Abstract
At a time when regional production networks have been resurgent, especially in Asia, why has India’s integration in regional markets not been deeper? Using highly disaggregated trade data and firm level field interviews, the paper found that despite low volumes, vertically specialized trade has been growing between India and ASEAN. Overall, we find that there is significant potential for deepening India’s engagement in ASEAN by expanding intermediates exports in the machinery sector, expanding into higher value specialty chemicals exports, unlocking the underexploited potential for growth in the electronics sector and moving up the value chain in the road vehicles and, telecommunications sectors where network exports are already important. Our field level interviews bear out these findings and show that besides the usual policy costs associated with supply side constraints in Indian manufacturing three factors hamper India’s deeper integration in Asian production networks: (i) low value addition in Indian manufacturing which translates into low-value component exports and a high degree of reliance on expensive imports creating a perverse effect on both learning and trade balance; (ii) a janus faced effect on technological change and productivity stemming from relatively low quality standards associated with cost-sensitive demand from domestic buyers and weak exports. This leads to technological stagnation on the one hand, and a growing capital intensity of routine operations on the other. (iii) and finally, despite the rise of export oriented industrial parks and SEZ’s there is a striking lack of an effective institutional eco-system of industrial advantage that agglomeration economies and colocation of interdependent, sectorally specialized firms can bring. Instead, sectoral fragmentation adds to manufacturing costs despite co-location. Although some firms have found innovative ways to cope, the coping costs are high.
