India in the GVC diversification strategy: A reality check

For MNCs relocating from China, India needs substantial catching up relative to Vietnam to be considered a significant contender

War and pandemic apart, the restructuring of global value chains (GVCs) and their resilience remained the dominant global concerns of 2022. Friendshoring and allyshoring became the buzzwords in an all-out attempt to diversify away from China.
“China plus n” is now the predominant strategy of large multinational corporations (MNCs) as they grapple with the consequences of the US-China stand-off revealing itself along multiple dimensions in the wake of the crisis in Ukraine. In this wave of supply chain restructuring and diversification, India too is hoping to attract MNCs that are in the process of relocating their subsidiary operations.

Trends in supply chain diversification, as they gained momentum over the last decade, show large MNCs having opted for friendshoring as their preferred relocation strategy. Among South and Southeast Asian economies, Vietnam has been in the lead in taking advantage of the opportunities arising from the regional shift in GVCs. Between 2010 and 2018, Vietnam showed a dramatic evolution in the foreign value added (FVA) component of its gross exports and hence its GVC integration. As against less than 5 per cent for Asia and India, Vietnam registered an annual increase of 17.3 per cent in the FVA component of its gross exports over this period (WTO GVC statistical profiles). This helped Vietnam to register significant gains in its share of global merchandise exports. From a low of 0.5 per cent in 2010, Vietnam’s share increased more than threefold to 1.6 per cent in 2020, making it the 20th largest goods exporter in the world. India’s share, in contrast, has remained stagnant at 1.6 per cent during this period.

A further reflection of the differential GVC participation of the two economies is evident from the share of manufactured exports, the lead category in global merchandise exports. As against an equal share of manufactured exports in their total merchandise exports (63 per cent) in 2010, Vietnam recorded an increase to 86 per cent in 2020 (which was, notably, also, double the share of 43 per cent at the start of this century for the country), while India’s manufactured exports registered only a small increase to 71 per cent in 2020, which was a decline relative to a 78 per cent share in 2000 (WDI, World Bank). During the pandemic too, as East Asia led the trade recovery in quarters three and four of 2020-21, Vietnam was in the lead in terms of both year-on-year export growth and gains in market share (UNCTAD Global Trade Updates, October 2020 and February 2021).

So, as India pitches itself as an attractive destination for relocating MNCs, a comparison with the lead beneficiary country of this process, namely Vietnam, may be useful.

Foremost among the factors that facilitate MNC relocation is an open trade regime. In the case of Vietnam, the number of free trade agreements (FTAs) that it has signed in the last decade, as well as the nature of partner economies and the depth and coverage of its FTAs, have been major contributory elements towards a conducive and liberal trade environment. Inclusion of WTO++ provisions on trade-related environment and labour issues have been positive signals of Vietnam’s commitment to undertake domestic reforms in these areas.

Notably, Vietnam’s FTAs include mega regionals like the Regional Comprehensive Economic Partnership, the higher grade Comprehensive and Progressive Trans-Pacific Partnership and the Indo-Pacific Economic Framework trade pillar as well as bi-laterals with advanced economies like the UK and EU and, as a member economy of the Asean, it is party to the regional bloc’s FTAs. Interestingly, while India has an almost equal number of FTAs, these are not deep trade agreements and, other than Japan and Korea, India has not been party to any FTA with developed economies. The FTAs with Japan and Korea are under review and that with Australia, signed in 2022, is an early harvest scheme. India also is not a member of any mega-regional trade agreement. Significantly, India continues to be reluctant to include labour and environment-related issues in FTAs, both aspects, among others, are the reasons for the prolonged negotiations, most recently with the EU and UK.

Vietnam’s tariff structure is another indicator of its relatively more open trade regime. Its simple average applied most favoured nation (MFN) tariff for non-agricultural goods is much lower than that imposed by India. A significantly higher number of tariff lines are included in the duty-free category and in the lowest bracket of 0-<=5 relative to the number of tariff lines in the 15 per cent plus category. India’s evident protectionist tendencies gaining ground over the last decade are evident from the adverse differentials across these tariff categories (See table). It is noteworthy that in GVC dynamic sectors, such as electrical machinery and transport equipment, lower average MFN applied tariff and a large number of duty-free lines allow imports of parts and components (as much as 89 per cent in electrical machinery) which in Vietnam facilitate efficient GVC integration in this trade dynamic sector.

Finally, good logistics help efficient movement of goods within and across borders, reduce trade costs and facilitate GVC operations. In the World Bank’s Logistics Performance Index (LPI) over the last decade, Vietnam has registered a significant increase in its score and rank. In 2018, it ranked at 39 among 160 countries, a major improvement relative to its consistent ranking at 53 during 2007 to 2012. In contrast, India was ranked at 44 in 2018, which was an improvement over its 2010 rank and score but of a much smaller magnitude. Additionally, Vietnam shows an increase in the score for all components of LPI from 2010 to 2018, while India shows an increase in only two sub-components: Customs clearance and arranging competitively priced shipments. For the other sub-components, the 2018 score is less than or same as that in 2010. Furthermore, the advantage of the two better performing sub-components also seems to be vitiated by lower scores for both logistics competence and performance on the timeliness of shipment deliveries.

So, while Vietnam seems poised to consolidate its position as the most attractive destination for MNCs diversifying away from China, India needs to undertake substantial catch-up reforms in all areas to be considered a significant contender in this process.

The writer is professor of economics, School of International Studies, JNU. The views are personal