4 min read.Updated: 04 Mar 2021, 10:10 PM ISTAruna Sharma
To generate jobs by the million, we should focus our export thrust on overseas sales by small enterprises via the internet. We could leverage the cost benefits of retail disintermediation.
India faces the dual challenge of creating new jobs and ensuring a sustainably high growth trajectory. The country’s foreign trade policy needs to be analysed and modified in this context. We have 1.34 billion people, with almost two-thirds aged under 30. But they need good health care and skills to acquire income avenues. For India’s youth to be an asset and its demographic dividend to materialize, the economy must create job openings for 18.6 million people every year.
It is equally important to understand emerging consumer behaviour in India, both rural and urban, and also overseas. There’s a big move towards e-commerce. With an estimated internet user base of over half a billion, India is next only to China on its online market potential. With robust e-com platforms and secure modes for digital transactions, the internet could enable even small and medium businesses to reach out to and explore new markets across the globe. The government’s clarion call of Atmanirbhar Bharat is based on the same ambition.
Our foreign trade policy, therefore, must focus on encouraging e-commerce platforms that offer authentic and verifiable details of the wares on offer, enable product choice by means of efficient aggregation, help maintain inventories, and also ensure deliveries to the satisfaction of customers. As buyer choice is critical, supplies from a wide variety of manufacturers should be enabled at very low cost, with mechanisms in place for feedback and the standardization of products and supply chains.
Under traditional brick-and-mortar retail operations, as represented by the Confederation of All India Traders, the consumer is charged at a marked ‘maximum retail price’ (MRP), with back-end commissions for the retailer and distributor that often account for about half the MRP. In the model, consumer choices are sought to be directed by shop-shelf visibility and availability, which explains high retail commissions. The disintermediation effect of e-commerce, however, breaks the hold of retailers and helps reduce consumer prices. So long as logistical and physical delivery costs are kept low, this cost advantage could be leveraged in global markets too. This is thus an opportunity that policymakers must work towards helping the country maximize the benefits of.
In 2018, India changed its foreign direct investment (FDI) rules for the e-commerce sector, barring foreign-owned e-com platforms from selling the products of suppliers in which they have a direct stake of over 25%. In effect, this curtailed back-end FDI in systems to ensure the standardization of products and packaging, as well as processes of quality control. There is now talk of a policy clarification that might extend that 2018 restriction to cover even indirect stakes in back-end firms. This reduction of their role to that of service providers alone would lower both the cost and quality competitiveness of these platforms.
This would also hinder the handholding done by global e-com platforms of small producers keen to reach wider markets and sell their products online, as they depend on not just the platforms’ feedback systems, but also on their warehouse and inventory management systems, which they themselves cannot afford on their own.
For a global outreach by small Indian businesses, online aggregators are needed to play a significant role in important back-end parts of the value chain. And for aggregation, the best suited are managers at e-commerce platforms that are equipped with data on markets to be addressed around the world. Their being asked to be no more than service providers in India would therefore hamper the core objective of a foreign trade policy aimed at giving Indian businesses access to overseas customers across the internet and thereby generating the sizeable employment needed by the country.
Another pertinent issue that policymakers must look into is the overlap of various laws that currently govern e-commerce activities in India. These include the Income Tax Act, Consumer Protection Act, Foreign Exchange Management Act, Competition Act, Payment And Settlement Systems Act, Companies Act and also legal provisions related to India’s goods and services tax (GST). Besides, any security rule that disallows online merchants, e-com platforms and payment aggregators from storing customer payment card details could make payments cumbersome for customers, who will need to input their card details for each and every transaction. It is clear that payment processes and protocols must be harmonized to enable easy website navigation and usage, if the internet is to aid Indian exports.
India has an opportunity to access international markets placed at a combined annual $400 billion, by some estimates. For this not to be lost, efforts need to be coordinated among all stakeholders, including government agencies like the customs department. Product returns are a reality in this business and these have to be done smoothly. In general, however, cost minimization and smooth transactions hold the key to online global success.
India’s foreign trade policy should take a holistic approach, enabling the handholding of micro, small and medium enterprises so that they can access new markets. The policy framework needs to recognize the role that e-com platforms with international reach can play in the emergence of India as an online export powerhouse.
Aruna Sharma is a development economist and former secretary, Government of India