Positioning India in Global Value Chains

This editorial is based on “In the race for exports, India’s competitive edge missing” which was published in The Financial Express on 29/05/2025. The article brings into picture the renewed trade opportunity for India amid US-China tensions, while highlighting that deep structural weaknesses and low competitiveness hinder its gains. To capitalize, India must pursue bold reforms and integrate effectively into global value chains.

For Prelims: Foreign Trade Policy 2023, Production Linked Incentive (PLI) scheme, India's merchandise exports, Australia (ECTA), UAE (CEPA), PM Gati Shakti Plan, World Bank's Logistics Performance Index, Bharatmala, Sagarmala, Open Network for Digital Commerce,National Programme for Organic Production,  

For Mains: Key Drivers of the Growth in India's Exports, Key Issues Affecting India's Integration in Global Value Chains.

As global trade faces uncertainty from US tariff policies and potential Chinese export diversions, India stands at a crossroads between challenge and opportunity. Despite not capitalizing on the previous US-China trade war, India now has a second chance to benefit from shifting global trade patterns. However, a recent Competitiveness Index ranks India lowest among key Asian peers like Malaysia, Vietnam, and Thailand, revealing deep structural weaknesses. Therefore, India must move beyond reactive measures and implement comprehensive reforms that boost competitiveness, reduce red tape, and actively connect with global value chains.

What are the Key Drivers of the Growth in India's Exports? 

• Strategic Government Initiatives and Policy Reforms: Robust government policies like the Production Linked Incentive (PLI) schemes and Make in India have significantly enhanced domestic manufacturing and export capacity.  
  • The Foreign Trade Policy 2023 further simplifies export procedures and incentivizes emerging sectors such as e-commerce and high-tech products. 
  • For instance, mobile phone exports surged from virtually zero in 2016 to over $20 billion in 2024, driven largely by PLI incentives.  
    • Additionally, exports in pharmaceuticals rose to $27.85 billion in 2023-24, reflecting policy impact. 
• Diversification of Export Portfolio and Markets: India’s export basket has evolved beyond traditional commodities to high-value sectors such as electronics, engineering goods, and services, reducing dependence on a few products and markets. 
  • This diversification lowers vulnerability to external shocks and taps into fast-growing global demand. 
  • India’s merchandise exports to over 115 countries grew by 67% since 2013-14, with top destinations including the US, UAE, and Netherlands constituting 51% of exports.  
• Expansion into Global Value Chains: India’s growing participation in Global Value Chains (GVC) allows it to specialize in value-added stages of production, enhancing export quality and scale.  
  • Despite a relatively low GVC participation rate (around 41.3%), strategic infrastructure and policy reforms aim to boost backward and forward linkages, attracting lead firms and MSMEs into global supply chains.  
  • India’s exports to China rose 8.7% to $16.67 billion in FY24, showing increased regional integration, while sector-specific schemes target high-tech manufacturing.  
    • This integration promises increased productivity and export diversification. 
• Resilience and Growth of Services Exports: The surge in India’s services exports, particularly IT, telecom, and business services, underpins its export growth with relatively high value addition and global demand.  
  • Services exports rose 12.45% in FY25, reaching a record $374 billion, offsetting merchandise export volatility and trade deficits.  
  • India’s strength in digital services, coupled with global remote work trends, supports this expansion. For example, telecommunications services exports led the charge alongside IT, highlighting India’s competitive advantage in knowledge-based sectors. 
• Infrastructure and Logistics Modernization: Improved port facilities, multimodal logistics, and digital customs platforms have reduced costs, enhanced efficiency, and accelerated export processes.  
  • Initiatives like the Sagarmala Programme and PM GatiShakti aim to cut logistics costs, which constitute up to 14% of export value, thus improving competitiveness.  
  • The establishment of 35 multimodal logistics parks and the expansion of national waterways contribute to faster cargo movement.  
• Digitalization and Ease of Doing Business: Digital platforms such as the National Single Window System and Trade Connect streamline approvals and facilitate exporters, reducing compliance burdens and time.  
  • Automation and cloud-based tax software lower error rates and expedite customs clearance, helping SMEs access global markets efficiently.  
  • The digital push directly supports export growth by enhancing transparency and reducing trade costs. 
• Geopolitical Shifts and Trade Realignments: Rising US-China trade tensions and global supply chain disruptions present India with a unique opportunity to capture shifting trade flows and increase export share.  
  • Despite challenges, India’s exports grew by 5.5% to $821 billion in FY25, outperforming global averages amid uncertainty.  
  • For example, mobile phone exports to the US jumped 44% in 2024 as companies shifted production. Ongoing FTAs with UAE, Australia, and EFTA countries enhance market access and diversification. 
• Rising Domestic Demand Supporting Export Competitiveness: Strong and expanding domestic markets create economies of scale and foster innovation, improving the global competitiveness of Indian exporters. 
  • Despite global economic headwinds, India's growth remains stable at 6.5%, supported by strong domestic demand. 
  • With a growing middle class and robust consumption, sectors like electronics, pharmaceuticals, and automotive benefit from local demand-led capacity expansions. 
• Enhanced Financial Support and Export Credit: Schemes like the Interest Equalisation Scheme and expanded credit facilities for MSMEs provide concessional finance, lowering costs and enabling export scale-up.  
  • Additionally, export credit agencies like EXIM Bank and SIDBI extend lines of credit, facilitating market entry and growth. This financial backing plays a pivotal role in enabling sustained export growth, especially for SMEs. 

