Global value chains

Detail

1. From NCERT to the GVC concept

• The NCERT starting point (Class 10): an MNC making industrial equipment splits its work across the world.
• It designs in research centres in the USA.
• It makes parts in China.
• It assembles in Mexico and Eastern Europe.
• It sells worldwide and handles customer care from call centres in India.

• NCERT sums it up: production is "divided into small parts and spread out across the globe".

• Global value chain (GVC): production is split into stages spread across countries, and each stage adds value before the product reaches the final consumer.

• Value added = value of a firm's output − value of the inputs it bought.

• The scale of GVCs:

• GVCs drove the jump in world trade after 1990 [2].
• World Bank, World Development Report (WDR) 2020 ("Trading for Development in the Age of Global Value Chains"): GVCs now make up almost half of all world trade [2].

• The share peaked around 2008. After the 2008 global financial crisis, trade grew slowly and GVC growth stalled [2].

• Why GVCs matter for development:

• Countries could join GVCs to grow fast without building a whole industry first.

• This helped poor countries catch up with rich ones at a speed never seen before [2].

• New threats to GVCs (WDR 2020): [2]

• Automation and new technology may bring production closer to the consumer and cut the need for labour.

• Conflicts between big countries may shrink or split GVCs.

• WDR 2020's view: GVCs can still raise growth, create better jobs and cut poverty, but only if [2]:

• developing countries make deeper reforms;
• rich countries follow open and predictable policies;
• all countries revive multilateral cooperation (for example, through the WTO).

2. India's path: protection → opening → GVCs

• 1950s–1980s (protection):
• India followed import substitution (making goods at home instead of importing them).
• High tariffs and import quotas made imported inputs costly.

• So Indian firms could not easily become one stage in a foreign chain.

• 1991 (opening, NCERT Class 10 and 11):

• The New Economic Policy brought liberalisation (fewer controls), privatisation and globalisation (LPG).
• Barriers on trade and foreign investment were removed in large part.

• India joined the WTO in 1995.

• Services entered GVCs first:

• Outsourcing (a company buying a service from an outside firm, often in another country) grew fast (NCERT Class 11).
• Examples: BPO, call centres, IT services, accounting.

• This built India's strong forward links in services.

• Present: policy now tries to bring manufacturing into GVCs through PLI schemes, the semiconductor mission and FTAs (see Section 6).

3. Measuring GVC participation

• GVC participation (how deeply a country is part of global chains) has two parts:

	Backward participation	Forward participation
Meaning	Foreign value added (FVA) in a country's own exports (the imported inputs inside them)	The country's domestic value added used in other countries' exports
Position in the chain	Downstream (buyer of inputs, often assembly)	Upstream (supplier of inputs)
Example	India's smartphone exports using imported chips and displays	Indian software or chemicals built into another country's exports

• Common measure (share of gross exports):
• Backward share = FVA ÷ gross exports × 100
• Forward share = domestic value added sent on through partners' exports ÷ gross exports × 100

• Total GVC participation = backward share + forward share

• Data sources:

• OECD TiVA (Trade in Value Added) database.
• ADB MRIO (Asian Development Bank Multi-Regional Input-Output) tables.

• TiVA defines foreign value added content of gross exports as the value of imported intermediate goods and services built into a domestic industry's exports. That value may come from any foreign industry further back in the chain [3].

• Why value-added data matters:

• Gross export figures double-count inputs that cross borders many times.
• Worked example (numbers are for illustration):
  • Country A makes a chip worth $30 and exports it to B.
  • B assembles a phone, adds $20 of its own value, and exports it to C for $50.
  • Gross exports = 30 (A) + 50 (B) = $80.
  • Actual value added = 30 (A) + 20 (B) = $50. So $30 is counted twice.
  • B's backward participation = FVA ÷ gross exports = 30 ÷ 50 = 60%.
  • B's gross trade makes it look like a $50 exporter. Its real earning is only $20.
• Lesson: bilateral trade balances measured in gross terms can mislead. The assembling country looks like a large exporter even when most of the value was made somewhere else.

4. The smile curve

• Smile curve (idea of Stan Shih, founder of Acer, Taiwan):
• Plot value added (y-axis) against the stages of the chain (x-axis), and the line forms a smile.
• High value at the start: R&D, design, branding. These happen before production.
• Low value in the middle: fabrication and assembly.

• High value at the end: marketing, distribution and after-sales services.

• Why the middle earns little:

• Assembly needs common skills, and many countries can do it.
• So there is heavy competition, and prices and wages stay low.

• Design, brands and patents are hard to copy, so the firms that own them keep most of the value.

• Link to NCERT (Class 10):

• Jeans made in India are sold in the USA for US$145.
• Most of that price goes to the brand owner and the retailer. The garment worker gets very little.

• Compare Sushila, the NCERT garment worker. She lost her permanent job and now works on a temporary basis with no job security. Exporters cut labour costs to win MNC orders.

• Two types of GVC link:

• Relational GVCs: long-term, customised ties between a lead firm (the big brand that runs the chain) and its supplier. The two share designs and standards. Examples: autos, electronics. The supplier learns technology, so upgrading is easier.
• Arm's-length GVCs: standard goods bought on price alone. Buyers switch suppliers easily. Examples: basic garments, commodities. Suppliers learn little and face constant price pressure.

