Global Supply Chains (GSCs)

• Global Supply Chains (GSCs), also called Global Value Chains (GVCs), are international networks connecting production, distribution, and trade across multiple countries.

• Each country typically specialises based on comparative advantage, producing certain components or services while importing others.

• Enabled by globalisation, trade liberalisation, and technology, GSCs allow firms to optimise costs and efficiency.

Key Characteristics

1. Fragmentation of Production: Production occurs in multiple countries across different stages.

2. Just-in-Time (JIT) Systems: Minimal inventory is maintained, relying on timely deliveries.

3. Hyper-specialisation: Certain regions dominate specific industries (e.g., electronics in East Asia).

4. Interdependence: Economies and firms are tightly linked, making disruptions in one region impactful globally.

Implications

• These features improve efficiency but reduce resilience, making supply chains vulnerable to shocks.

• Recent crises like the Russia-Ukraine war, Middle East tensions, and COVID-19 exposed vulnerabilities in energy, logistics, and commodities.

Global Supply Chain Shifts

Drivers of Change

1. Geopolitical Conflicts: Interruptions in energy and commodity flows.

2. Trade Weaponisation: Sanctions, export controls, and strategic restrictions increase uncertainty.

3. Overdependence on Single Geographies: Heavy reliance on East Asia for manufacturing and critical components.

Economic Impact

• The IMF warns that global trade fragmentation could reduce global GDP by ~7%.

• Firms are increasingly diversifying sourcing networks, building redundancies, and reducing dependency on a single country or region.

Geopolitical Fragmentation

• Globalisation is not ending but fragmenting into regional and strategic blocs.

• Features of this trend include:

  • Disruptions at critical chokepoints (e.g., Strait of Hormuz, Red Sea).

  • Rise of friend-shoring (preferential trade with allies) and near-shoring (relocating production closer to home markets).

  • National security considerations increasingly shaping trade policies.

• Supply chains are now considered strategic assets, not merely commercial tools.

India as a Global Supply Chain Alternative

Key Advantages

1. Large Domestic Market: Supports economies of scale and acts as a demand anchor for global firms.

2. Demographic Dividend: Young workforce compared to ageing East Asian economies.

3. Political Stability & Institutions: Democratic system ensures policy predictability and lower geopolitical risk.

4. Strategic Autonomy: Ability to engage with multiple geopolitical blocs increases attractiveness for supply chain relocation.

Implications

• India’s geopolitical neutrality, market size, and workforce potential position it as a viable alternative in a fragmented global supply chain landscape.

• Multinational corporations are considering India for diversification and risk mitigation, especially in critical manufacturing and technology sectors.

India’s Efforts in Strengthening Supply Chains

India has undertaken multiple initiatives to enhance supply chain resilience, attract investment, and integrate into global value chains (GVCs).

1. Production Linked Incentive (PLI) Scheme

• The PLI scheme incentivises incremental production across 14 key sectors, including electronics, pharmaceuticals, solar, and automobiles.

• It has significantly improved India’s competitiveness and attracted global investment.

• While successful in boosting manufacturing, long-term integration into GVCs remains a work in progress.

2. Trade Agreements and Export Promotion

• India is pursuing an evolving Free Trade Agreement (FTA) strategy to strengthen its global position.

• Agreements are in place with the UAE, Australia, and the UK, while negotiations continue with the EU and the USA.

• Benefits include preferential market access and a boost to exports of electronics, textiles, and engineering goods.

• Combined with logistics reforms like PM Gati Shakti and the National Logistics Policy, India is reducing costs and improving efficiency.

3. Supply Chain Resilience Initiative (SCRI)

• SCRI is a trilateral partnership between India, Japan, and Australia.

• Objectives:

  • Reduce reliance on single-source suppliers.

  • Diversify sourcing and enhance economic stability in the Indo-Pacific region.

  • Utilize digital technologies and share best practices to mitigate disruptions.

4. Case Study: Electronics Manufacturing

• India has become a growing hub for electronics and smartphone manufacturing.

• Increase in domestic mobile manufacturing units and exports of smartphones indicates global firms are diversifying beyond China.

• India is transitioning from a back-office economy to a manufacturing hub, strengthening its role in global value chains.

Key Drivers of Growth in India’s Exports

India’s export performance has been supported by multiple factors ranging from government initiatives to global shifts in supply chains.

1. Strategic Government Initiatives and Policy Reforms

• Production Linked Incentive (PLI) Scheme and Make in India have boosted domestic manufacturing and export capacity.

• The Foreign Trade Policy 2023 simplifies export procedures and incentivizes emerging sectors like e-commerce and high-tech products.