What are the Key Issues Affecting India's Integration in Global Value Chains? 

• Limited Backward Linkages and Low Import Integration: India’s GVC participation is skewed towards forward linkages, relying heavily on raw material exports rather than integrating imported inputs into export products.  
  • This limits India’s role in higher value-added manufacturing and reduces competitiveness.  
  • The country’s backward linkage index declined from 47.6% in 2008 to 41.3% in 2018, indicating weakening integration.  
    • Meanwhile, imports from China for high-tech components like telecom parts remain high at $101.7 billion in FY24, highlighting dependence on external inputs. 
• Infrastructure Deficiencies and Logistical Bottlenecks: Inadequate transport infrastructure, port capacity constraints, and inefficient logistics raise export costs and delay shipments, undermining India’s GVC competitiveness.  
  • Congestion at major ports like Jawaharlal Nehru Port Trust and limited cold chain infrastructure for perishables impede seamless supply chain integration. 
  • These delays increase lead times, discouraging lead firms from sourcing from India. 
• Complex and Inconsistent Trade Regulations: India’s regulatory environment, marked by complex customs procedures, varying tariffs, and frequent policy changes, creates uncertainty for global firms.  
  • Misclassification of products and unclear HS codes add to compliance costs and delays.  
  • Exporters cite regulatory bottlenecks as a key hurdle, particularly in sectors like electronics and pharmaceuticals, where international standards must be met. 
    • The fragmented tariff structure and inconsistent application of export incentives limit India’s attractiveness in GVCs. 
• Skill Gaps and Labor Quality Constraints: While India has a large labor pool, shortages of skilled workers in manufacturing and high-tech sectors impede GVC integration.  
  • High-tech GVC segments like semiconductors and pharmaceuticals require specialized skills, which are currently scarce.  
  • Only 42.6% of Indian graduates were found employable in 2024. Targeted skill development programs are underway, but tangible improvements in workforce capabilities are gradual, limiting India’s ability to climb up the value chain. 
• Weak Linkages Between MSMEs and Lead Firms: MSMEs contribute nearly 50% to exports but suffer from limited integration with global lead firms, restricting their GVC participation.  
  • Issues like lack of access to finance, technology, and management expertise hinder MSME competitiveness.  
  • For example, MSMEs face difficulty meeting quality standards and certification norms required by international buyers.  
    • Strengthening these linkages, as seen in Vietnam’s Samsung-led supply chains, remains an urgent priority for India. 
• Insufficient R&D and Innovation Ecosystem: India’s low investment in R&D (0.6% of the GDP) and weak collaboration between industry and academia curtail its ability to innovate and produce high-value exports.  
  • This limits participation in design and development stages of GVCs, confining India largely to assembly and low-tech manufacturing.  
  • Enhancing innovation capabilities is crucial for moving up GVCs and attracting foreign lead firms. 
• High Domestic Tariffs and Protectionist Policies: Protectionist trade policies, including high tariffs on intermediate goods and domestic subsidies, raise input costs and discourage import integration essential for GVC participation.  
  • This inward-looking approach disincentivizes firms from embedding Indian operations in global supply chains.  
  • Despite recent shifts, India still imposes tariffs higher than ASEAN peers, impacting sectors like electronics and automotive.  
    • Critics argue that reducing these barriers would improve competitiveness and attract greater GVC involvement. 
• Geographic Concentration of Export Activity: Export production and GVC participation are concentrated in a few coastal states with better infrastructure, leaving vast regions underdeveloped and excluded.  
  • Six states contribute 70% of exports, reflecting uneven industrial growth. Inland states struggle with inadequate logistics and power supply, deterring investments.  
  • Bridging regional disparities through infrastructure development and policy support is critical to broaden GVC integration nationwide. 

What Measures can India Adopt to Enhance Integration in Global Value Chains and Boost Exports?   

