Riding the Wave of Global Value Chains: India’s Prospects and Challenges


India as a catalyst in the flow of goods, services, people and ideas is always interdependent and interconnected in order to maintain a global value chain system. These un-disrupted, sometimes crucial, flows determine the bond of GVCs. The aftermath of COVID 19 , Russia Ukraine war and tension between the US and China  led to the deglobalising effect of this value. In a deeply interconnected world these  flows have stood resilient during the turbulent period and left no region self-sufficient! This structural shift is both a challenge and opportunity  for India to maintain the dependency chain  to integrate GVC factors more favorable to the nation.

For a better understanding lets swim through the meaning of GVC, benefits of GVC, key factors related to it, global participation, recent paradigm shift, and finally how india can turn this table beside.

The development of Global Value Chains can be traced back to the 1970s when many developing countries transitioned their national development strategies from import-substituting industrialization (ISI) to export-oriented industrialization (EOI). This shift occurred worldwide and marked a significant turning point in the evolution of GVCs. Global Value Chain is A sequence of stages involved in the production of a product or service, ultimately aimed at selling to consumers.A GVC can be embodied as a value addition ( idea, designing, labor, marketing and distribution)  at each step  of production and at least two stages are produced in other countries. The exportation of iPhones by the USA serves as an example. The conception and design of iPhones take place in California, while high-tech components are sourced from other developed nations. The assembly process occurs in China, and ultimately, California takes charge of marketing and branding activities.

Participating in GVC has numerous benefits in a globalized economy, over 50% of global trade has remarkable involvement of GVCs.An increase of one percent in Global Value Chain (GVC) participation is projected to result in a per capita income growth of over one percent for a country. This growth rate is approximately twice as impactful as standard trade. This leads a nation to provide more employment opportunities as well as they mainly keep focusing on structural transformation in developing countries.for example in Ethiopia GVC firms are more into faster growth of employment despite their higher capital strengthening. The reduction of poverty through Global Value Chains (GVCs) proves to be more significant compared to conventional trade. According to the World Bank, the most substantial decreases in poverty have been observed in countries that have become integral to global value chains, including China, Vietnam, Bangladesh, and several others. As it gives you a chance to be specialized in the product market your capability delegation remains strong and independent. Knowledge sharing and strengthening of local firms are other factors in regard.

Based on the economic specialization a country can engage in either backward linkages or forward linkages while being a participant of GVCs. backward linkages are when a country utilizes inputs sourced from another country for its domestic production. This occurs when the required inputs for production are either not accessible within the country or available but insufficient in certain aspects such as quantity, quality, or price. For instance, India purchases raw material for steel manufacturing from Australia, South Africa and the UK. forward linkages are Such arrangements arise when one country provides inputs or intermediate goods that are utilized in the production process of another country. The supply of such inputs holds particular significance for developing nations as they strive to enter new industries and acquire knowledge on producing goods, even if they are relatively simple, for export markets. Like India supplies steel for production of consumer durables in countries like Korea, Japan and China.

Policy factors, and Non-Policy Factors, which are respectively non structural and  structural in manner can be the influencing factors of GVCs. a large domestic Market helps a country to lower backward engagement. a higher per-capita income helps to  increase the aggregate forward and backward engagement. As the share of the manufacturing sector in the GDP increases, the level of backward engagement of the country also increases, while the level of forward engagement decreases. Global Value Chain (GVC) activity revolves around prominent manufacturing hubs. The proximity to major manufacturing hubs in Europe, North America, and Asia plays a crucial role in determining the level of backward engagement. Countries located farther from these main manufacturing hubs tend to exhibit lower backward engagement, indicating the advantage of being situated closer to major headquarters economies.

India possesses specific competitive advantages such as cost-effective workforce, a knowledge-based economy, proficiency in English speaking, and governmental support. As a result, it stands as a prominent exporter of services and aims to achieve a target of US$ 1 trillion in services exports by 2030. Only six states in India contribute to 75 percent of the country’s exports, with the export share varying from 30 percent in Gujarat to below one percent in Bihar.

India’s involvement in Global Value Chains primarily revolves around forward linkages, indicating a greater emphasis on exporting raw materials and intermediate products, rather than export-oriented goods.Merchandise exports of network products, where GVCs serve as the dominant mode of production, comprise only 10% of India’s overall total. India’s active participation in GVCs is driven by key products such as coal and petroleum, business services, chemicals, and transport equipment.

Presently, As per McKinsey report there are  five structural shifts in the GVCs. In recent times, goods-producing value chains have exhibited reduced trade intensity, as evidenced by a decline in the ratio of gross exports to gross output across nearly all value chains related to goods production.This trend reflects the progress made by China and other emerging economies, as they are now consuming a larger share of their own production. Over the past decade, trade in services has experienced a growth rate exceeding 60 percent compared to goods trade. This growth is partly attributed to the emergence of innovative business models such as leasing, subscription, and other “as a service” models. However, services primarily consist of intangible assets like software, branding, design, operational processes, etc., which hold significant value. Yet, they often remain unpriced and untracked unless they are accounted for as intellectual property charges. In the 1990s and early 2000s, the location decisions for labor-intensive goods and services heavily relied on labor costs. But , in today’s landscape, only 18 percent of goods trade is influenced by labor-cost arbitrage. This shift primarily stems from the increasing wages in developing nations and the inclusion of other factors such as access to skilled labor, availability of natural resources, proximity to consumers, and the quality of infrastructure. Looking ahead, the progression of automation and artificial intelligence (AI) may further accentuate this trend, leading to a transformation from labor-intensive manufacturing to capital-intensive manufacturing. Within numerous value chains, the process of value creation is transitioning towards upstream activities like research and development (R&D) and design, as well as downstream activities encompassing distribution, marketing, and after-sales services. This shift towards knowledge and intangible assets provides an advantage to countries equipped with highly skilled labor forces, substantial innovation and R&D capacities, and robust intellectual property protections. Since 2013, the intraregional share of global goods trade has risen by 2.7 percentage points, which can be attributed in part to the increased consumption in emerging markets. This trend is particularly evident in Asia and European Union (EU) countries, and it is most prominent in global innovation value chains that require close integration with numerous suppliers.

