Indian MSMEs Must Take E-commerce Pathway To Expand Markets, Recover & Succeed

As India gets on to the path of recovery after various phases of lockdown, our ailing MSME sector needs a booster shot. In mid-March, the All India Manufacturer’s Organization (AIMO) said that about a quarter of over 75 million MSMEs in India would face closure if the lockdown is extended beyond four weeks. This figure was expected to touch a whopping 43% if the stay-at-home call extended beyond eight weeks. These figures highlight the need to open all doors for Made in India products to travel out of the country and reach customers wherever they are located in the world. The post-COVID era should be one of rigorous export promotion and facilitation through all channels, especially e-commerce, which is now becoming a critical channel in the markets where Indian products are exported to.

Traditional selling methods to international markets remain expensive and prohibitive for small businesses in India. However, with the rapid adoption of e-commerce across the world, MSMEs can reduce costs on labor, logistics, warehousing, international travel for customer out-reach and advertising as the information they need to build their customer base can be handled right from their desktop. E-commerce presents an opportunity for both existing export units as well as potential start-ups, to capture a portion of the rapidly expanding consumer base comprising of global citizens who are buying products on online marketplaces. 

Cross-Border Trade (CBT) via e-commerce amongst Indian MSMEs is still in the embryonic stage. There are numerous MSME clusters in India that make products with potentially very high demand in North America (USA, Canada), Europe (UK, Germany, Italy and France), Australia and South East Asian countries (Thailand, Singapore, Philippines and Malaysia) and the Middle East (UAE and Saudi Arabia). Therefore, as India tries to recover swiftly from the adverse economic effects of the lockdown due to the pandemic, it is critical to boost online trade in items like textiles, apparel, finished leather goods, handloom products, consumables, organic supplements, toys, handicrafts and auto accessories so that MSMEs can stage a strong recovery and start treading on growth path.

This is something that MSMEs can benefit from e-commerce directly and bring in much needed forex into the country to counter the trade imbalance. It is therefore important to understand the opportunity for exports from India through e-commerce, and that this depends on the e-commerce readiness of Indian MSMEs. The pandemic has provided us an opportunity to go back to the drawing board and innovate strategies to motivate Indian MSMEs to migrate towards the e-commerce platform, while ensuring high profitability.

In the Foreign Trade Policy 2015-2020, announced in April 2014, the Ministry of Commerce & Industry, for the first time, provided incentive of INR 25,000 to e-commerce exporters through courier services, for items such as handloom products, books, leather footwear, toys and customized fashion garments, from six ports on a pilot basis. Recently, the Ministry extended the Foreign Trade Policy (FTP) by one year due to the pandemic. There were no new incentives offered to MSMEs seeking to export through e-commerce channels for the interim period. It is imperative that the government takes the learnings from this pilot and provides some big bang incentives in the new Foreign Trade Policy, which is expected to be notified next year.

The success of Indian MSMEs on e-commerce platforms will depend on two factors - (i) internal digital capabilities and (ii) conducive policy environment. MSMEs will have to work harder than before to ramp up their ICT capabilities, e-payments mechanisms and skill themselves on e-commerce exports dynamics. They will also have to address challenges pertaining to inadequate supply capacity to cater to export orders and adhere to international quality standards.

The government will have to support MSMEs in addressing challenges relating to ICT infrastructure such as low bandwidth, slow connectivity, network reliability, and power failure. Thanks to government programs like Digital India and the Deen Dayal Upadhyaya Gram Jyoti Yojana, great strides have already been made in these directions. However, in the post-COVID world, there will be no margin of error and the government should not drop the ball.

There is an urgent need for the government to recognize retail e-commerce exports as an industry and work towards removing regulatory barriers, including reviewing the FTP policy in terms of its limitation to certain product categories and limited volumes when it comes to products like gems and jewelry. The government will have to simplify customs duty procedures and allow exporters to claim duty drawbacks. Customs duty levy on return of goods, absence of refund on value-added tax or Service Tax and absence of support for small-value single item shipments in the current courier shipping bill remain critical bottlenecks and these must be addressed on priority. Recently enacted Equalization levy will be an additional taxation burden on Indian MSMEs as they would need increase the prices of the products as international marketplaces would be forced to pass on this tax element to the exporters from India. In a globally competitive supply chain, Indian MSMEs would thus be at a disadvantage. 

India Post can be a critical support element for MSMEs to export on e-commerce from India. However, base requirements such as end-to-end tracking of parcels, committed delivery timelines are yet to be developed. The current solution of EMS / Speed post is cost-prohibitive and hence is not used by MSMEs whereas the registered packet suffers from aforementioned issues. The need of the hour is to create a focused logistics solution from India Post and increase the coverage of foreign post offices to the top 100 districts that manufacture products for exports.

The current compliance burden on MSMEs for exports is extremely daunting with multiple forms for customs, banks and RBI to be submitted. Through Digital India and Ease of Doing Business, the government, can remove the burden of compliance by integrating EDPMS (export data processing and monitoring system) of RBI and ICEGATE of customs and ensure that MSMEs can focus on manufacturing and exporting goods than worrying about extensive compliance.

The post-COVID era necessitates ingenious innovation in governance to integrate Make in India and Digital India and thereby lay the foundation for local products to go global. The MSME sector is the backbone of the economy with more than 110 million employees and 30-35% share in GDP. Indian MSMEs are gasping for breath, and steps to facilitate export of Indian products online will enable them to access new geographies and expand the market exponentially.

India should move forward with a killer instinct and capture large sections of Global Value Chains. At a time when there is much disruption in the global economy, our country should go all out and fill overseas markets with Made in India products and quickly resuscitate MSMEs. This will require prompt, effective and aggressive action by our policy-makers. The government has already provided a robust economic package for MSMEs; now it is time to seize the moment and allow Indian MSMEs to help revive the economy.

Dr. D Rajasekhar

Guest Author Professor D. Rajasekhar is a senior member of the faculty at the Institute for Social and Economic Change (ISEC) and head of the institute’s Centre for Decentralization and Development.