Will Samsung plant boost India’s electronics output?
CRUCIAL It will depend on how much of its components are domestically sourced
NEWDELHI: Prime Minister Narendra Modi and South Korean President Moon Jae–in inaugurated a Samsung plant in Noida on July 9. This plant is billed to be world’s largest mobile phone manufacturing facility. That the company has decided to set up the facility in India is a boost to India’s high-skill manufacturing sector and the government’s Make in India push. What do such achievements entail for India’s aims of becoming a major exporter for manufactured goods in the world? Understanding how global value chains work is essential to answer this question.
In today’s age, production processes are spread across international borders. Whether it is a car, mobile phone or petrochemicals, most manufactured products use inputs and equipment produced in many countries.
A country’s share in the value of a given manufactured item depends on how much of the product has been produced in the domestic economy. For example, a Maruti Suzuki car produced in India is likely to have a bigger share of domestic value added than a BMW because the former will have much less import content than the latter. Similarly, the amount of value which Samsung’s facility will add to the Indian economy will depend on how much of its components – batteries, circuits, motherboards, accessories etc. – have been domestically sourced.
An analysis of World Integrated Trade Solutions (WITS) data from the World Bank shows that intuitive reasoning can be very misleading in evaluating the impact of decisions such as Samsung setting up a plant in India.
HT has compared trade surplus of India and China from 1992 (earliest period for which Chinese data is available) in four broad categories: raw materials, intermediate goods, consumer goods and capital goods. The data shows that India has always had a trade surplus in consumer goods, the category which includes items such as mobile phones. Both India and China have been experiencing a growing trade deficit in raw materials. In India’s case this is primarily driven by import of crude oil.
The situation, however, is very different in the case of intermediate goods and capital goods, where China has a trade surplus or negligible deficit but India has a large trade deficit.
(Chart 1 A and 1B)
These statistics underline the importance of a country’s position in global value added chains. Even if the end-product is manufactured within a country’s domestic boundaries, the overall contribution to its external account and GDP might be negative if this production has large import content. India’s disadvantage vis-à-vis China is borne out by a comparison of share of domestic manufacturing in value added origin of its exports.
According to 2011 data from the World Trade Organisation, domestic manufacturing had a share of 32.2% in China’s export industry. The figure was just 18.9% for India. (Chart 2)
Interestingly, China also had a higher share (11.8%) of foreign manufacturing in value added origin of its exports than India
WHETHER IT IS A CAR, MOBILE PHONE OR PETROCHEMICALS, MOST MANUFACTURED PRODUCTS USE INPUTS AND EQUIPMENT PRODUCED IN MANY COUNTRIES
(4.7%). This probably shows that its manufacturing exports are more deeply entrenched in the global value chains than India’s.
These statistics show that there are no short-cuts when it comes to exploiting the economic gains from manufacturing. While getting big firms to come and set up shop is the necessary condition for it, it is not a sufficient one.