• Holistic Export-Oriented Skill Development Ecosystem: Develop sector-specific, industry-led skill development centers aligned with GVC requirements, emphasizing advanced manufacturing, digital technologies, and quality standards.  
  • Integrate vocational training with real-time industry exposure and certification frameworks to bridge skill gaps rapidly.  
  • Leverage PPP models and international collaborations to ensure global best practices. This will create a ready workforce capable of engaging in higher value-added activities and innovation within GVCs. 
• Integrated Trade Facilitation and Digital Customs Reforms: Implement end-to-end digitization of customs and logistics through blockchain-enabled platforms to ensure transparency, reduce clearance times, and eliminate paperwork redundancies. 
  • Harmonize tariff classifications and adopt AI-based risk management to streamline inspections.  
  • Link this with the National Single Window System and Trade Connect portals to create a seamless, single-source export facilitation ecosystem that enhances compliance and competitiveness. 
• Targeted MSME-GVC Linkage and Innovation Hubs: Establish dedicated innovation clusters that connect MSMEs with global lead firms, providing technology transfer, quality certification support, and market access.  
  • Facilitate finance and capacity-building through schemes like the ECLGS combined with PLI incentives tailored for MSMEs in export-oriented sectors. 
  • These hubs should act as localized export incubators to boost MSME productivity and their role in complex supply chains. 
• Rationalization of Tariffs and Alignment with Trade Policy: Undertake comprehensive tariff rationalization focused on reducing duties on intermediate goods and raw materials essential for export production.  
  • Align tariff reforms with export promotion schemes to avoid policy contradictions and incentivize global integration.  
  • Complement this with active trade diplomacy and FTAs that facilitate tariff concessions and non-tariff barrier reductions, expanding market access while maintaining strategic safeguards. 
• Infrastructure Upgradation with Emphasis on Multi-Modal Connectivity: Accelerate development of integrated multimodal logistics parks combining road, rail, air, and waterways connectivity to drastically cut freight time and costs.  
  • Expand cold-chain infrastructure and warehousing near production clusters to reduce perishability and inventory losses.  
  • Synchronize these efforts under the Sagarmala and PM GatiShakti programs for optimized resource allocation and enhanced export supply chain resilience. 
• Innovation-Driven R&D Funding and Intellectual Property Ecosystem: Increase public and private R&D investment with tax incentives and grants targeting export-centric sectors like pharmaceuticals, electronics, and specialty chemicals. 
  •  Foster academia-industry collaboration through innovation clusters and fast-track patent processing.  
  • Enhance IP-backed financing frameworks to help exporters monetize innovations and strengthen global competitiveness. 
• Dynamic Export Market Diversification Strategy: Adopt a data-driven, flexible export diversification approach using market intelligence to identify emerging demand hubs beyond traditional partners.  
  • Boost market entry support via diplomatic channels and trade missions focused on Africa, Latin America, and Southeast Asia.  
  • Integrate this strategy with initiatives like Bharat Mart and E-Commerce Export Hub to leverage digital platforms and expand SME participation. 
• Policy Coordination Mechanism Across Centre and States: Establish a high-powered export competitiveness council involving central and state governments to harmonize policies on labor, land acquisition, infrastructure, and skill development.  
  • Encourage states to design region-specific export promotion roadmaps aligned with national GVC goals, fostering inclusive growth. This coordinated approach will address regional disparities and unlock inland states’ export potential. 
• Sustainability and Green Export Certification Framework: Develop a national green export certification system that incentivizes sustainable production practices and eco-friendly supply chains aligned with global environmental standards. 
  • Support exporters through capacity-building on carbon footprint reduction and circular economy adoption.  
  • Link this initiative with existing schemes like the National Programme for Organic Production (NPOP) to create premium market positioning and future-proof export competitiveness. 

Conclusion: 

India's export growth is being driven by strategic reforms, diversified markets, and digital transformation. However, unlocking its full potential in global value chains requires overcoming deep-rooted structural barriers. Targeted interventions—especially in skilling, MSME integration, infrastructure, and trade facilitation—are crucial. A coordinated center-state approach, along with tariff rationalization and innovation support, can boost long-term competitiveness.  

Drishti Mains Question:

“India stands at a strategic inflection point to harness shifting global trade dynamics, yet structural challenges continue to constrain its integration into Global Value Chains (GVCs).” Discuss.

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Q1. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if (2018)  

(a) Industrial output fails to keep pace with agricultural output.  

(b) Agricultural output fails to keep pace with industrial output.  

(c) Poverty and unemployment increase.  

(d) Imports grow faster than exports.  

Ans: (c)

Q2. The SEZ Act, 2005 which came into effect in February 2006 has certain objectives. In this context, consider the following: (2010)  

1. Development of infrastructure facilities.  
2. Promotion of investment from foreign sources.  
3. Promotion of exports of services only.  

Which of the above are the objectives of this Act?  

(a) 1 and 2 only  

(b) 3 only   

(c) 2 and 3 only  

(d) 1, 2 and 3  

Ans: (a)

Q3. A “closed economy” is an economy in which (2011)  

(a) the money supply is fully controlled  

(b) deficit financing takes place  

(c) only exports take place  

(d) neither exports or imports take place  

Ans: (d)