Can Digitization be a Potential Driver for Improving MSMEs’ Export Performance
Can Digitization be a Potential Driver for Improving MSMEs’ Export Performance

In recent times, India has achieved a record-high growth in exports, surpassing the pre-pandemic level of $331 billion in FY 2018-19 and reaching $418 billion in FY 2021-22. Despite these achievements in trade, India is still far below its potential. For example, the annual growth rate of India’s exports between 2011 to 2020 was a little over 1 percent compared to 3 percent and 4.2 percent, respectively, for China and Bangladesh. While we have done well in the services sector, the manufacturing sector’s growth in terms of its share in GDP and exports is miserably lower than its counterparts. What is more worrisome is the fact that MSMEs’ contribution to the annual merchandise exports decreased in the post-pandemic year FY 22 despite the latter reaching a record high level in the same year.

In such a scenario, the role of digitization in impacting the export performance of Indian MSMEs that are considered potential export powerhouses needs some attention. Amidst rigorous competition and economic shocks such as the one caused by the COVID-19 pandemic, e-commerce and digitization have emerged as instrumental to the performance of businesses in both domestic and international markets. The growth of the e-commerce sector in India has been exponential. According to the Economic Survey of 2018-19, the market has been estimated to be worth $43 billion, growing at 12 percent annually. This implies that this growing online commerce can also turn out to be a real game-changer for the MSMEs by way of employing digital devices and internet networks to trade goods and services and to make/facilitate payments. 

For early adopters, evidence suggests that digitization has lowered overall costs for firms, sped up the buying-selling process, and reduced the time needed to respond to market needs. It has also helped enterprises get broader market access.

A recent study conducted by the Indian Institute of Foreign Trade (IIFT) Delhi, in collaboration with PayPal India, has analyzed the role of digitization as a tool to promote and facilitate the performance of the country’s MSMEs in the world trading platform. Using the CMIE’s Prowess database entailing information on more than 8,000 organized sector manufacturing firms (MSMEs) for the period 1990-2019, the report suggests, among various factors determining the export performance of MSMEs (Figure 1), digitization has two critical roles to play. First, for firms that are already selling their products internationally, digitization acts as a catalyst in enhancing their exports and expedites the payment process (Figure 2). This is because, while digitization is only a tool, e-commerce as a channel, is well established globally, and hence, improves the market access for these firms. 

Can Digitization be a Potential Driver for Improving MSMEs’ Export PerformanceCan Digitization be a Potential Driver for Improving MSMEs’ Export Performance

Secondly, the study interestingly highlights how this process of digitization, when combined with technical knowledge or digital skills, can enable hitherto non-exporting firms to become exporters by enabling them to leverage the benefits of the existence of e-commerce platforms, without having to invest in the creation of their own website or working on generating more traffic on their self-initiated online channels – which, of course, is far-reaching for a micro or small enterprise especially.

Though the Indian government has introduced numerous schemes such as Digital MSME Scheme (2017), Pradhan Mantri Gramin Digital Saksharta Abhiyaan (2017), Udyam registration (2020), Aadhaar Enabled Payment System (2019), PayGov India (2016), Digidhan Abhiyaan (2016), Skill India (2015), and many others to improve digital penetration, encourage online transactions, provide digital literacy, particularly to the rural population, improve the basic infrastructure such as the availability of electricity, etc., the pace of digitization in Indian MSMEs is still low compared to other countries. This could point towards the prevalence of several lacunae faced by Indian MSMEs such as a lack of awareness regarding eligibility, procedures, grievance redressal, and potential benefits of the government schemes. Further, these enterprises often face difficulties in export-related payments, and micro-firms that form the biggest chunk of the MSME sector, often get excluded from availing of the benefits of the scheme due to the lack of economies of scale in small-scale production and inadequate revenues.

Looking at policy efforts to push for digitization, it could be said that the current framework does not require more schemes to be launched; instead, it needs reorientation, monitoring, and simplification of the existing ones. For instance, the proposal to link several portals, including Udyam, e-Shram for MSMEs, that are currently run and hosted by different Ministries, is a step in the right direction. This portal could then be used for obtaining all the required information from a single platform related to registration, labor welfare schemes, associated compliances on the supply side, and access to new sellers, and markets on the demand side, enabling ease of doing business in the country for these MSMEs.

In conclusion, a digital ecosystem with end-to-end solutions, including easy access to finance, payments, operations, management, and even accessible skilling and knowledge sources, would be an incentive for MSMEs to fully adopt digital technology. This is particularly relevant for India’s policymakers because of two reasons. The first one is that only a few Indian firms are exporters, while the majority are still only catering to domestic markets. Secondly, the country’s e-commerce policy is still in its draft stage. In addition, a greater push for digitization could aid in meeting the targets of $1 trillion in merchandise exports by 2027-28 and $1 trillion in services exports by 2030, which will eventually help achieve the $5 trillion economy goal sooner.

(The article is written by Sugandha Huria and Neha Jain - Assistant Professors of Economics at the Indian Institute of Foreign Trade (IIFT), New Delhi-IN, and Kriti Sharma  - (Former IIFTian) Research Analyst at the International Food Policy Research Institute (IFPRI). Views expressed are personal.)

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