Can e-commerce and MSMEs coexist? It’s complicated

Indian businesses, especially MSMEs, still lack proper access to digital technology. Photo: iStock
Indian businesses, especially MSMEs, still lack proper access to digital technology. Photo: iStock


E-commerce benefits consumers but has scope for harming small retailers.

The issue of co-existence of organized and unorganized sectors in a developing country like India is not new. While the debate persists, specifically in the services sector, a relatively new (though related) variant of the problem now concerns the co-existence of traditional brick-and-mortar sellers with online marketplaces (so-called e-commerce aggregators), such as Flipkart and Amazon. It is well known that these e-commerce platforms have in the past decade-and-a-half assumed a significant role in providing benefits to consumers in terms of ease of shopping, saving travel time, providing after-sale services, etc. While growing in the Indian market, they have also created a large number of warehouses and supply jobs. In fact, some surveys suggest that this medium provides an added advantage to small home businesses, which do not need a physical set-up to market their products, and hence encourage the entry of new firms. The positive spillover effects have also been witnessed by the fintech industry, as many consumers and producers now prefer digital transactions.

However, in recent years, some sections of Indian industry, specifically small retail businesses and traders’ associations, have been expressing concern over the negative impact e-commerce majors are having on their growth and sustainability. Their complaint is that these platforms attempt to erode their business opportunities through predatory pricing, deep discounting, cashback policies and preferential terms for select sellers. This has squeezed the profitability of Indian retailers by forcing them to charge customers low prices and reducing their overall market share in the country—an effect that got aggravated during the covid pandemic. It has also been claimed that the two big e-commerce platforms are effectively trying to induce duopoly elements in the Indian retail market, hence creating problems for the survival of incumbent firms and also for the entry of new players.

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These issues have also been recognized by Indian policymakers, which is evident from the time-to-time changes that the government introduces/proposes in the country’s e-commerce norms. In late 2018, the government introduced a new policy that barred any entity related to e-commerce platforms from selling on that site and imposed a quantitative restriction on how much a vendor can sell on a particular online portal. More recently, to protect domestic firms, the ministry of consumer affairs proposed to impose new registration requirements for online retailers, place a ban on specific flash sales, and impose stringent data-use norms. While these practices are meant to regulate e-commerce in India, the question is whether this is the right way forward.

Conflicts of interest among various potential gainers, on one hand, and India’s huge unorganized set of retailers on the other, make it imperative for the government to take a balanced approach. While research in this area is limited, owing to data issues, a recent econometric study conducted by the Indian Institute of Foreign Trade (using information from the CMIE Prowess database) shows how the e-commerce industry has facilitated domestic sales of the overall Indian retail and manufacturing sectors by providing them with an additional channel for marketing their products, even as they continue with their offline businesses. These firms can now take advantage of 24X7 online marketplaces made accessible by e-commerce platforms, without any need for heavy investment to create their own online portals, or advertising/marketing their products, provided they ensure supplies of good-quality products. However, it is important to note that e-commerce is only a channel for selling goods or providing services, and a firm cannot directly leverage benefits from such platforms unless supported by adequate digital infrastructure.

The research further shows that while, on average, manufacturing micro, small and medium enterprises (MSMEs) have benefited from the growth of online commerce, retail MSMEs, specifically, have not yet gained significantly from this channel. This is one reason why objections against e-commerce majors have mostly been raised by MSME retailers.

Though India has one of the world’s fastest-growing digital commerce spaces, Indian businesses, especially MSMEs, still lack proper access to digital technology. In another study conducted by IIFT, in collaboration with PayPal, it was found that the country’s digitization level remains low relative to many other economies such as China and Vietnam, posing risks to India’s growth prospects in the increasingly digitalized era of today. Further, while these findings pertain to organized sector MSMEs, there is no doubt that they apply all the more strongly to India’s unincorporated enterprises, which account for the major chunk of the Indian retail sector.

The bottomline, as India’s e-commerce policy is still a work-in-progress, is that more research is needed to devise regulations that strengthen the connect between e-commerce and MSMEs, rather than support one at the expense of the other. This also calls for the creation of a robust database to make such analyses possible, which is presently highly skewed in the case of India.

These are the authors’ personal views.

Kanika Pathania of the Indian School of Business & Finance contributed to the article.

Manoj Pant & Sugandha Huria are, respectively, vice-chancellor and professor of economics, and assistant professor of economics at the Indian Institute of Foreign Trade (IIFT).

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