It’s time to put a figure on India’s exposure to global value chains
The intricacy of global value chains has resulted in complex dependency patterns whose risks we should track and mitigate
are, respectively, India’s chief economic advisor, an officer of the Indian Economic Service, and a young professional attached to the Office of the Chief Economic Advisor.
The world experienced supply disruptions for vaccines and personal protection equipment during the covid pandemic. Subsequently, in the wake of the war in Ukraine, global supply chains for critical commodities such as semi-conductors were disrupted, which in turn impacted automobile manufacturing, among other things. Due to rising tensions, countries are rethinking the concept of efficiencies as the basis of global supply chain arrangements and opting for supply chain security. It has given rise to the concepts of re-shoring and friend-shoring. Given China’s impressive and pervasive presence in the global supply chains of many commodities, other countries have been re-assessing their dependence on China. In fact, China too has made it one of its policy goals to reduce dependence on global value chains (GVCs).
In this context, it becomes important to understand how ‘exposed’ our manufacturing sectors are to the rest of the world, and especially to China. A birds-eye view of exposure can be provided by bilateral trade deficits. For instance, India’s industrial sector trade deficit with China has risen over the years, touching $84.4 billion in 2022 (27% higher than 2021).
However, bilateral trade does not show the full extent of dependency, as manufacturing industries are scattered across GVCs with several countries playing a part in the production process. Thus, to understand dependency along manufacturing GVCs we replicated seminal work in the area by Richard Baldwin et al (2023) (bitly.ws/3ezMM). Their research investigated the reliance of the US’s manufacturing sector, particularly on Chinese intermediate products using input-output tables of the Organization for Economic Cooperation and Development (OECD).
Baldwin’s exercise for the US reveals that the country sources about 87% of its intermediate inputs domestically, whereas 12% of the total are sourced from abroad. Despite such a sizeable domestic share, the US continues to safeguard itself against shocks arising from foreign exposure by re-shoring and friend-shoring its value chains because nearly 28% of all its foreign inputs are sourced from China. The next most significant supplier for the US is Canada, which accounts for 10% of all its foreign inputs.
As per the formula used by Baldwin and others, we calculate two types of exposures. The first is ‘face-value exposure,’ which looks at the proximate origin of intermediate inputs purchased by India’s manufacturing sector. The next is ‘lookthrough exposure,’ which cuts a layer deeper to understand where the intermediate inputs themselves are sourced from. To illustrate the use of these two measures, let’s take for example India’s electronics sector, which may source intermediate inputs from Vietnam. Face value exposure would take into account the reliance of India’s electronics sector on Vietnamese inputs. Now if Vietnam’s suppliers in turn rely on China for inputs, the lookthrough measure would capture India’s reliance on China (through Vietnam).
The implication of a high look-through exposure is two-fold. First, it shows that protectionist measures may just end up lengthening a value chain, without reducing a country’s real dependence on a particular seller nation. Thus, even though a country may not be sourcing inputs at face value, these products may enter the market with minor modifications from third-party countries— which the look-through exposure would capture. Second, sectors with higher look-through exposure to a nation would be more prone to supply-chain shocks as their reliance on foreign intermediates is higher than what is seen in terms of direct ‘face-value’ linkages.
Exposure calculations for India for 2022 reveal that the foreign exposure of India’s manufacturing sector was around 17%, while 83% of the sector’s intermediate inputs were sourced domestically. While these numbers may seem reassuring at first glance, they are not necessarily indicative of self-sufficiency in production. A large part of the 83% figure is labour value-addition. Moreover, while 17% foreign exposure might seem relatively modest, it is best not to underplay the number, since some of those foreign-sourced inputs might be critical.
Indian sectors that are most exposed to foreign intermediates include basic metals, transport equipment, electrical equipment, coke, refined petroleum and nuclear fuel. Further, on a lookthrough basis, China on average accounts for 23% of all foreign inputs sourced. This is more than three times higher than the next highest supplier, the US, which accounts for 6% of all foreign inputs sourced.
This exposure exercise, done for 2012 and 2000 as well (apart from 2022), reveals an increase in India’s look-through exposure to China across the decades, even though face-value exposure shows a decline. Between 2000 and 2022, China’s share of foreign inputs purchased by Indian manufacturers rose sharply from 5% to 23%.
Our analysis shows that the story of India’s exposure to various nations, like the intricacy of GVCs themselves, is much more nuanced than what meets the eye. An exercise of understanding exposures along GVCs can improve risk preparedness by identifying the range of essential sectors that could be prone to geopolitical shocks. Second, to the extent that some of this exposure seems unavoidable for some time to come, it may be useful to examine the ways in which the risks of such dependence could be mitigated. Is it less risky to source the inputs through trade or by onshoring their production by encouraging foreign direct investment in India?
These are the authors’ personal views.