5. India's pattern (verify current)

• Overall: India's GVC integration is modest and services-heavy. It has strong forward links in IT and business services.
• Backward participation is rising:
• Foreign content in India's exports rose from 21.9% (2010) to 25.7% (2022) [3].

• This is above the G20 average of 19.8% [3].

• India is "somewhat backward-oriented":

• India relies slightly more on foreign inputs than on supplying value added to foreign final demand [3].

• Its FVA shares slightly exceed its forward participation estimates [3].

• Sectors with high backward linkage:

• Refined petroleum, which runs on imported crude oil.
• Gems and jewellery, which run on imported rough diamonds.

• Electronics assembly, which runs on imported chips, displays and components.

• Electronics is the most GVC-driven sector:

• About 75% of India's electronics exports come from GVCs [4].
• Electronics production nearly doubled from US$48 billion (FY17) to US$101 billion (FY23) [4].
• Mobile phones make up 43% of electronics production (FY23) [4].
• About 99% of smartphones used in India are now made in India [4].
• In the last 11 years, India changed from a net importer to a net exporter of mobile phones. It is now the second-largest mobile manufacturing country in the world [5].

6. Policy levers to plug in

• Production Linked Incentive (PLI) schemes:
• What PLI is: the government pays firms a cash incentive linked to their extra (incremental) sales of goods made in India. The reward depends on actual output, not on investment alone.
• Covers 14 sectors (announced 2020-21), with an outlay of about ₹1.97 lakh crore.
• 755 applications approved across the 14 sectors [6].

• ₹1.23 lakh crore of investment realised by March 2024, creating about 8 lakh jobs [6].

• Electronics:

• Apple's partners (Foxconn and others) assemble iPhones in India and export them.

• This has made smartphones one of India's top export items.

• India Semiconductor Mission (ISM):

• Launched in December 2021 with ₹76,000 crore for fabs (chip factories) and assembly-and-test units (ATMP/OSAT).
• Under the Semicon India Programme, the government has approved 10 projects with investment commitments of about ₹1.6 lakh crore [7].
• It has also approved 24 chip and SoC (system-on-chip) design projects [7].

• Why it matters: it moves India from the middle of the smile curve (assembly) towards the higher-value ends (chips and design).

• Trade facilitation: faster customs and ports, and lower logistics costs.

• In a GVC, goods cross borders many times, so every delay adds up.

• Lower tariffs on inputs:

• A tariff on a chip raises the cost of the phone that India exports.

• So high input tariffs work like a tax on India's own exporters.

• FTAs (free trade agreements): these secure cheaper inputs and open markets for Indian products.

• Examples: India–UAE CEPA (2022) and India–Australia ECTA (2022).

7. Risks

• Heavy import dependence on China for intermediates (half-finished goods used as inputs):
• electronic components;
• APIs (active pharmaceutical ingredients, the raw material of medicines);
• solar cells and modules.

• The risk is that a border dispute, export ban or pandemic can stop Indian production.

• Getting stuck in low-value assembly:

• A country can export a lot but earn little, because most of the value belongs to foreign chip-makers and brands.
• Rising backward participation (25.7% in 2022 [3]) shows this risk.

• Exports rise, but domestic value added per unit may stay thin.

• Global slowdown in GVCs:

• GVC growth has stalled since 2008 [2].
• Automation and rivalry between big powers may shift production closer to consumers [2].
• This gives India a narrower window to join the chains.

Prelims Hooks

• GVC: production split into stages across countries, with each stage adding value. The WDR 2020 says GVCs account for almost half of world trade.
• WDR (World Development Report) is published by the World Bank, not the IMF or WTO. The 2020 edition's theme was GVCs.
• Backward participation = foreign value added in a country's exports. Forward participation = its domestic value added used in other countries' exports. A common trap is to swap the two.
• OECD TiVA = Trade in Value Added database. It fixes the double counting in gross trade data.
• Smile curve: proposed by Stan Shih (Acer). The value is lowest at assembly/fabrication.
• FVA share of India's exports: 21.9% (2010) → 25.7% (2022), above the G20 average of 19.8% (OECD).
• Electronics: about 75% of India's electronics exports are GVC-linked (NITI Aayog). India is the second-largest mobile manufacturer in the world.
• PLI: 14 sectors, outlay about ₹1.97 lakh crore. The incentive is linked to incremental sales/output.
• India Semiconductor Mission: December 2021, ₹76,000 crore.

Mains Points

• Volume versus value: India's export growth in electronics (production US$48 bn → US$101 bn, FY17–FY23) has come mostly from assembly, the bottom of the smile curve.
• Rising foreign content (25.7%, 2022) shows that domestic value addition is still thin.

• Policy should move from PLI for assembly towards components, design and R&D (ISM, chip design projects).

• Tariff paradox: high tariffs on inputs, left over from the protection era, tax India's own exporters in a GVC world.

• Deeper GVC entry needs low input tariffs, trade facilitation and FTAs, alongside Atmanirbhar Bharat goals.

• Resilience versus efficiency: heavy dependence on China for components, APIs and solar cells is a supply-chain risk.

• "China+1" diversification and PLI make India an alternative.

• But reshoring and automation (WDR 2020) may shrink labour-intensive GVC opportunities.

• Equity dimension (NCERT: the US$145 jeans, Sushila):

• GVC gains flow mainly to brand owners.
• Workers in arm's-length chains face flexible, insecure jobs.
• Labour codes, skilling and moving into relational chains are needed for inclusive gains.