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Role of e-commerce in MSME growth

IBEF, Knowledge Centre

Jun 03, 2021 12:38

The Micro Small and Medium Enterprises (MSMEs) sector is a key contributor to the socioeconomic development of the country. India comprises ~6.3 crore MSMEs and the number of registered MSMEs increased 18.5% Y-o-Y to reach 25.13 lakh (2.5 million) units in 2020 from 21.21 lakh (2.1 million) units in 2019. The MSMEs sector contributes ~29% towards the Indian GDP through its domestic and international trade. The Indian government envisions to double the country’s economy to US$ 5 trillion in five years and to achieve this goal, it aims to enhance MSME’s share in exports and its contribution to the GDP. In addition, in FY22, the government increased (by 2x) MSMEs budget to Rs. 15,700 crore (US$ 2.14 billion) vis-à-vis Rs. 7,572 crore (US$ 1.03 billion) in FY21.

Government Push
Since 2014, the government has been introducing initiatives such as Digital India, Make in India, Start-up India, Skill India and Innovation Fund to accelerate e-commerce in India. It is also encouraging MSMEs to market their products on e-commerce sites, especially on the government-owned websites, such as e-Marketplace (GeM), which is used by Ministries and PSUs (public sector undertakings) to procure materials. The platform recorded transactions worth Rs. 55,048 crore (US$ 7.5 billion) until September 2020. As part of the Digital India initiative, the Ministry of MSME undertook numerous initiatives to digitise the entire MSME ecosystem, wherein all offices have been digitally empowered, efforts have been taken to spread awareness on benefits of digital payment solutions such as BHIM, UPI and Bharat QR code. 

Nitin Gadkari, the Minister for MSMEs, at the Amazon Smbhav Summit 2021 said, “E-commerce will play a decisive role in the success of the Indian MSMEs, and the sector must ensure that this digital transformation happens at a pace that enables them to capitalise on current opportunities. It is increasingly evident that technology will be a crucial factor in defining the success and competitiveness of India's MSMEs, both domestically and globally, in the coming days. Digitisation of millions of MSMEs should be a top priority”. He also urged Amazon and all other stakeholders, industry leaders and experts to continue investing and improving the potential of MSMEs and thereby, make them more successful and powerful.

MSME businesses have an unprecedented opportunity to embrace digital transformation with the availability of a healthy and favourable ecosystem being built by the current government. 

Potential Benefits of E-commerce to Indian MSMEs
In recent years, the rise/emergence of online markets through e-commerce has boosted and had a positive impact on MSMEs. By adopting e-commerce, MSMEs stand to gain significant advantages such as increased revenues and margins, improved market reach, access to new markets, savings in marketing spending, customer acquisition and enhanced customer experience.

India's e-commerce sector is projected to reach $80 billion by 2021 and $300 billion by 2030. For MSMEs, e-commerce is rightly synonymous with economic stability, growth and security; and is a channel that allows even the smallest MSMEs to showcase their products in any part of the world without having to shell out on expansion or changing locations. These platforms have empowered small businesses by removing barriers, providing a large customer base and consequently, ensuring increased revenues. For growth and development of MSMEs, e-commerce marketplaces are perhaps the best catalysts for directing their transformation at minimal costs, investment and innovation. A collaborative effort between the government, the private sector, industry groups, training organisations and SMEs is the most efficient way to support MSMEs.

