india’s integration in global value viit in india’s t&c industry 5.5 comparisons 5.6 main...
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INDIA’S INTEGRATION IN GLOBAL VALUE
CHAINS: CASE STUDY OF MACHINERY AND
TEXTILE & CLOTHING INDUSTRIES
NEHA GUPTA
DEPARTMENT OF HUMANITIES AND SOCIAL SCIENCES
INDIAN INSTITUTE OF TECHNOLOGY DELHI
SEPTEMBER 2015
© Indian Institute of Technology Delhi (IITD), New Delhi, 2015
INDIA’S INTEGRATION IN GLOBAL VALUE
CHAINS: CASE STUDY OF MACHINERY AND
TEXTILE & CLOTHING INDUSTRIES
by
NEHA GUPTA
Department of Humanities and Social Sciences
Submitted
in fulfilment of the requirements of the degree of
Doctor of Philosophy
to the
Indian Institute of Technology Delhi
September 2015
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CERTIFICATE
This is to certify that the thesis titled “India’s Integration in Global Value Chains: Case
Study of Machinery and Textile & Clothing Industries”, being submitted by Ms. Neha
Gupta to the Indian Institute of Technology Delhi, for the award of the degree of Doctor
of Philosophy, is a record of original bona-fide research carried out by her under our
supervision. In our opinion, the thesis has reached the standards fulfilling the requirements
for submission relating to the degree.
The results contained in the thesis have not been submitted, in part or full, to any other
institute or university for award of any degree or diploma.
Dr. Vrajaindra Upadhyay Dr. Rashmi Banga
Professor (Economics) Senior Economist Department of Humanities and Social Sciences Division on Globalization and Development Strategies
Indian Institute of Technology Delhi UNCTAD
New Delhi-110016, India Geneva 10, Switzerland
Date:
New Delhi
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ACKNOWLEDGEMENTS
I dedicate my thesis to my beloved country and it is my firm belief that this thesis will help India
emerge as a robust economy in the world. Thereafter, I would like to express my sincere
gratitude to my supervisors, Prof. V. Upadhyay and Dr. Rashmi Banga for being excellent
guides, both in letter and in spirit. They imparted much needed navigation and propulsion for a
successful completion of this thesis. Their personal care and special attention have sharpened
my academic knowledge and skills. Their constant support in both personal and academic
struggle is invaluable. My sincere word of thanks goes to Dr. Vignesh for providing valuable
inputs as and when I needed them. I also take this opportunity to thank people from the HUSS
Department of IIT, particularly economics faculties: Dr. Debasis, Dr. Reetika, Dr. Jayan, Dr.
Sourabh and Dr. Ankush for their critical comments and suggestions. I would also like to thank
Bala Mam for helping me in official paper work.
Special thanks to family friend Amit for being there for me at every point. I would like to thank
all my dear friends at IIT - Sanchita, Diptimayee, Anindita, Anjali, Pallavi, Megha, Mini, Malish,
Swikar, Shan, Prakash, Vandita and Amit - for sharing my PhD journey at IIT and for constantly
supporting me especially during my tense periods. I also thank Khirod, Jayesh, Ashraf, Rambir,
Ishan, Sandip, Malvika, Monami, Balramji and Dharti for being good colleagues and friends.
Most importantly, I cannot forget the love and encouragement of my closest school and college
friends: Garima, Kamaljeet, Rekha, Sweta, Vikas, Divya, Shirin, Sadia, etc. Specifically, my
heartfelt thanks to my friends Sumit and Digvijay for their constant motivation and belief in my
dreams. Special thanks to Suresh Bhaiya (Lucknow), Dr. Bhagat, Dr. Balmukund, Anita aunty,
Verma uncle, Datta uncle and Mishraji for their constant support.
