TIME FOR COMPANIES TO PARTICIPATE IN GLOBAL VALUE CHAIN
While most economists and analysts are exasperated over the third quarter GDP growth, the authority considered the growth a significant as it bottomed out the downswing. The Economic Affairs secretary was upbeat and asserted that it signalled for a bounce back in the growth in the successive quarters.
Quarterly base GDP growth witnessed a continuous downswing for five quarters since July-September 2018-19. It was 7 percent (from 8 percent in the preceding quarter) to 4.5 percent in July-September 2019-20. Hence, growth at 4.7 percent in October-December 2019-20 showed a sign of solace, indicating reversing back to the growth trajectory.
Agriculture was in the driver seat to pull the growth from further downturn. Manufacturing was in shamble. Manufacturing tended to lower growth trajectory since second quarter of 2018-19. It’s growth declined from 5.6 percent in second quarter of 2018-19 to negative growth of 0.2 percent in third quarter of 2019-20. It failed to respond to even a mega reform in corporate tax structure in last September. May be, it was too early to enliven the investors.
Analysts observed that Make in India lost the steam. Private investors were sulky and Government took back seat. Rank up in Ease of Doing business and Modi’s charisma for investment friendly leadership had little impact to encourage domestic investors.
One of the main reasons for the failure in manufacturing under Make in India was the non- adaptability of modern manufacturing process. The manufacturing process continued to follow the traditional method, which was “input base” and concentrated in domestic area. Whereas the global manufacturing practices shifted to Supporting Base and GVC (Global Value Chain) system. The development of automobile and electronic industries are the cases in point. These industries overrode the traditional industries like textile, chemical and basic metal industries. With the advent of new technology, Supporting Base and GVC systems were focused as the new trend in the global manufacturing.
Supporting Industry refers to manufacturer of component and parts, required for assemblers. It is a group of industries within a country who manufacture component and parts and supply them to the assemblers in third countries, under GVC chain manufacturing system. Supporting Industry is low cost capital and high labour intensive industries with skilled labour. This system made the manufacturing process globally fragmented to reap the benefits of low cost manufacturing in cross-border.
In this chains of manufacturing, each participant has specialization in a particular manufacturing process. This specialization is based on the country’s comparative advantages in terms of technology and cost of production. These products are not produced from beginning to final within a particular country. Their production are spread over the countries in respect of specialization and comparative advantages. For instance, China, with abundant labour, specializes in low skilled labour intensive stages of production, whereas richer countries specialize in capital and skilled intensive stages, such as R&D.
Given this backdrop, Economic Survey 2019-20 focused on the need for a transformation in manufacturing process. It advocated India to be the global hub for assembly operation and should be transformed into global GVC. It said “By integrating Assemble in India for the world into Make in India, India can create 4 crore well-paid jobs by 2025 and 8 crore jobs by 2030”.
At present, India has low level participation in GVC. In contrast, China’s high level participation in GVC, driven by exports, made its manufacturing a big success. China’s export promotion policies since 1990 have relied heavily on the strategy of integrating domestic industries within GVC. As a result, China emerged a major assembly hub for several capital intensive products.
The key factor behind Make in India was job creation and not the shift of manufacturing process in the line of global trend. As a result, despite a sustainable growth in GDP for the first five years of Modi regime, manufacturing growth was in shambles.
Against this backdrop, questions arise which industries should be focused to give a new lease of life in the manufacturing. In this case, a lesson from Vietnam’s success in manufacturing is laudable. India has abundant labour force and significant unexploited export potential. Vietnam’s success story of Supporting Industry base industrial growth, embracing GVC, can unfold a potential strategy for transformation of India’s manufacturing process.
In India, the fast growth of Japanese led automobile and Chinese led mobile phone manufacturing are the cases in point. Lured by vast unexploited automobile market, Japanese thronged in investment in Indian automobile industry. Hamstrung by rise in cost of manufacturing and unabated US- China trade war, a number of Chinese mobile phone manufacturing companies shifted to India. Today, India is the second biggest manufacturer of mobile phones in the world. From a mere two companies in 2014, the country has 265 manufacturing companies of mobile phones, parts and accessories. These give a lead to India to be the potential global hub for GVC in automobile and mobile phone manufacturing.
Economic Survey suggested that India should focus on “Network Product”, whose manufacturing is globally fragmented with the ownership of MNCs. These MNCs include transnational companies in developing nations, blessed with comparative cost merits and medium skilled manpower. Investment by Apple, Samsung, Sony for manufacturing mobile phones in India are the cases in point. Survey said that India has huge potential to be a major hub for final assembly. This unfolds India’s potential to be hub for Supporting Industry base growth. It suggested that “Assembling in India” should be a part of Make in India.
Economic Survey advocated a trigger in exports of NP (Network Products), which might upturn India’s manufacturing growth and create job opportunities. NP refer to products, which are produced under value chain across the border. Despite making a big success in Supporting Industries like automobile and mobile phones, India is at low level in exporting NP as against China and Vietnam. NP accounted for10 percent in India’s export only as compared to 52 percent in China and 47 percent in Vietnam in 2018.
In other words, the survey suggested a transformation in manufacturing process in Supporting Base industries under the ambit of value chain across the border. This will help India to be globally integrated and negate the domestic risk of volatile demand.