Government Wants MSMEs To Adopt E-Commerce To Access International Markets

Overriding the Covid induced massive disruptions in economic activity and business and the onerous burden of revival, India’s micro, small and medium enterprises (MSMEs) have clocked 9.2 million registrations on the Udyam portal -- which allows online application by any entity to establish a business in this category of industry -- and have enhanced their presence in the Government e-Marketplace (GeM) from 1 lakh to 6.91 lakh in a year span of May 2020 to May 2021.

“Registration of MSMEs under the Udyam portal is going to cross 10 million, a milestone for ease of doing business,” said Bhanu Pratap Singh Verma, Minister of State for MSME said at a Confederation of Indian Industry-Ministry of MSME outreach activity on Monday (27 June) which also marked the ‘International SME Day’.

The Udyam portal is among the slew of measures to provide the necessary enabling environment for MSMEs that the government sees as essential in its plans for building an ‘AatmaNirbhar Bharat’.

A ‘Champion Portal’ to resolve MSME grievances, easing the public procurement policy mandates, establishment of 15 MSME technology centres across the country and schemes providing financial assistance, skill development, infrastructure development, marketing assistance to MSMEs are part of an ecosystem to allow MSMEs to compete, flourish and contribute in achieving the goal of a $5 trillion Indian economy.

These initiatives have encouraged India’s more than 63 million MSMEs to contribute to almost 50 per cent of exports and 30 per cent of the overall GDP.

However, even a build-up of dedicated schemes and efforts to strengthen MSMEs over the years have not been able to insulate them from the economic aftermath of the pandemic which caused severe disruptions in a sector already reeling from the shocks of the past few years.

According to a CRISIL study, more than a quarter of India’s MSMEs lost market share of over 3 per cent due to the Covid-19 pandemic while half of them suffered a contraction in their earnings before interest, tax, depreciation and amortisation (Ebitda) margins.

This was because of a sharp rise in commodity prices last fiscal, compared with the pre-pandemic (fiscal 2020) level, the CRISIL SME Report 2022 reveals after examining 69 sectors and 147 clusters that logged aggregate revenue of Rs 47 lakh crore. This represents 20-25 per cent of the gross domestic product and implying two-thirds coverage of the MSME universe.

In fact, the pandemic-induced supply chain disruptions impacted small pesticides manufacturers more, says Crisil. On the other hand, large ones leveraged their global presence to procure raw materials and hence grabbed a huge chunk of the SME pie. Edible oil SMEs lost market share because an increase in hygiene quotient because of the pandemic meant less buyers for oil sold loose.

Pesticides and edible oil SMEs suffered margin contraction to the extent of 100 bps and 200 bps, respectively, as they could manage only a partial pass-through — at less than 60 per cent — of the increase in raw material costs.

However, amid the pandemic and ongoing geopolitical crisis, sectors such as textiles and pharmaceuticals have offered a ray of hope for exports. Cotton yarn exports have benefited from the US ban on Xinjiang, China-made items, apart from the China+1 policy.

The readymade garment industry, with 70 per cent MSME share, gained from supply constraints in China, and from emerging global opportunities. Pharma exports soared on pandemic-related demand, even as the domestic industry was struggling with lower volume demand.

On the home front, the rapid and successful adoption of digital technologies and digitalisation as key coping mechanism to overcome mobility restrictions during the pandemic, is seeing a proactive push by the government as the way ahead for reinvigoration of the MSMEs.

The focus has moved to adoption of digital commerce which, government thinks, will allow these enterprises to access international markets and improve customer experience. Indeed, there was a massive surge in the share of online sales of MSMEs that are integrated with e-commerce platforms.

An ICRIER survey found that in 2020-21, online sales accounted for 27 per cent of total sales compared to 19 per cent in 2019-20 and barely 12 per cent in 2018-19. There was an 80-90 per cent 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.

The digital payments ecosystem has also supported the growth of e-commerce and the adoption of e-commerce by MSMEs. According to the Department of MSME, digital transactions have grown to 92.02 per cent in terms of value and 90.19 per cent in volume during the year 2020-21.

There are though formidable challenges for MSMEs engaging with e-commerce platforms. The process of switching to e-commerce is often slow as businesses face difficulties in adapting to technology hence MSMEs, especially those offering new and unbranded products, face challenges in targeting and retaining customers.

The large network of sellers on any online platform increases the pressure faced by MSMEs. Moreover, MSMEs require more support to market and promote their products through e-commerce platforms and micro and small units lack ability to pay for promotional campaigns, further affecting their competitive position vis-à-vis larger enterprises on e-commerce platforms.

The inability of not being able to avail the advantages under GST since e-commerce marketplaces do not get the advantage of GST threshold exemption (Rs 4 million), a disproportionately high compliance burden on MSMEs and skill gaps are issues among others which need to be addressed to encourage MSMES to adopt e-commerce platforms as the mantra for survival and growth.

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