Key initiative taken by India to integrate itself to GVC

India has undertaken targeted initiatives through transformative programs like Make in India and Atmanirbhar Bharat (“self-reliant India”) to actively integrate itself into GVCs. These efforts aim to address various obstacles that had previously impeded the country from realizing its complete potential in GVC participation. PLI (Production Linked Incentives) provides financial incentive for eligible manufacturers to make India hub of manufacturing in 14 key sectors like automobile and auto parts. Labor reforms Consolidation of 29 discrete laws under four codes covering wages; occupational safety, health and working conditions; industrial relations; and social security. Bharatmala For bridging critical infrastructure gaps in existing highway network for improving India’s rank in the Logistic Performance Index (LPI). Sagarmala For port-led development by leveraging the country’s coastline and inland waterways to drive industrial development. National Infrastructure Pipeline (NIP) programme to provide high quality infrastructure like transport, energy and water, across the country. PM Gati Shakti- National Master Plan for infrastructure development as a digital platform to create Next Generation Infrastructure by facilitating planning, designing and execution of the infrastructure projects with a common vision. In most  sectors of the economy, India allows foreign investments of up to 100 per cent through the automatic method. And finally the Foreign Trade Policy (FTP) 2023 which aims at process re-engineering and automation to facilitate ease of doing business for exporters. India has implemented various schemes to promote and facilitate export-oriented manufacturing. The Advance Authorization Scheme allows for the duty-free import of raw materials specifically for the production of export items. Under the Export Promotion of Capital Goods (EPCG) Scheme, the import of capital goods for export production is permitted with zero customs duty. Additionally, four new towns, namely Faridabad, Mirzapur, Moradabad, and Varanasi, have been designated as Towns of Export Excellence (TEE), joining the existing 39 towns. TEE status is granted to towns that demonstrate a minimum value of production and export in specific sectors, which encompass handicrafts, handloom, seafood, pharmaceuticals, fisheries, apparels, coir, leather products, and more. These initiatives aim to enhance India’s export capabilities and boost its participation in global markets.

Hindrance on the way to GVCs for India

India’s economic policies in the past have been characterized by an inward-looking approach, which hindered its integration into larger global value chains. Historical industrial policies, such as import substitution, the Licence Raj, and state-led industrialization, primarily aimed at safeguarding domestic industries through measures like tariffs, subsidies, and quotas. While these policies aimed to protect domestic industries, they also limited India’s participation in broader value chains. One notable challenge is the limited presence of lead firms within the country. Lead firms play a crucial role in various aspects of a value chain, ranging from sourcing supplies to the final product. The inadequate development of lead firms in India has impeded its ability to fully engage with global value chains and reap the associated benefits.and  shortage of skilled labor, which limits the country’s ability to nurture and attract talent necessary for leading value chains. Additionally, limited access to finance creates barriers for firms to invest in research and development, technology adoption, and expansion into global markets. Cumbersome customs procedures and high taxes further impede the growth of lead firms in the country, creating unfavorable business conditions.

 Despite Micro, Small, and Medium Enterprises (MSMEs) in India contributing approximately 30 percent to GDP and nearly 50 percent to the country’s exports, their involvement in global value chains remains limited. The potential synergy between MSMEs and GVCs has not been fully realized, preventing these enterprises  from fully capitalizing on the opportunities presented by global trade networks. Addressing these challenges and effectively leveraging the strengths of MSMEs can unlock their significant potential for greater engagement in global value chains, leading to enhanced economic growth and export competitiveness for India.

Structural shortcomings ,Lack of institutional support, Absence of adequate information regarding markets, partners, EXIM rules, and even trade finance play an important role for companies in creating partnerships and tapping into value chains. The lack of information impedes enterprises’ integration into GVCs.Complex tax policies and procedures, the quality of infrastructure, and uncertainty in trade policy create obstacles in efforts to scaling up production in India.

Globally, Global Value Chains are undergoing a transformation driven by various factors, including the need for diversification and supply chain security in light of the pandemic and strategic considerations. This evolving landscape presents significant opportunities for emerging economies, including India, to enhance their presence in established value chains and capture a larger market share. To effectively capitalize on these opportunities, India must address key challenges. It is crucial for India to not only focus on reducing reliance on imported materials but also to develop its capabilities, acquire new skills, upgrade existing capacities, improve trade facilitation, and integrate Micro, Small, and Medium Enterprises (MSMEs) into GVCs. By efficiently executing these strategies, GVCs can become a significant contributor to India’s economic growth, employment generation, productivity improvement, and income enhancement.

sayanthana K
sayanthana K
English journalism student from IIMC Dhenkanal ( Indian institute of mass communication


Canada Lifts Sanctions Against Businessman Oleg Boyko

The Government of Canada has officially removed international businessman...

UNDP launches plan to boost carbon markets

UN Development Programme launches plan to boost integrity in...

Why Learning to Fail Can Teach Us to Thrive: FT Business Book of the Year

The Financial Times and Schroders today announced that Amy...