E-commerce, digital transformation keys for growth of MSMEs

The pandemic caused severe disruptions in the MSME sector, especially in the manufacturing segment. While official government data is still awaited, survey-based studies conducted during the pandemic revealed significant distress for this sector.

A Small Industries Development Bank of India (SIDBI) study found that 67% MSMEs surveyed reported temporary closure for up to a three-month period during COVID in the financial year 2020-21. Moreover, over 50% of the respondent MSMEs experienced a decline of more than 25%in their revenues during 2020-21. Around 66% units had reported a decline in profitability on account of stable fixed costs and a decline in revenue. A study of 388 MSME firms, mainly from North and Central India, reported losses amounting to 17% of their previous year’s sales. The situation was significantly worse for smaller firms that account for the predominant share of Indian MSMEs.

ICRIER conducted a survey of 1537 MSMEs in the manufacturing sector between June-August 2021, right after the peak of the second wave of Covid-19. A significant departure from the previous survey-based studies was that it covered only those MSMEs that are integrated with e-commerce platforms. Six sectors and 28 clusters were covered across 10 states in India. The intention was to investigate the impact of e-commerce on MSMEs in India – specifically to understand whether e-commerce and digitalisation has been instrumental in improving the business prospects for manufacturing sector MSMEs in India. Especially as digital transformation of all sections of the economy is seen as an important driver for growth in the ‘Amrit Kaal’.

Survey findings

During Covid, most of the surveyed enterprises reported an increase in their online sales. Naturally, since there were restrictions on physical movements, MSMEs that were integrated with e-commerce platforms had an advantage over those that did not have online presence. Online channels of sales helped MSMEs sustain their business. The survey found that in 2020-21, online sales accounted for 27% of total sales compared to barely 12% in 2018-19. Moreover, there was an 80 to 90% increase in seller registration with some large e-commerce companies in the second half of 2020, almost all of which were MSMEs belonging to smaller cities and remote areas.

Despite the Covid shock, MSMEs that integrated with e-commerce platforms experienced an increase in sales, turnover, and profits. About 70% of the 476 firms surveyed that integrated with e-commerce platforms during the Covid situation, experienced an increase in sales volume. About 65% experienced an increase in turnover and around 54 per cent reported an increase in their profits. A relatively higher percentage of micro firms reported an increase in business compared to medium and small enterprises.

Thus, digitalisation turned out to be a coping mechanism during the pandemic. Most MSMEs are dependent on third-party platforms. Only 12% of the 1537 MSMEs surveyed have their own e-store – there were largely medium enterprises while micro and small enterprises were largely dependent on third party platforms to sell online. This underscores the importance of e-commerce platforms as non-store retail formats. In fact, our study found that these platforms turned to be launch-pads for several e-commerce-based start-ups that germinated during the pandemics.

The challenges

A few challenges are worth mentioning. There are hurdles that stop MSMEs from onboarding e-commerce platforms. Since enterprises that are integrated on e-commerce platforms must compulsorily get goods and service tax (GST) registration, they cannot avail the advantages under GST since e-commerce marketplaces do not get the advantage of GST threshold exemption (Rs 4 million). This is particularly disadvantageous for MSMEs. The current e-commerce policies are pro-consumer, and they often create a disproportionately high compliance burden on MSMEs. Moreover, while digital infrastructure is gradually expanding in the country, there is still reluctance given the low level of awareness and skill gaps. The MSMEs are still not prepared to completely and there is a constant comparison with offline selling model. Targeting and retaining customers remain a challenge and MSMEs face competition from larger enterprises and established brands.

As the nation continues to face intermittent restrictions to movement, e-commence seems to be developing as a long-term structural shift in the modes of selling. The survey also found that most MSMEs are satisfied with the digital infrastructure.

However, it must be acknowledged that due to the Covid situation, over the last two years, there has been significant on-boarding of MSMEs on e-commerce platforms, which was largely out of necessity. While the survey presented several benefits of e-commerce, challenges arise due to the current regulatory system, the nature of the Indian manufacturing sector and needs that are unique to Indian MSMEs.

So far, the approach to e-commerce policy has been spontaneous, often arising in response to the need of the large unorganised nature of the retail sector in India. There is a need to streamline policies across ministries with a common focus, best suited to the needs of the Indian economy. Policy patchwork leads to uncertainty and creates complexities, especially for smaller enterprises. India’s manufacturing sector has a dualistic structure, with a huge unorganised sector. This should be looked at as a strength that the country possesses. There is huge potential that needs to be tapped with the use of digital technology.

At the same time, large e-commerce platforms must acknowledge that the transition from offline to online retail for many enterprises has been precipitous. It indeed requires ‘sabka prayaas’. Our study found that for most smaller units, it is not financially feasible to invest in paid marketing of their products to make the most of their integration with such platforms. In such a scenario, it is important that the platforms create financially feasible marketing models that ensure that MSMEs can maximise the benefits of a platform, as larger enterprises and brands do.

The writer is a consultant with the Indian Council of Research on International Economic Relations (ICRIER).)

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