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There are so many other people to thank who helped me in conceptualizing various ideas which
ultimately developed into thesis and who helped me in completion of this thesis in the form of
survey interviews: Mr. Manish Mohan, Mr. Ameet Kumar, Mr. Nirankar Saxena, Mr. Ajay
Kumar, Mr. Ashish Jain, Mr. Devendra Pratap, and the list goes on (from CII, FICCI, NCAER,
CITI). I also want to thank Pankaj (FICCI), Kartik, Vandita and Pulkit (IIT) for their exceptional
help during my PhD.
More importantly, loving thanks to my Papa and Mummy, who always tried to do more than
what they could to keep me going. It’s because of their prayers, I moved up in life as well as
completed this thesis. I would also like to thank my brothers, Manish and Piyush, and my sister-
in-law, Garima, for their constant encouragement. I cannot forget the loving face of my nephew
Aarav, as it always acted like a catalyst for me. Special thanks to Daya mummy and Daddy
(Naniji and Nanaji) for providing me environment conducive for studies and for their love and
support. I also want to thank Seema mausi, Veena mausi, Madhu mausi, Shashi mama and Ashit
mausaji for listening to me when I wanted to talk to someone. They have been there with me in
times of professional and personal crisis. I do not forget to thank all my cousins for meticulously
helping me during my PhD and in my everyday life – Akhil bhaiya, Rumanie, Monty, Annu,
Raveena, Chintoo, Tannu and Raja. Last but not the least, I express my sublime gratitude to the
Almighty for everything.
NEHA GUPTA
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ABSTRACT
Global value chains (GVCs) consist of several pre-manufacturing, manufacturing and post-
manufacturing activities that bring the product from the stage of conception to its final use.
Intermediate goods rapidly cross the international borders leading to huge rise in imported
content of exports. The thesis focuses on this changing landscape of international trade.
Developing countries are largely stuck in low-value manufacturing stages of GVCs rather than
high-end services that generate higher value added in production process. Available literature
reveals that India lags behind many other Asian countries, particularly China, in terms of
linkages into GVCs. Manufacturing sector of India is also found to be 'hollowing-out', i.e., its
domestic value-added growth is declining. The thesis aims at estimating the extent of integration
of Indian manufacturing sector into the GVCs, focusing on machinery and textiles and clothing
industries. Four different quantitative methodologies are used: trends in exports of intermediate
inputs and intra-industry trade index based on trade data; vertical specialisation index based on
India’s input-output tables; and foreign value added in exports and gains under GVCs using
inter-country input-output tables of OECD-WTO Trade in Value Added (TiVA) database (2013).
To capture the qualitative aspects of integration into GVCs, the thesis undertakes industry
specific surveys. Suitable policy interventions are further suggested for enabling greater linkages
of the two industries into GVCs.
Trade data estimations show that Indian ‘machinery industry’ has very low levels of integration
in GVCs, especially when compared with East Asian and South-East Asian countries. Trade
shares for 'finished machinery' have been higher. In contrast, India is importing fewer inputs
used in production of textiles and clothing (T&C) products, but exports inputs in huge amounts
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to a large number of countries. Indian ‘T&C industry’ is therefore linked at lower ends in GVCs
and has very low intra-industry trade (IIT). But, India’s machinery industry has very high
vertical IIT and uses comparatively higher amount of 'imported content in its exports'. TiVA
database shows decline in India’s share of domestic value added (DVA) exports in its gross
exports. However, India has 'net gains' from linking into GVCs in the two industries as the ratio
of forward linkages to backward linkages is greater than one. This indicates that value-added
exports are greater than value-added imports in these industries. Cross country input-output
tables thus provide better insights into functioning of GVCs. 80 Indian firms and industrial
associations have been interviewed covering 16 States of India. The surveys throw light on the
constraints faced by the two industries while linking and upgrading in GVCs. These are multi-
tax structure prevailing in the country; poor infrastructure facilities; shortage of power; lack of
manpower; weak domestic value chains; and rigid labour laws. The surveys highlight lack of
capacities of Indian industry to produce big and sophisticated machines. Machine tool segment
is still very small. In T&C industry, fabrics and garments are India’s weakest links and they face
tough competition from China, Bangladesh, Vietnam, etc. These manufacturing industries can
upgrade in GVCs if government policies and business environment become conducive in India.
