As India prepares to become the world’s third largest economy by FY28, the economy is witnessing a significant transformation. Startups and large companies are driving innovation, while MSMEs are moving towards digitalization. MSMEs are increasingly adopting digital methods of doing business as it helps them improve their market access and improve the profitability of their operations and transactions.

E-commerce has played a vital role for MSMEs, enabling even small artisans to reach customers across the globe. Industry data shows that the e-commerce market is expected to grow at a robust annual growth rate over the next four years (2024 to 2029), and MSMEs will be the main beneficiaries of this expansion.

Even though the widespread growth of digitalization and e-commerce has had a positive impact on MSMEs that have adapted to technology, the proportion of MSMEs leveraging e-commerce remains low compared to the overall manufacturing base in India.

Given the strong growth in e-commerce domestically and globally, it is crucial to focus on how MSMEs can take advantage of this trend instead of adopting a restrictive perspective that views this growing sector as a ” scourge.”

The profound impact of e-commerce

The impact of e-commerce on opening markets, improving supply chains and reducing costs is well recognized in policy circles. A report by the NITI Aayog highlights its benefits, particularly for exports, and calls for greater integration of MSMEs into global supply chains. However, as the Global Trade Research Initiative points out, there is still a long way to go for Indian MSMEs when it comes to cross-border e-commerce, with current e-commerce export volumes from Indian companies estimated at around $2 billion only.

The Economic Survey of India for FY24 also delved into the multifaceted benefits of e-commerce on the economy, highlighting its role in deepening personal credit growth, enhancing export achievements MSMEs and job creation across the country.

Given the strong evidence of the value of e-commerce to the country and MSMEs, it seems inappropriate to view the sector’s growth with caution. Rather than being deterred by economic changes, we should focus on harnessing the potential of e-commerce to grow MSMEs. Calming the sector, despite data from government agencies and industry bodies demonstrating its benefits, harms the interests of millions of MSMEs who stand to benefit from its continued expansion.

A negative perception of e-commerce jeopardizes the interests of MSMEs by dissuading policymakers from approaching the sector constructively. This hampers efforts to address operational, market-related and regulatory gaps, thereby hindering the effective integration of MSMEs into the e-commerce ecosystem. Despite the government’s stated focus on digitalizing the economy and supporting MSMEs, the challenges they face in online sales tell a different story.

Priorities for the digitalization of our MSMEs

In today’s digital economy, we must ensure that MSMEs are not left behind to enable strong domestic and international growth of our national e-commerce capabilities. To realize this vision of a vibrant e-commerce ecosystem, we need to prioritize MSME capacity building initiatives that focus on digital payments and utilize the ministry’s infrastructure. Additionally, it is essential to identify and eliminate compliance with restrictive regulations, as these barriers often hinder MSME participation in e-commerce.

For example, last year the government waived mandatory GST registration for e-commerce sellers with annual revenues of up to Rs 40 lakh, apparently aimed at creating parity between online retail and offline. However, this exemption is limited to MSMEs selling online within a single state or union territory. Since the primary goal of e-commerce is to remove geographic boundaries, this restriction introduces an unnecessary level of complexity. While the intentions behind this shift may be well-founded, MSMEs face persistent challenges when selling online, especially when expanding beyond their home state. They must obtain GST registration for each state in which they sell, and the newly implemented biometric authentication requirement complicates matters further, requiring the manager of an MSME to travel to multiple locations to secure these records.

Come to think of it, the government’s focus on unifying tools, such as UPI and ABDM, highlights a stark contrast to the piecemeal approach of requiring state-by-state GST registrations. State. If technology has proven capable of integrating financial systems and digital identities on a national scale, why should GST compliance remain fragmented? A more logical intervention would be to establish a “single home state GST registration” valid across all states, with certain parameters and exceptions. This model could simplify compliance, reduce administrative burden and better align with the government’s broader digital goals.

E-commerce export compliance is another area that places significant time and cost constraints on MSMEs, who must manage quality accreditations, import duties and customs disputes. Moreover, reporting to multiple authorities including DGFT, Customs, GST, Banks and RBI adds to the woes.

While major economies have developed robust ecosystems for SMEs to thrive in the global e-commerce market, our regulations require more nuanced interventions. The e-commerce sector, still in its infancy, holds great potential. To foster innovation, we need to create an enabling environment rather than imposing strict regulations, as excessive oversight could stifle the creativity and growth needed for industry progress.

The e-commerce sector relies on the collaboration of domestic and foreign players. The government must establish a favorable policy environment that encourages investment and reduces uncertainty, fostering a competitive landscape and ensuring fair opportunities for all participants.

In conclusion, e-commerce is an enabler that has the potential to significantly advance MSMEs while expanding our business landscape. To fully harness this potential, the government must prioritize targeted capacity building programs that equip MSMEs with the skills to navigate digital payments and comply with regulations effectively. Simplifying the regulatory framework is essential; Reducing compliance burdens, including removing GST registration limits for interstate sales, will ease barriers for our small businesses. Additionally, streamlining compliance processes into a unified framework will reduce operational complexities, thereby allowing MSMEs to focus on growth. Likewise, by encouraging digital adoption and promoting initiatives that facilitate cross-border e-commerce, we can strengthen the presence of our MSMEs in the global market.

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