• Impact Example: Mobile phone exports grew from near-zero in 2016 to over $20 billion in 2024, and pharmaceuticals exports reached $27.85 billion in 2023–24.

2. Diversification of Export Portfolio and Markets

• India has moved beyond traditional commodities to high-value sectors such as electronics, engineering goods, and services.

• Diversification reduces dependence on a few products or markets, lowering vulnerability to shocks.

• India’s merchandise exports reached over 115 countries, with the US, UAE, and Netherlands accounting for 51% of exports.

3. Expansion into Global Value Chains (GVCs)

• India’s participation in GVCs enables specialization in value-added production stages, improving export quality and scale.

• Despite a GVC participation rate of ~41.3%, policies and infrastructure aim to strengthen both backward and forward linkages.

• Example: Exports to China grew 8.7% to $16.67 billion in FY24, reflecting regional integration and high-tech manufacturing potential.

4. Resilience and Growth of Services Exports

• Services exports, particularly in IT, telecom, and business services, support export growth with high value addition.

• Services exports rose 12.45% in FY25 to $374 billion, offsetting merchandise volatility.

• India’s strength in digital services aligns with global remote work trends.

5. Infrastructure and Logistics Modernization

• Improved ports, multimodal logistics, and digital customs platforms reduce costs and accelerate exports.

• Initiatives like Sagarmala and PM GatiShakti aim to cut logistics costs (up to 14% of export value).

• Expansion of national waterways and establishment of 35 multimodal logistics parks enhance cargo movement efficiency.

6. Digitalization and Ease of Doing Business

• Platforms like the National Single Window System and Trade Connect simplify approvals, reduce compliance burdens, and speed up customs clearance.

• Automation and cloud-based systems support SMEs in accessing global markets efficiently.

7. Geopolitical Shifts and Trade Realignments

• Global tensions (US-China trade conflict, supply chain disruptions) provide India opportunities to capture new trade flows.

• Exports grew 5.5% to $821 billion in FY25, outperforming global averages.

• FTAs with UAE, Australia, and EFTA countries enhance market access and diversification.

8. Rising Domestic Demand Supporting Export Competitiveness

• Strong domestic markets create economies of scale and foster innovation.

• Domestic demand supports sectors like electronics, pharmaceuticals, and automotive.

• Stable growth at 6.5% amid global headwinds strengthens exporters’ competitiveness.

9. Enhanced Financial Support and Export Credit

• Schemes like the Interest Equalisation Scheme and MSME credit facilities reduce financing costs.

• EXIM Bank and SIDBI provide lines of credit for global market expansion.

Key Issues Affecting India’s Integration in Global Value Chains

Despite growth, India faces several challenges in fully integrating into GVCs:

1. Limited Backward Linkages

• India relies on forward linkages, exporting raw materials instead of high-value products.

• Backward linkage index fell from 47.6% in 2008 to 41.3% in 2018, highlighting weak import integration.

• Example: High dependence on China for telecom components ($101.7 billion in FY24).

2. Infrastructure Deficiencies and Logistical Bottlenecks

• Port congestion and limited cold chain facilities increase costs and delays.

• Major ports like Jawaharlal Nehru Port Trust face capacity constraints, deterring global lead firms.

3. Complex and Inconsistent Trade Regulations

• Fragmented tariffs, complex customs, and frequent policy changes create uncertainty.

• Misclassification of products and unclear HS codes increase compliance costs, especially in electronics and pharmaceuticals.

4. Skill Gaps and Labor Constraints

• Skilled workforce shortages in manufacturing and high-tech sectors impede GVC integration.

• Only 42.6% of graduates were employable in 2024.

• High-tech sectors like semiconductors and pharmaceuticals face a scarcity of specialized skills.

5. Weak MSME Linkages with Lead Firms

• MSMEs contribute ~50% of exports but have limited GVC integration.

• Barriers include lack of finance, technology, and management expertise.

• Example: Vietnam’s Samsung-led GVC integration demonstrates potential for India.

6. Insufficient R&D and Innovation

• India invests only 0.6% of GDP in R&D, limiting design and high-value manufacturing participation.

• Weak academia-industry collaboration curtails innovation and movement up the value chain.

7. High Domestic Tariffs and Protectionism

• High tariffs on intermediate goods raise input costs, discouraging GVC participation.

• Despite reforms, India’s tariffs remain higher than ASEAN peers, affecting electronics and automotive sectors.

8. Geographic Concentration of Export Activity

• Export activity is concentrated in 6 coastal states contributing 70% of total exports.

• Inland states remain underdeveloped due to poor infrastructure and power supply, limiting nationwide GVC participation.