India has enough potential to compete with other countries in the upper-ends of value chains in
both the industries. It can make use of its competitive services sector to capture higher gains
from exports of manufactured products and accordingly develop its own GVCs. Technological
upgrading and skill development is needed to effectively upgrade in GVCs. Domestic value
chains can be strengthened for helping India to initiate, link and upgrade in GVCs. India should
enhance its designing, branding and R&D services (pre-manufacturing services) as well as sales,
marketing and post sales services (post-manufacturing services).
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TABLE OF CONTENTS
PAGE NO.
Certificate i
Acknowledgements ii-iii
Abstract iv-v
Table of Contents vi-viii
List of Figures ix
List of Tables x-xiv
1 INTRODUCTION 1-25
1.1 New Approach of GVCs
1.1.1 Review of Emergence of GVCs
1.1.2 Theories of GVCs
1.1.3 Defining GVCs
1.2 Rationale, Objectives and Scope
1.2.1 Research Questions and Objectives
1.2.2 Selection of Industries
1.3 Research Methodology
1.4 Contribution of the Thesis
1.5 Structure of Thesis
2 REVIEW OF LITERATURE AND THEORETICAL FRAMEWORK 26-75
2.1 Conceptual Framework: Evolution of GVCs
2.2 Benefits and Costs of Linking into GVCs
2.3 Issues in GVCs
2.4 Manufacturing Sector in GVCs: Role of India
2.5 Gaps in Literature and Motivation for Study
2.6 Theories of GVCs
3 RESEARCH METHODOLOGY 76-92
3.1 Analysis Based on Trade Data
3.1.1 Use of Trends in Exports of Intermediate Inputs
3.1.2 Estimation of Intra-Industry Trade: Grubel-Lloyd Index
3.2 Estimations Based on Input-Output Tables
3.2.1 Estimation of Vertical Specialisation Index
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3.2.2 Estimations Based on Trade in Value Added (TiVA) Database
3.3 Employing Qualitative Methodology in Thesis
4 GLOBAL COMPETITIVENESS OF INDIAN MACHINERY AND
TEXTILES & CLOTHING INDUSTRIES 93-123
4.1 Trade Shares of Industries
4.1.1 Shares of Indian Machinery Industry
4.1.2 Shares of Indian T&C Industry
4.2 Brief Review of Policies for Industries
4.2.1 Policies for Indian Machinery Industry
4.2.2 Policies for Indian T&C Industry
4.3 Methodologies to Identify Globally Competitive Products
4.4 Results Based on RCA Index
4.4.1 Competitive Products of Indian Machinery Industry
4.4.2 Competitive Products of Indian T&C Industry
4.5 Results Based on Export Unit Costs
4.5.1 Cost-competitive Products in Indian Machinery Industry
4.5.2 Cost-competitive Products in Indian T&C Industry
4.6 Main Findings and Implications
5 ESTIMATING EXTENT OF INTEGRATION IN GVCs
USING TRADE DATA 124-171
5.1 Integration of Machinery Industry
5.1.1 Comparison with Other Countries: HS Chapters 84-92
5.1.2 Integration Level in Various Machinery Categories
5.2 Assessing Integration in Indian Textiles and Clothing Industry
5.3 Calculation of IIT using GLI Based on Trade Data
5.3.1 IIT in India’s Machinery Industry
5.3.2 IIT in India’s T&C Industry
5.3.2.1 IIT in Indian Textiles: 4-digit Level
5.3.2.2 IIT in Indian Clothing: 4-digit Level
5.4 Calculation of Vertical IIT: Decomposition Type Threshold Method
