Fostering connectivity through stronger regional trading relationships may hold the key to unlocking growth in India’s manufacturing sector. Opening up regional trade networks will not only reduce the costs of trading but also accelerate the development of manufacturing, production networks, and value chains in the region. Successful market integration requires a foundation of cooperation and knowledge sharing across borders

Goyal, Tanu M.

Mukherjee, Arpita

LSE Research Online

21/06/2017 Reinvigorating India’s manufacturing sector: Integrating the services value chain with Southeast Asia - IGChttp://www.theigc.org/blog/reinvigorating-indias-manufacturing-sector-integrating-the-services-value-chain-with-southeast-asia/ 1/3Authors Arpita MukherjeeICRIER ProfessorIndian Council forResearch on InternationalEconomic Relations(ICRIER) Tanu M. GoyalConsultant, ICRIERIndian Council forResearch on InternationalEconomic Relations(ICRIER)Published on: 19 Jun 2015Countries: Asia, India - Central,InternationalResearch themes: Trade Reinvigorating India’smanufacturing sector: Integratingthe services value chain withSoutheast AsiaFostering connectivity through stronger regional tradingrelationships may hold the key to unlocking growth inIndia’s manufacturing sector. Opening up regional tradenetworks will not only reduce the costs of trading but alsoaccelerate the development of manufacturing, productionnetworks, and value chains in the region. Successfulmarket integration requires a foundation of cooperationand knowledge sharing across borders.The Bharatiya Janata Party (BJP) led National DemocraticAlliance (NDA) government has recently completed its firstanniversary with a yearbook of reform agendas for India.Several international policies of the previous government havebeen rechristened. For instance, the erstwhile ‘Look East Policy’is now ‘Look West, Act East’ policy with renewed emphasis onEastern neighbours. There is focus on uplifting the laggardmanufacturing sector with greater integration with countries inEast and Southeast Asia. All of these are wrapped in theattractive ‘Make in India’ package, with a global growthstrategy for India, linking the country with global value chains.In the past two decades, India and Southeast Asian countrieshave signed several comprehensive free trade agreements (FTAs)and they are in the process of negotiating regional tradeagreements known as Regional Comprehensive EconomicPartnership Agreements (RCEP). The recent trade agreementsare comprehensive, covering goods, services, investments,electronic commerce and trade facilitation, among others toensure easier movement of goods and services and to facilitatethe creation of a value chain.Constructing global value chainsWithin Southeast Asia, India is now negotiating acomprehensive trade agreement with Thailand, a key tradingpartner in the region. Services sector reforms in both countrieshave enhanced the role of services in their respective globalvalue chains and production networks. Trade agreementsincluding services facilitate creation of value chain throughglobal production networks, enabling different trading partnersto add distinct value to exportable goods. The OECD gives dataon value added by other countries in the exports of a particularcountry. In 2009, countries in East and Southeast Asiacontributed to about 4.6 percent of the value added embodiedin India’s exports. Among ASEAN countries, Thailand is the21/06/2017 Reinvigorating India’s manufacturing sector: Integrating the services value chain with Southeast Asia - IGChttp://www.theigc.org/blog/reinvigorating-indias-manufacturing-sector-integrating-the-services-value-chain-with-southeast-asia/ 2/3in India’s exports. Among ASEAN countries, Thailand is thethird largest in terms of value addition, with about $24.41million or 20 percent of the value added by ASEAN memberstates. Thailand’s value added in India’s exports has been thehighest in wholesale and retail trade, hotels and restaurantservices and the manufacturing sector. This suggests thepossibility of creating a global value chain in services sectorsbetween India and Thailand. Creation of value chain can benurtured by three kinds of connectivity – physical connectivity,institutional connectivity and people-to-people connectivity.Connecting placesTransport connectivity is an important component of physicalconnectivity. It is crucial for establishing production networks.It is worth mentioning that the land route from India toAssociation of South East Asian Nations (ASEAN) is throughThailand where Myanmar plays an important role. Despitetheir close proximity transport connectivity between India andThailand is poor. The two main links connecting India andThailand are a) the India–Myanmar–Thailand TrilateralHighway (IMTTH) and b) the Mekong–India EconomicCorridor (MIEC). India and Thailand need to cooperate at aninstitutional level to develop these corridors, along with supportfrom the private sector in both the countries. This will enablebetter physical linkages between the two countries that