India continues to be one of the fastest growing economies in the world despite sluggish global growth, supply chain constraints and rising inflationary pressures. The IMF projects that by 2027, India will become the third largest economy globally, surpassing Japan and Germany, with a GDP exceeding $5 trillion.
This growth is largely driven by India’s robust export performance, which has remained strong for two consecutive years amid challenging conditions. In the 2023-24 fiscal year, India's economy is anticipated to grow at a rate of 6 per cent to 6.8 per cent, outpacing other major economies worldwide.
Total exports, including both merchandise and services, are estimated to have reached $770 billion in the 2022-23 fiscal year. Merchandise exports alone grew to $447 billion, marking a 6 per cent increase year-on-year.
India's Economic Landscape and Projections: A Global Standout
The MSME and e-commerce sectors have played a major role in sustaining India's consistent economic growth. India's e-commerce sector has revolutionised business practices and has opened numerous commercial opportunities.
Although India's e-commerce exports currently stand at just $3-3.5 billion, accounting to around 1 per cent of its total exports, there is immense potential for growth. By 2025, global e-commerce exports are predicted to reach $2 trillion. India can capitalize on this opportunity by targeting $200 billion in e-commerce exports by 2030.
The e-commerce exports sector, being relatively young, needs substantial policy support to maximize its potential. Recognizing this, the government introduced the Foreign Trade Policy (FTP) 2023 to boost exports and streamline processes for exporters.
This policy targets key challenges: lack of awareness about export incentives, complex customs procedures, and the need to promote exports at the district level. It emphasizes automated IT systems and risk management to simplify business for exporters and aims to bolster grassroots trade development.
Addressing a crucial issue, the FTP stresses the importance of raising awareness about e-commerce exports. With only 1.25 to 1.5 lakh e-commerce exporters currently, this push is essential to capitalize on the sector's immense potential.
Role of MSMEs and E-commerce in India's Growth Story
One of the key exports related challenges that small scale sellers face is need for documentation and cumbersome compliance challenges. The documentation required for the same is very cumbersome and places extra cost burden on small to medium sellers. This creates a barrier for MSMEs to enter into the ecommerce exports space.
A potential solution for this issue is to allow foreign as well as Indian e-commerce platforms to hold inventory for MSMEs for export purposes. This allows for many innovative models, such as allowing small sellers to transfer product title ownership to e-commerce platforms on the back of an order. It would also allow several small sellers to leverage established mechanisms in place to manage inventory and execute speedy last mile delivery.
Moreover, MSMEs can leverage comprehensive fulfilment services such as expedited delivery, improved quality control, inventory management, and order fulfilment, all managed by e-commerce marketplaces. This would not only alleviate cost pressures on MSMEs but also reduce the considerable compliance burden associated with fees and permits required for exports.
Furthermore, MSMEs face difficulties in obtaining timely MSME funding, complex regulatory procedures, and a lack of financial understanding. One of the main hurdles MSMEs face when adopting e-commerce exports is the lack of credit availability. Due to the small size of loans and the MSMEs' limited capacity to provide collateral and relevant credit history, traditional banking and financial institutions often hesitate to cooperate with them.
According to a report by the Global Trade Research Initiative (GTRI), India's e-commerce exports are primarily being hindered by a range of banking issues. The report shows that banks prefer to process forex received through bank transfers but are hesitant to process forex received through foreign currency cheques, payment gateways like PayPal, credit cards, Western Union, cash receipt when buyers select items live in the retail shop.
This delay in crediting forex received in a firm's account when payments are received through such channels affects cash flow and hampers business operations. Furthermore, there is the issue of export realization variation limit, which as per RBI is set at 25 per cent.
RBI guidelines state that the amount received in the seller's account must match the value declared in the shipping bill to close the entry on the Export Data Processing & Monitoring Systems (EDPMS) portal. However, this may raise problems, as exporters often initially overestimate shipping bill values and face returns or may decide to offer discounts, causing significant discrepancies with the actual value and remittances received.
Rising Above The Challenges
Despite the challenges, e-commerce exports growth prospects remain strong. The government has taken important steps to boost e-commerce exports through the Foreign Trade Policy 2023. The government's focus on simplifying procedures, promoting exports at the district level, and leveraging IT systems to ease business operations is commendable.
However, there remains a need for further reforms to simplify documentation processes, improve credit availability, and address regulatory hurdles for MSMEs to realize their full potential in e-commerce exports. It is now essential for stakeholders to collaborate and discuss the existing policy provisions to further streamline e-commerce exports for Indian businesses.
States also need to rise to the occasion through special focus on ecommerce exports. With a supportive policy framework that prioritizes ease of doing business, the industry can unlock its full potential and make a significant contribution to India's exports and economic growth.
(The article is written by Shriram Subramanian, Founder and MD, InGovern Research Services)
(The opinions presented belong solely to the author)