5.4.1 VIIT in India’s Machinery Industry
5.4.2 VIIT in India’s T&C Industry
5.5 Comparisons
5.6 Main Findings and Implications
6 ESTIMATING LINKAGES INTO GVCs USING
INPUT-OUTPUT TABLES 172-210
6.1 Calculation of IIT through GLI Formula
6.1.1 Results for Indian Machinery Industry
6.1.2 Results for Indian T&C Industry
6.2 Estimation of Vertical Specialisation Index
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6.2.1 Results for Indian Machinery Industry
6.2.2 Results for Indian T&C Industry
6.3 Conceptual Framework: Value-Added Trade under GVCs
6.4 Working and Usage of TiVA Database
6.5 Measurement of India’s Value Added Trade under GVCs
6.5.1 Value Added in India’s Machinery Industry
6.5.2 Value Added in India’s Textiles Industry
6.5.3 India’s Gains under GVCs: Comparative Analysis
6.6 Preference of IO Tables over Trade Data for GVCs
6.7 Findings from Analysis of IO Tables
7 CONSTRAINTS TO LINKING INTO GVCs: CASE STUDY
OF INDIAN INDUSTRIES 211-259
7.1 Survey Questionnaire and Respondents
7.2 Linkages in Value Chains: Indian Machinery
7.3 Constraints under GVCs for Indian Machinery Firms
7.4 Linkages in Value Chains: Indian Textiles and Clothing
7.5 Constraints under GVCs for Indian T&C Firms
7.6 Main Findings and Implications
8 POLICY DIRECTIONS 260-280
8.1 Policies Adopted for Machinery Industry
8.2 Policies Adopted for Textiles and Clothing Industry
8.3 Lessons for India
8.4 Policy Suggestions for Indian Machinery Industry
8.5 Policy Suggestions for Indian Textiles and Clothing Industry
8.6 Conclusions and Way Ahead for India
9 CONCLUSION 281-290
9.1 Summary of the Findings
9.2 Usefulness of Thesis and Policy Recommendations
9.3 Strategies and Policy Suggestions for Initiating India’s GVCs
9.4 Limitations of Thesis
9.5 Future Research Agenda
REFERENCES 291-306
APPENDICES 307-330
BRIEF BIO-DATA
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LIST OF FIGURES
Figure Number and Title Page No.
Figure 2.1: 20th Century Trade (Upper Part) and 21st Century Trade (Lower Part)
Figure 2.2: Framework of GPN Analysis
Figure 2.3: Framework for Analysing Regional Development and GPNs
Figure 2.4: Double Counting and Value Added in Global Value Chains 41 Figure 2.5: Trade Data vs Value Added Technique: Case of Apple i-Phone
Figure 2.6: Smiley Curve of GVCs Figure 2.7: Process of Flying-Geese Theory of Development 62 Figure 2.8: Simple Version of Fragmentation Theory 64 Figure 2.9: Two-Dimensional Fragmentation Theory Figure 2.10: Agglomeration and Dispersion Forces 69 Figure 2.11: Theory of GVCs Governance Structure
Figure 2.12: Upgrading in GVCs 73 Figure 2.13: Theory of Snakes and Spiders 74 Figure 5.1: Shares of Machinery Goods in Total Exports to and Total Imports from World in 1988-95 Figure 6.1: Value Added in Exports 175 Figure 6.2: Share of India’s DVA Content of Exports in its Gross Exports (%): Total 193 Figure 6.3 (in Appendices) Figure 6.4: India’s Participation in GVCs (%): 1995 to 2009
Figure 6.5: Actual Trade Balances and Value-Added among countries 208
30
33
34
42
44
65
71
127
196
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LIST OF TABLES
Table Number and Title Page No.
