Assessing India’s Trade Performance: Pathways to Strategic and Deeper Integration With Global Value Chains

Executive Summary

Global economic developments have triggered significant policy shifts across major economies, and for India, this presents both opportunities and challenges. The opportunities lie in addressing India’s fundamental structural weaknesses to integrate into global value chains (GVCs) and become a key destination for foreign investments.

The current period holds an immense opportunity to shift the policy focus toward manufacturing. Historically, India’s growth story has not been effective in adequately promoting its manufacturing sector. This is reflected in India’s limited participation in global manufacturing GVCs.

To address the challenges facing Indian manufacturing, it must focus on its fundamental constraints: access to land, labour productivity, technology adoption, domestic competition, and an over-reliance on import protection measures. Correcting these structural issues is essential for enhancing competitiveness, raising productivity, and positioning India as a key player in global production networks.

In this context, the paper discusses the key challenges facing the Indian manufacturing sector, with particular emphasis on its import protection policies.

The paper makes five key contributions:

• It summarises the major challenges facing Indian manufacturing, including competitiveness constraints, specifically tariff and non-tariff measures (NTMs).
• It presents empirical evidence of India’s recent successes in trade integration for the machinery production chains, demonstrating models that other industries can replicate to deepen their integration into GVCs.
• It assesses six-digit Harmonised System (HS) tariff lines for 2023 to identify goods that need to be liberalised, given their importance in the import basket and their critical role in domestic production.
• Using a simulation model, the paper assesses the impact of recent United States (US) tariffs on India and other key economies. It estimates the potential Gross Domestic Product (GDP) gains for India under a scenario of Most Favored Nation (MFN) tariff reduction.
• Finally, the paper recommends a short- to medium-term policy roadmap to make Indian manufacturing more competitive and better integrated into GVCs.

Competitiveness Challenges Facing India

India’s share in the global economy has remained almost stagnant over the past decade, as reflected in its limited participation in GVCs. Several factors appear to be driving this trend.

• A comparative assessment of India and four key Asian economies—Indonesia, Malaysia, Thailand, and Vietnam—highlights India’s structural competitiveness gaps. In a competitiveness index based on six key pillars, India ranked lowest, while Malaysia topped the index, followed by Vietnam and Thailand. India performed poorly on parameters such as labour productivity, land access, firm concentration, import tariffs, participation in Free Trade Agreements (FTAs), and regulatory hurdles.
• While high tariffs have constrained India’s competitiveness, non-tariff barriers (NTBs) have further aggravated the problem. Quality Control Orders (QCOs) have risen sharply over the years, particularly targeting intermediate goods critical to production supply chains. Moreover, QCOs appear to be increasingly used for price-related or strategic reasons, issues already addressed by anti-dumping measures, which have proliferated over the years. The recent withdrawal of several QCOs is a much-needed relief for Indian firms, but many existing QCOs still require careful reassessment to achieve more efficient, growth-enhancing outcomes.
• The trade barriers are sometimes inadvertently reinforced by industrial policies. Take, for example, the Production Linked Incentive (PLI) scheme, which has been introduced across 14 sectors since 2021 to support domestic manufacturing and exports by incentivising production volumes. While a few sectors have demonstrated improved export performance, many others continue to struggle. A key reason may be that the incentives are tied primarily to sales rather than to investments in technology adoption, process upgrading, and research and development (R&D), areas that are crucial for long-term competitiveness. Changes in this direction can yield positive outcomes.

Positive Signs of GVC Integration

• An empirical assessment of machinery production networks across key Asian economies shows that East Asian countries exhibit much smaller gaps between predicted and actual export and import values, reflecting strong integration into regional value chains.
• By contrast, India’s gap ratios for machinery exports and imports, 20% and 70%, respectively, indicate that the country is yet to capitalise on significant opportunities for deeper participation in these production networks.
• Between 2017 and 2023, India’s machinery exports increased 1.9 times, but gap ratios rose only modestly. Exports to the US grew 3.5 times, and final-product exports increased 6.3 times, partly driven by smartphone assembly, though gaps remain far below 100%.
• On the import side, progress is more pronounced. India’s total machinery imports rose 1.6 times, with notable increases from East Asian economies. China remains the largest source, but Japan, Korea, Taiwan, and the Association of Southeast Asian Nations (ASEAN) all show gap ratios above 100%, indicating India’s growing integration into East Asian machinery networks from the import side.

A mix of openness and GVC integration, foreign entry, import access to key components, and seamless supply-chain participation drove investment and export growth in this sector. Replicating this model across manufacturing requires lower import barriers, stronger connectivity, and a supportive policy environment to enable task-based global production and deeper industry-level integration.

Assessment of India’s Protectionist Policies

A granular analysis of 3,927 HS-6-digit products for 2023 reveals the following:

• 92.5% of product lines (worth USD 410 billion in imports) carry non-zero MFN tariffs.
• 7.9% of product lines (worth USD 40 billion in imports) are subject to Anti-Dumping Duties (ADD).
• 8.6% of product lines (worth USD 50.7 billion in imports) fall under QCOs.
• The 10–15% [1] MFN tariff band dominates, covering nearly half of tariff lines and USD 241.8 billion in imports, primarily capital and intermediate goods. This structure raises input costs and undermines supply-chain efficiency.
• Products facing tariffs and NTMs, ADDs and QCOs, account for USD 9.3 billion in imports, concentrated in plastics, chemicals, steel, and aluminium, which are core industrial inputs.

These findings highlight the need to liberalise critical inputs to support manufacturing competitiveness and deeper GVC integration.

Expected Gains From Most Favored Nation Tariff Reduction

The US “reciprocal tariff” policy announced on April 2, 2025, marked a shift from a multilateral, rules-based trading system to one driven by geopolitics.

• Institute of Developing Economies-Geographical Simulation Model (IDE-GSM) showed that with 26% tariff, India experienced a positive impact (+0.4%), also possibly due to its low dependence on US exports. In comparison, China, with 54% import tariff, faced severe losses in terms of its GDP.
• Subsequent bilateral negotiations substantially altered the situation. China faced a 20% tariff until November 2026, while India faced a combined 50% tariff, removing the earlier advantage. Updated simulations show that India’s GDP fell slightly (-0.07%), highlighting the loss of relative competitiveness.
• Despite the GDP fall, India is relatively resilient compared to many ASEAN economies because of its low relative export dependence on the US. The findings highlight the need for India to focus on strengthening its competitiveness.
• A liberalisation scenario, reducing MFN tariffs and lowering NTBs provides a strong positive GDP effect (+1.5%), particularly in key sectors.

Policy Recommendations

India must reconsider its blanket protectionist approach, especially on intermediate goods, as it raises input costs and weakens industrial competitiveness.

• In the short term, India should avoid hiking tariffs, correct inverted duty structures, and suspend QCOs on non-safety-critical inputs.
• Medium-term priorities should include lowering tariffs on key inputs, examining cases of overlapping duties, reassessing QCOs, and negotiating and concluding deeper FTAs.
• Over the long term, India should address deeper structural constraints such as land constraints, regulatory quality, R&D investment, and firm concentration to strengthen manufacturing competitiveness.