Bringing MSMEs into e-commerce

Only a minuscule percentage of SMEs participate in e-commerce platforms, leaving the sector's large potential untapped. A mechanism to change this scenario is needed

The advent of e-commerce has shifted the locus of retail business in both the global and domestic context by bringing the store to the customer, obviating the need for customers to visit the store. Aided by a thriving digital economy with Rs 500 million internet users, India’s e-commerce sector recorded the second highest year-on-year growth at 31.9 per cent across countries in 2019. In 2017, India’s e-commerce sector was valued at $24 billion, representing 3 per cent of total retail sales. However, the share of the global e-commerce sector in overall retail sales was approximately 10 per cent, implying that there is space for growth of e-commerce in India.

A large proportion of India’s e-commerce sector primarily is shared by four companies.  Leading e-commerce companies operate on the philosophy of increasing the gross merchandise value by bringing big retailers on board their platform and moving inventory swiftly through heavy promotions. Additionally, marketplaces see major spikes in sales during festive seasons owing to heavy discounts offered by vendors.

However, looking at the larger picture, two questions arise: Is Indian e-commerce growing in an inclusive manner? Also, are the prevailing practices enough to realise the sector’s significant latent potential?

The answers do not appear to be in the affirmative. The practices prevailing in the e-commerce sector are not inclusive. They also pose obstacles in leveraging its true potential for the benefit of both the entire e-commerce network and the overall economy. There are an estimated 1.5 million sellers registered across various Indian portals.  However, since the majority of the sellers are common across platforms, the true number could be just a little more than the number of sellers registered on the largest marketplace.

Distinctive sellers, across marketplaces, range between 0.5 million and 0.75 million. Further, those who engaged in at least one transaction in the preceding 30 days on a particular platform could be just 10-15 per cent of the total number of registered sellers. This takes us to around 100,000 active sellers across marketplaces. On the other hand, there are over 60 million micro, small and medium enterprises (MSMEs) registered in India, which are very diverse. Of these, some 43 million are in manufacturing and trading. Obviously, the e-commerce landscape has not adequately integrated the MSMEs of the country.

There are multiple reasons for poor integration of MSMEs on e-marketplaces — poor digital literacy, poor geographical reach, and inadequate digital and physical infrastructure. There are two key reasons that impair the ability of MSMEs to participate actively. First, the average commission charged for facilitating business across marketplaces is very high, and after deducting shipping costs and taxes, what the seller is left with is quite low as compared to offline sales, which makes it unviable for most small and medium-sized businesses.

Another major reason behind the sub-par onboarding and sustenance of small and medium-scale traders is cliquish nature of the e-commerce sector, which is reflected in the huge market share held by closely associated sellers. On the major marketplaces, a few top vendors capture a large share of the total merchandise and, given their financial strength to offer products at lower price points, smaller businesses find it difficult to compete. This is further compounded by the introduction of private labels by marketplaces through select vendors, which squeeze the e-commerce space for smaller businesses.

All this demonstrates that only a minuscule percentage of MSMEs participate on e-commerce platforms, leaving the large potential untapped. The sector needs to devise a mechanism to facilitate increased participation by MSMEs and small businesses in India’s e-commerce growth story, which will increase trade, domestic manufacturing and employment generation, and help in integrating smaller businesses with the overall value chain. Thus, there is an imminent need to devise a solution for remedying this situation.

The solution lies in creating a universal e-commerce interface which is seller-agnostic and pro-active in on-boarding sellers of goods and services who are MSMEs as well. There needs to be engagement with the MSMEs and in making their on-boarding ‘worth their while’ in terms of both economic value and capacity-building. Data aggregation and sharing across e-commerce platforms will go a long way in enhancing the inclusivity of the overall e-commerce ecosystem. E-payment infrastructure as well as established public service platforms can be leveraged for providing ease of payment and delivery, and in facilitating last mile connectivity. This may just open up a pan-India market for small businesses.

The above measures are poised to enhance the value of the Indian e-commerce sector manifold and make it more inclusive. It is now up to the stakeholders to decide what they want to do.

The writer is Advisor, NITI Aayog. The views are personal