Table 2.1: Cost Structure in Two-Dimensional Fragmentation
Table 2.2: Four Transaction Layers 67
Table 2.3: Choice of Transaction Layers 67
Table 2.4: Factors Affecting GVCs Governance Structure
Table 4.1: Trade Shares of Indian Machinery Industry in World Trade 95
Table 4.2: Shares of Indian Machinery Industry (HS 84-92) in Total Exports to and Total Imports from World 96
Table 4.3: Simple Average Tariff Rates on Imports (India’s Machinery Industry) 97
Table 4.4 (in Appendices)
Table 4.5: Trade Shares of Indian T&C Industry in World Trade 102
Table 4.6: Shares of Indian T&C Sector in Total Exports to and Total Imports from World in the years 103-104 Table 4.7: Simple Average Tariff Rates on Imports (Indian T&C Industry) Table 4.8 (in Appendices) Table 4.9: RCA Index for Indian Machinery Products in 2012 Table 4.10: RCA Index for Indian T&C Products in 2012 114-116 Table 4.11: Export Unit Values for Indian Machinery Products in 2012 Table 4.12: Comparison of Export Unit Values of India with other countries (Machinery) 118 Table 4.13: Export Unit Values for Indian Textiles Products in 2012 Table 4.14: Comparison of Export Unit Values of India with other countries (Textiles) 119
66
70
104
112-113
117
119
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Table 4.15: Export Unit Values for Indian Clothing Products in 2012 120-121 Table 4.16: Comparison of Export Unit Values of India with other countries (Clothing) 121 Table 5.1: Top Ten Integrated Countries in GVCs in 1988-95: Export and Import Shares of Intermediate and Finished Machinery (%) 125 Table 5.2: Ten Least Integrated Countries in GVCs in 1988-95: Export and Import Shares of Intermediate and Finished Machinery (%) 127 Table 5.3: Export and Import Shares of Intermediate and Finished Machinery: Changes from 1988-95 to 1999 (including changes in positions) [in percentage point terms] 129 Table 5.4: Comparison of Shares of Exports and Imports of Finished and Intermediate Machinery of India (in percentage point terms) 130 Table 5.5: Top Ten Integrated and Ten Least Integrated Countries in GVCs in 2012: Export and Import Shares of Intermediate and Finished Machinery (%) 131-132 Table 5.6: Export and Import Shares of Intermediate and Finished Machinery: Changes from 1988-95 to 2012 (in percentage point terms) 132 Table 5.7: Comparison of Shares of Exports and Imports of Finished and Intermediate Machinery of India (in percentage point terms) 133 Table 5.8: Top 12 Countries as per Highest Rise in Export Share of Intermediate General Machinery (1988-95 to 2012) [in % terms] 134 Table 5.9: Countries as per Declining Export Share of Intermediate General Machinery (1988-95 to 2012) [in % terms] 135 Table 5.10: Top 10 Countries as per Highest Rise in Export Share of Intermediate Electric Machinery (1988-95 to 2012) [in % terms] 137 Table 5.11:Comparison of India’s Export Shares of Intermediate and Finished Machinery over the period 1988-2012: HS 86-89, HS 84 and HS 85 (%) 139 Table 5.12: Top 10 Countries as per Highest Rise in Export Share of Auto Components (1988-95 to 2012) [in % terms] 140-141 Table 5.13: Comparison of India’s Export Shares of Intermediate Machinery over the period 1988-2012: HS 87, HS 84 and HS 85 (%) 142
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Table 5.14: Top 10 Countries as per Highest Rise in Export Share of Intermediate Precision Machinery (1988-95 to 2012) [in % terms] 143
Table 5.15: India’s Export Shares of Finished and Intermediate Precision Machinery: 1988-2012 (%) 144
