BackIndia’s self-defeating stand on e-commerce
India has taken an unfavourable stance on liberalizing e-commerce at the WTO, which may not help in making its SMEs competitive
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India’s small and medium enterprises (SMEs), struggling to survive in the aftermath of demonetization and the introduction of the goods and services tax (GST), seem now to face the threat of global competition through e-commerce platforms. In the recently concluded eleventh ministerial conference (MC11) of the World Trade Organization (WTO) held in Buenos Aires, developed countries sought to negotiate new global e-commerce rules which could liberalize e-commerce and benefit SMEs. India, however, has taken an unfavourable stance. It has cited unfair market access to foreign companies in the currently ‘asymmetrical’ e-commerce space, with its power to hurt domestic e-commerce platforms, as well as SMEs, as the logic for such a stance. Such a stance, however, may not be in its own interests.
SMEs, which contribute to almost 50% of India’s exports, can provide the basis for an export-led growth model. The challenge to the SME-led traditional growth models lies in the barriers that they face in growing their markets domestically and globally in a cost-effective manner. SMEs can use the e-commerce route to mitigate the challenges to their growth, as also to increase their competitiveness.
E-commerce can help SMEs expand their geographical reach to reap economies of scale, as also increase the speed and flexibility of business, with a positive impact on top-line growth. By tying up with reputed e-commerce marketplaces, SMEs can allay customer fears and mitigate the trust deficit associated with online transactions. This would improve their profit margins by reducing overhead costs and upfront capital investments. At the same time, such e-commerce platforms also reduce transaction costs by eliminating the need for middlemen.
The internet economy, with its concomitant power of exponential growth, will prove to be a game changer in this regard. Active internet adoption for business activities by Indian SMEs, KPMG found (https://goo.gl/qvXEXz), boosted revenue by 51%, profits by 49% and expanded the customer base of such SMEs by 7%, compared to SMEs which chose to remain offline. Further, marketing and distribution spending were expected to be 60-80% lower than traditional marketing spending.
SMEs which used a wide range of internet tools to market, sell and support their products, called high-web SMEs, experienced a three-year sales growth of 19%, as opposed to 13% growth experienced by low-web SMEs. More importantly, India’s export revenue from the sector was generated mainly by the technology-enabled SMEs. Thus, 98% of such SMEs contributed to India’s export revenue, as opposed to only 11% of the traditional SMEs engaged in exports, which used the internet sparingly. SMEs that adopted e-commerce perceived it as a cost-effective medium for growing sales, ensuring business expansion, and increasing business profitability.
Indian SMEs have been slow in adopting e-commerce despite the strong evidence in its favour. It is critical that participants in the e-commerce ecosystem, as well as the government, understand and resolve the challenges associated with not adopting e-commerce, both on the demand and supply side.
The low rates of e-commerce adoption can be explained partly due to a lack of awareness of information technology products and services, and the e-commerce ecosystem as a whole. However, adoption rates by even those SMEs which had gone online were extremely low (27 %).
One important reason for the non-adoption of e-commerce on the sellers’ side is the perceived cost of technology adoption and maintenance. Lack of adequate financing for SMEs and confusion about the total cost of ownership and return on investment of technology adoption, as also the non-availability of ‘soft’ training and support required to sustain the usage of technology, act as factors causing the under-adoption on the sellers’ side.
On the demand side, issues pertaining to payment gateways, infrastructure, patchy internet connectivity, and the absence of a clear legal and regulatory environment, deter domestic adoption of e-commerce. Building trust regarding the timely and effective delivery of goods and services will prove to be the biggest challenge in building global demand for Indian SMEs’ products and services.
Changes in the information and communication technology (ICT) landscape, as well as global developments such as those represented by the WTO negotiations, will make SME-led global e-commerce a reality. It is important that India recognize this as an opportunity, and prepare and plan adequately.
The government, in partnership with universities, can undertake active SME engagement to educate them on the power of the internet economy. SMEs can be made aware of the minimal investments, ranging from Rs99 to Rs3,000, required to establish an online presence or enter the e-commerce space, respectively. At the same time, Indian SMEs can be encouraged to partner with global businesses to adapt to, or adopt, new technologies, innovations, and the quality needed to compete in global markets.
It would be foolhardy to overlook the benefits to Indian SMEs of participating in the international value chains—greater market access, improved efficiency and lower transaction costs—that global e-commerce represents. The mantra should be—join them to beat them.
Tulsi Jayakumar is professor of economics and programme head of the postgraduate programme for family managed business SPJIMR, Mumbai.
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