Articles > What Stops India From
Being Asia’s Next Big Factory?
What Stops India From Being Asia’s Next Big Factory?
The Wire, November 22, 2018
By Pradeep S Mehta and Surendar
The US-China trade war is disrupting
the functioning of global value chains (GVCs) that spread across East
Asia, North America and West Europe.
Nearly two thirds of international trade is now happening through GVCs.
Its potential spillover effects will likely transform the geography of
GVCs, which in turn define the global trading system’s geo-economic
This is forcing a large number of Asian manufacturers to shift their
production lines from East Asia to low cost economies such as
Bangladesh, Cambodia, Sri Lanka that are relatively less fragile to a
global trade war.
Many multinational corporations including Mitsubishi Electric, Hasbro,
Micron Technology and Toshiba Machine are contemplating shifting their
production centres to minimise the impact of the trade war between the
US and China.
Now, a relevant question is: does the trade war offer a window of
opportunity for India? The answer is probably yes. This is a unique
opportunity for India to increase its exports and to capture greater
space in GVCs. However, the potential gains from this opportunity
hinge on India’s ability to align its trade, investment and
infrastructure with operative principles of GVCs.
It’s clear that our trade and trade-related policy-makers need to
undertake specific and substantial structural reforms over the next
three to five years. If this is done, we can definitely emerge as the
next factory of the world. The ripple effects of this cannot be
overstated – it will emerge as a sustained contributor towards
creating new job opportunities for our youth.
If we fail, India will have to deal with social unrest due to high
unemployment of the increasing demographic dividend.
So, what needs to be done?
First, India is yet to liberalise its trade policy to make it coherent
with the value chain led trade. India’s average applied tariff is
higher than those in most other East Asia and Pacific economies. In
2016, India’s trade weighted average tariff was 7.5%, while in East
Asia & Pacific economies, it was 3.6%. Higher tariffs hindering the
imports of intermediate products create an impact at the very root of
value addition through forward linkages.
Even with this disparity and its concomitant impact on the ability of
Indian firms to operate within GVCs, the fact of the matter is India
has recently increased its import duty on a number of products
including telecom equipment, steel, automobile, textile products. An
increase in import tariffs generates trade policy uncertainty.
Moreover, such changes in tariffs may drive India out of regional
production networks, which operate on efficient movement of
intermediate products across borders.
Other than this, India’s trade policy is largely conducted at the
aggregate level and its overall orientation is on conventional product
or sector specific policies. Such policies often fail to capture
nuances of comparative cost advantage at firm level that are vital for
the participation in GVC-led trade. This is primarily happening due to
the absence of trade-related firm-level data to understand the
critical factors of their internationalisation.
Secondly, free trade agreements are important instruments to
facilitate regional integration and connect with regional and global
value chains. In the Asia-Pacific region, India has comprehensive free
trade agreements with Japan, South Korea, Association of Southeast
Asian Nations (ASEAN), Singapore and Malaysia. However, Indian firms
are largely unable to use these FTAs to penetrate themselves into
foreign markets. One of the major reasons is low utilisation of these
This is evident from a survey by Japan External Trade Organization (JETRO)
in 2017. The utilisation rate of India’s FTAs with ASEAN and Japan is
more on imports than exports. The average utilisation rate for exports
is 42% for ASEAN and Japan, while on imports it is 71% and 55%
respectively. The higher usage of FTAs on imports indicates that
Indian importers are making greater use of these FTAs and, therefore,
greater market access for ASEAN and Japanese products in the Indian
The lower usage of FTAs in case of exports indicates that India’s FTAs
do not provide incentives to importers in Japan and ASEAN to import
under these FTAs. One of the reasons is wafer-thin margins between MFN
(most-favoured-nation) tariffs which are same for all WTO (World Trade
Organisation) members and preferential tariffs under these FTAs.
Thirdly, participation in GVCs also hinges on the state of trade
infrastructure and trade regulatory framework. Efficient export and
import clearance is vital for well-lubricated value chains. India’s
performance on the World Bank’s Trading Across Borders, 2018 has
improved remarkably by taking a quantum leap from 146 to 80 out of 190
countries. Thus, it would be interesting to see how it impacts the
cost and time of doing trade and facilitate the integration of Indian
firms in GVCs.
However, it would be worthwhile if one analyses the current
performance of India on trade facilitation in the context of the
nature of traded products. Majority of India’s exports constitute
cotton, diamonds, rice, yarn, garments, gem and jewellery, low-end
engineering products, pharmaceuticals and petrochemicals. These
products can be easily exported with less efficient trade
infrastructure. Furthermore, more than 70% of India’s global trade
takes place through Nhava Sheva Mumbai, Chennai and Mundra ports.
All of them are overburdened and working at 85% of their capacity
whereas globally 70% is considered to be ideal. Therefore, reforms at
the broader level might help India to improve its ranking on different
global benchmarks but it is difficult to say that they would produce
positive impact on business operations, where they are actually
On the trade policy front, Indian policymakers should move away from
sector-specific approach to GVC-oriented policies, which measure
success in terms of efficiency and reduced transaction costs. There is
also an urgent need to enhance the robustness of ‘trade policy
analysis’ with a particular focus on firm level analysis. For this,
special attention should be made to collect firm level trade-related
data to enhance the effectiveness of trade policy.
Another necessary step is to conduct deeper examination of the impact
of trade agreements on India’s firms and their integration into global
value chains. A simple trade flows analysis will not lead to any
On trade facilitation front, India should think about the setting-up
of National Trade Platform (NTP) on the lines of Singapore’s NTP. This
will serve as a one-stop platform for all kind of trade information
and will electronically facilitate export-import related compliances.
The NTP will help our exporters and importers to submit all
information/documents online at one place and there will be no need to
deal with customs, other regulatory bodies, banks and port authorities
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