Table 5.16: Selected 45 Inputs in Indian T&C Industry 145-147 Table 5.17: India’s Bilateral Export Shares for Selected Textiles Inputs (%) 149-150 Table 5.18: Top 30 Countries at 4-Digit Level for year 2012 151-152 Table 5.19: India’s GLI for HS 84-92 (%) 153 Table 5.20: Top Five 4-digit Machinery Parts for years 1988, 1996, 2000, 2005 and 2012 155 Table 5.21: Top Ten 4-digit Machinery Components with Highest Percentage Rise in GLI (1988-2012) [%] Table 5.22: Top Ten 4-digit Machinery Components with Highest Percentage Rise in GLI (2000-2012) [%] 157 Table 5.23: 4-digit Machinery Components with Highest Percentage Fall in GLI (1988-2012) 157 Table 5.24: Machinery Components with Highest Percentage Fall in GLI (2000-2012) 158 Table 5.25: India’s GLI for HS 50-63 (%) 159 Table 5.26: Top Five 4-digit Textiles Products for years 1988, 1997, 2001, 2006 and 2012 161 Table 5.27: Top Ten 4-digit Textiles Products with Highest Percentage Rise in GLI (1988-2012) 162 Table 5.28: Top Ten 4-digit Textiles Products with Highest Percentage Rise in GLI (2006-2012) [%] 162 Table 5.29: 4-digit Textile Products with Highest Percentage Fall in GLI (1988-2012) [%] 163
156
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Table 5.30: 4-digit Textile Products with Highest Percentage Fall in GLI (2006-2012) [%] 163 Table 5.31: Top Five 4-digit Clothing Products for years 1988, 1997, 2001, 2006 and 2012 164 Table 5.32: Top Ten 4-digit Clothing Products with Highest Percentage Rise in GLI (1988-2012) [%] 165 Table 5.33: Top Ten 4-digit Clothing Products with Highest Percentage Rise in GLI (2006-2012) [%] 165-166 Table 5.34: Decomposition Type Threshold Index (Machinery) Table 5.35: Decomposition Type Threshold Index (Textiles) 168 Table 5.36: Decomposition Type Threshold Index (Clothing) Table 6.1: GLI for Indian Machinery Industry from India’s Input-Output Tables (%) 176-177
Table 6.2: Comparison of GLI for Indian Machinery Industry: Input-Output Tables and Trade Data from WITS (%) 177-178
Table 6.3: GLI for Indian T&C Industry from India’s Input-Output Tables (%) 179
Table 6.4: Calculation of VSIIndiafrom India’s Input-Output Tables
Table 6.5: Calculation of VSIIndiamach from India’s Input-Output Tables 181
Table 6.6: Calculation of VSIIndiamach for Types of Machinery 181
Table 6.7: Calculation of VSIT&C from India’s Input-Output Tables 182
Table 6.8: Calculation of VSITEXTILES and VSICLOTHING from India’s Input-Output Tables 183
Table 6.9: Illustration of FVA Content of Gross Exports (Cty – Country) 188 Table 6.10 (in Appendices) Table 6.11: Illustration of DVA Content of Gross Exports (Partner is World; Ind - industry) 190
167
168
180
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Table 6.12 (in Appendices) Table 6.13: Illustration of ‘Domestic value added (by source industry) embodied in gross exports’ in 2009 for textile industry 191 Table 6.14: Illustration of DVA embodied in foreign final demand 192
Table 6.15: India’s Net Value Added in Exports in 2009 (in USD million terms)
Table 6.16: Participation Index for Indian Machinery and Textiles Sub-sectors wise (%) - 1995 to 2009*
Table 6.17: Value Added Trade and Gains under GVCs for Indian Machinery Industry 198
Table 6.18: Value Added Trade and Gains under GVCs for Various Sub-sectors of Indian Machinery Industry 199-200
Table 6.19: Value Added Trade and Gains under GVCs for Indian Textiles Industry 202
Table 6.20: Comparison of Gains from Trade (India and other Asian countries) 203 Table 6.21: India’s Index of Number of Production Stages (1995-2009) Table 6.22: China’s Index of Number of Production Stages (1995-2009) 205
Table 6.23: Index of Distance to Final Demand for India and China (1995-2009) 206
Table 7.1: Brief Description of Value Chains for Selected Indian Machinery Firms 216-220
Table 7.2: Brief Description of Value Chains for Selected Indian T&C Firms 235-238
195
197
204-205