willbenefit the entire ASEAN region and support the developmentof production networks. It will also reduce transportation timeand cost.Connecting institutionsOther important infrastructure services that supportmanufacturing sector and strengthen physical connectivity aretelecommunications and financial services. These are enablingservices for establishing manufacturing linkages and productionnetworks. At present, both of these are restricted for foreigninvestors in the two markets. Business-facilitating instrumentssuch as banks have a limited presence in each other’s market.Telecommunications in India have an oligopolistic setup whileit is nearly a monopoly in Thailand (which is now movingtowards an oligopoly). Lower call charges and bettertelecommunication and broadband connectivity will bebeneficial for businesses of the two countries.Connecting PeopleAs regards movement of people, both India and Thailand haveabundance of manpower. However, while India’s exportinterest lies in high-skilled, professional services, Thailand hascomparative advantage in terms of certain specialised skills suchas nursing, midwifery, spa specialists, etc. India is keen toexport professionals in sectors like business services andinformation technology to Thailand while Thai companies andassociations are interested in establishing a foothold in spaservices in India. While Thailand has interest in exportingspecialised skills, India being a labour abundant country hasreservations. It imposes a minimum salary condition, which istough for the Thai spa workers, nurses and midwiferies to meet.Indian service providers are also facing visa and work permitrelated issues in Thailand. The regulatory bodies for21/06/2017 Reinvigorating India’s manufacturing sector: Integrating the services value chain with Southeast Asia - IGChttp://www.theigc.org/blog/reinvigorating-indias-manufacturing-sector-integrating-the-services-value-chain-with-southeast-asia/ 3/3related issues in Thailand. The regulatory bodies forprofessionals in the two countries do not recognise each other’squalifications.Current barriers to regional market integrationIndia and Thailand have a fairly restrictive FDI regime inservices and the regulations in this sector are evolving. Thecurrent operating environment for Foreign Service providers isnon-transparent offering limited cooperation and knowledgesharing among regulators of the two countries. All these factorsimpede bilateral flow of trade and investment therebyrestricting market integration and development of services valuechains.An analysis of the existing trade agreements of India andThailand reflect that the two countries have undertaken liberalcommitments with their trading partners. They are bothproponents of liberalising the movement of people in theirWTO and bilateral/regional trade agreements. India’scommitments in different services sectors in the bilateralagreements are similar to or lower than their domestic regime.However, Thailand is willing to go beyond its domestic regimein trade agreements. Ideally, a bilateral trade agreement shouldaim to facilitate market integration. Nevertheless, if it evenbinds the existing regime it provides operational certainty tobusinesses, since both countries will find it difficult to roll backthe existing regime. Such operational certainty is important incountries such as India and Thailand that frequently changetheir regulatory regime. Since both India and Thailand continueto negotiate trade agreements such as the RECP, marketintegration will enable them to leverage each other’s strengths.It will also enhance their joint bargaining power in RCEP vis-à-vis countries such as China.Integrating services may facilitate growth in India’smanufacturing sectorFor the trade agreements and market integration to besuccessful, the two countries have to develop a soundinstitutional and regulatory framework.  There is a need forgreater co-operation at three levels—government togovernment, among industry associations and amongbusinesses. Co-operation and sharing of information andknowledge will facilitate market integration. Companies fromIndia and Thailand can leverage their mutual strength to accessthird country markets. Overall, for services market integrationand the development of services value chains, countries in thisregion have to speed up their domestic reforms process, removemarket access barriers and implement a sound regulatoryframework that enables foreign companies to operate in atransparent and non-discriminatory environment. Moreover,services have a key role in supporting the manufacturing sector,which has so far depicted slow growth in India. By opening theservices sector to foreign markets and in this case withThailand, India can secure its place in global productionnetworks and participate in services value chain in the ASEANregion, rather than being left out in the hands of protectionism.

Reinvigorating India’s manufacturing sector: integrating the services value chain with Southeast Asia

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