Baldwin’s Study: The analysis follows the methodology used by Richard Baldwin et al., focusing on the interdependencies in manufacturing sectors.

Utilizing OECD Input-Output Tables: The research employs input-output tables from the Organization for Economic Cooperation and Development (OECD) to track the flow of products between countries.

Measuring Face-Value Exposure: This aspect considers the direct origins of intermediate products used by a country’s manufacturing sector, like India’s electronics sector sourcing from Vietnam.

Assessing Look-Through Exposure: This deeper analysis identifies the original sources of these intermediate products, such as Vietnamese suppliers relying on Chinese inputs, revealing indirect dependencies.

Way forward

To reduce dependency, India should diversify its manufacturing inputs, source from various countries, and possibly attract foreign investment. This approach would mitigate risks evident from the high trade deficit and growing indirect reliance on China, as seen in sectors like metals and transport equipment.

Question for practice:

Discuss how India’s growing dependency on China for manufacturing inputs, as revealed through the look-through exposure analysis, impacts its industrial autonomy and trade balance.