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India’s Trade Policy and GVCs
As we prepare to adopt the new trade policy, this article studies the trends in the global value chain participation of six sectors from Indian manufacturing with an emphasis on the nature of participation. It analyses the trends over the last few decades and connects them to the changes in the trade policy of the Indian government. It concludes by commenting on the viability of various policies to improve Indian competitiveness and employment over the medium term, cautioning that protectionism without improvement in productivity of the protected sectors (even as some GVCs get reorganised in a post-pandemic world) would prove counterproductive, thus puncturing India’s ambitions of becoming a manufacturing hub or creating quality employment for its workforce.
As a leading emerging economy, India has gradually liberalised and increased participation in world trade over the last few decades. With the changing nature of global production, India has also started integrating with value chains in certain sectors and thereby increased its footprints in trade in parts and components.
Trade policies of any country drive its competitiveness in the medium to long term. While tariffs may help lower foreign inputs in production, trade agreements between countries increase trade through trade creation effects. India too has signed various agreements to help increase trade. However, most free trade agreements (FTAs) have worked to increase imports more than they have increased exports. This, apart from other concerns of losing market share to foreign businesses, has led to India earning the reputation of being hesitant in agreeing to commitments in specific agreements that require greater liberalisation than required by the World Trade Organization (WTO) in key areas. India has thus stayed out of the Regional Comprehensive Economic Partnership (RCEP) and is reviewing agreements with other South East Asian countries. These have implications for India’s participation in world trade and its prospects in emerging as a global manufacturing hub. As India embraces the new trade policy, we take a look at India’s participation in global value chains (GVCs) and analyse the possible effects of domestic policies like production-linked incentives (PLIs) as well as trade policies on sector-specific GVC participation by India.
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