  • Increase revenues and profit margins: Improved timeliness of marketing, global client base and flexible business conduct can aid MSMEs to increase revenues and provide specific e-commerce benefits such as online referral systems to acquire more customers, knowledge-based customisation to improve customer acquisition and use service & feedback channels to enhance the future sales experiences. Also, e-commerce adoption enables MSMEs to take advantage of third-party trading platforms (e-commerce marketplaces) with nominal or no investment in developing and hosting online storefronts and managing packaging, logistics, warehousing and other infrastructure. This can increase profit margins by reducing overhead and initial investments.
  • Reduce spend on marketing and distribution costs: Because of increased competition in this space, e-commerce players are heavily spending on digital and traditional media to improve site traffic, gain customers, establish customer relationships and boost sales. In addition, digital channels provide a cost-effective and efficient infomedia space to advertise and communicate with target audiences, wherein most e-commerce platforms provide links on social media channels, which is then used by their partners to create awareness about their products and services. This can further help MSMEs lower expenses on trade shows, offline adverstising, traditional marketing and avoid additional costs that are required to open offline stores in multiple locations.
  • Use data analytics to understand, engage and retain customers: Through their portals/websites, most B2B e-commerce players generate, store and analyse customer data including products, prices and technical details accessed, time spent on every page, orders placed and purchases made over a period. These players also analyse data points such as preferences including delivery time, location, order quantity, packing, logistic choices and payment methods. Moreover, this data can be of great assistance to MSMEs that do not have technical resources. In addition, MSMEs can use data to provide faster response to customer demands and better after-sales service to lock-in a loyal consumer base.
  • Expand MSME outreach: E-commerce has the potential to help SMEs scale up and expand reach in the following ways:
    • Building a global reputation: Online transactions create an auditable history of a company's performance and reliability. Often consumers depend on these records to identify companies that are most likely to provide a satisfactory service. Also, businesses and financial institutions rely on these data points to find reliable partners and identify solid businesses to invest and support growth. Therefore, a strong record of online transactions is one of the most valuable asset that a business can have to build a global reputation.
    • Access to foreign markets: One of the biggest challenges with traditional export channels is the inability of small enterprises to participate in that process. To overcome this, e-commerce platforms provide a level playing field for all types of businesses that seek access to foreign markets. This can be achieved in the following two ways—one, where businesses can create their own websites and execute orders on their own; second, where businesses can embark on e-commerce sites that have a presence on international markets and avail benefits such as inbound client traffic and infrastructure support. Moreover, e-commerce exports allow businesses to test the waters and identify how products meet needs of their customers in various segments. By directly conducting experiments with customers in small quantities and with low initial investments, enterprises can establish product-market suitability as well as test all key operational aspects such as purchase, shipment and return management. In addition, MSMEs can access the necessary information to build a client base and understand their preferences in real time. For example, the Maharashtra-based NMK Textiles is an export company, which recently adopted Amazon’s e-commerce platform to launch its new ‘California Design Den’ brand. Through this brand, the company sold and exported premium ‘made in India’ bedlinen; this helped double its sales in North America and expand footprints in global markets.
  • Procurement benefits: E-commerce platforms can provide MSMEs with an opportunity to directly deal with manufacturers and suppliers and thereby, help reduce the cost of procurement by removing intermediaries and make long-term contracts. Numerous e-commerce B2B platforms have created hub and spoke models for supply chain management; this allows MSME partners to lower storage costs and downtime. E-commerce offers the following benefits to MSMEs:
    • Competitive pricing: MSMEs usually source from local retailers or wholesalers and due to low volume requirements, they do not benefit from bulk quantity pricing. However, an e-commerce platform can provide the best price for products that are negotiated for bulk purchases. An offline procurement network is much less likely to provide competitive pricing.
    • Wide accessibility: MSMEs face the issue of product availability due to limited inventory of local retailers or dealerships; however, its requirement of specific products is satisfied/met by online B2B purchases, as this channel offers multiple brand options and numerous products & suitable substitutes at the same or a lower price.
    • Overcoming information asymmetry: With a detailed product catalogue, a wide range and better prices, e-commerce platforms solve problems of global information asymmetry in the industrial goods sector. Product reviews, articles, buying guides and user tutorials, which are organised by e-commerce platforms, can enormously benefit shoppers by helping them choose the right products for their needs.
    • Technology integration: Finally, e-commerce platforms offer technological advantages such as complete transparency, with detailed tracking of the status of the order, and enable recurring purchases, which are not available during offline purchases. Since industrial products are functional in nature and necessary to be repeated to run a business, MSMEs can benefit from these services/offerings.
  • Key initiatives by e-commerce companies to boost MSMEs sales
    • SAMARTH’ by Flipkart: In July 2019, Flipkart, a local platform, developed/introduced Samarth programme to promote Indian artisans, weavers and state handloom industries. Through this initiative, the company aims to provide MSMEs an easy access to the online business marketplace and support in terms of business management, storage and account management. With Samarth, Flipkart intends to empower millions of small businessmen, leading to rural India's development.
    • ‘MSME Accelerate’ by Amazon: The company launched this initiative in June 2020 to help MSMEs recover from the aftermath of the pandemic. Through this programme, businesses can avail offers and bulk discounts to continue/run their businesses smoothly.
    • Collateral-free loans by Paytm: The company launched an initiative to offer unsecured loans of up to 5 lakh (US$ 6,729), at low interest rates, to MSMEs. Under this initiative, Paytm, in partnership with banks and NBFCs, digitised the entire loan process, from application to disbursement, without additional document requirements.
    • Atmanirbhar Section’ by Shopclues: As part of this initiative, Shopclues launched an online ‘Vocal for Local’ market platform, which includes locally produced products in various categories such as fashion, footwear, jewellery, groceries and others. The company works with thousands of local merchants and promotes local products on the marketplace.
  • Key Recent Developments Supporting MSMEs
    • In April 2021, Amazon announced the 'Spotlight North East’ programme (US$ 25 million) to bring together and provide online support to 50,000 artisans, weavers and small businesses from all eight states in the Northeast by 2025; and boost exports of key commodities such as tea, spices and honey.
    • In April 2021, ICICI Bank launched ‘Merchant Stack’, a comprehensive digital banking services that is specially curated for retail merchants. These value-added services enable users—such as merchants, grocers, supermarkets, large retail store chains, online businesses and large e-commerce firms—to meet their banking requirements and further serve their customers amid the pandemic. In addition, users can avail these contactless services on InstaBIZ, the bank’s mobile banking application.
    • In April 2021, Vedanta Limited, a leading producer of metals and oil & gas, launched the ‘Vedanta Saathi’ programme, which offers services including channel financing in partnership with a host of banks, NBFCs and fintech firms; soon to be launched e-commerce solutions (such as transparent pricing and live pricing options, direct buy access to a diverse product portfolio with no bar on quantity and easy delivery tracking & micro-logistics); avenues for technical upskilling; opportunities for MSMEs to set up downstream/ancillary manufacturing units near Vedanta’s plants; and a dedicated web portal for MSMEs to interact with Vedanta’s quality, product application, engineering and innovation teams.
    • In February 2021, Walmart's Vriddhi programme was extended to Uttar Pradesh, with launch of an e-institute to facilitate small businesses in granting access to skills and competencies across online and offline platforms such as Flipkart's marketplace and Walmart's global supply chain, resp. This new e-institute will benefit 50,000 MSMEs across the country to expand domestically and globally.
    • In February 2021, Mastercard and Razorpay joined forces to help small Indian businesses and entrepreneurs embrace digital payments. This partnership will integrate Razorpay's payment processing capabilities with Mastercard's digital banking platforms and card services.
    • In February 2021, Bank of Maharashtra collaborated with Vayana Network, a supply chain financing (SCF) platform, to provide financial assistance to MSMEs. Through this partnership, the bank will provide short-term credit to address the budget needs of legitimate corporate dealers/vendors through its Mahabank Channel Financing and Vayana Network scheme.