Digital Gateways for Nano-Enterprises in India

Small businesses have always been present across different pockets of the country. The MSME sector has become crucial for India’s economic growth, contributing 29.2% to the Gross Value Added (GVA) in 2021-22, accounting for 43.6% of exports in 2022-23, and playing a substantial role in generating employment opportunities and fostering innovation (Ministry of Micro,Small & Medium Enterprises, 2023)

However, most of the MSMEs, especially the micro-enterprises are mostly limited to selling their products in the local marketplace since they lack the resources to access other marketplaces at the regional, national, and international level. Limited ability to produce collateral and credit history and lack of financial expertise and knowledge among small enterprises leads to financial exclusion, thus decreasing their ability to expand their market reach. A report on credit access by BCG indicates that MSMEs depend greatly on informal credit sources, with approximately 40% of MSME lending transactions through such sources (Omidyar Network & Boston Consulting Group, n.d.).

The COVID-19 pandemic imposed various challenges all over and the Darjeeling Tea Industry was no exception. The European market had closed down and travel restrictions greatly affected their sales and tourism. In this scenario, Gopaldhara and Rohini Tea Estate owner Rishi Saria would have been completely stranded had he not established and strengthened his company’s online presence before the pandemic’s onset. An online presence for his brand not only helped him increase his sales manifold as compared to when he was selling in the local market but also enabled him to establish a strong consumer base. This even nudged other small players in Darjeeling to start selling online. This is only one of the many stories that show the potential of access to e-marketplaces for small businesses.  

The Promises and Obstacles of E-Commerce

The e-commerce boom has helped enterprises to solve the issue of limited market access and broaden their market base. The benefits of opening up the e-commerce avenue are evident in the stories of thousands of small entrepreneurs across the nation. According to the Annual Survey of Micro, Small, and Medium Enterprises (MSMEs) in India by ICRIER, an increase in sales and profit margins was observed among the survey participants integrated with e-commerce websites. Micro and medium enterprises were positively affected by the integration with 39% of micro-enterprises reporting a sales increase in the range of 10-30% and 45% showing a profit growth in the same range (India Council for Research on International Economic Relations, 2023). Other changes like better customer reach, increased use of digital payments, increased innovation, and training were also observed among the survey participants engaged in e-commerce transactions. However, in 2021-22, online sales remained limited, with nearly half of the micro-enterprises indicating that only 10-20% of their total transactions were through online means. 

E-commerce appears to have transformed the purchasing patterns of Indian consumers, with the COVID-19 pandemic accelerating its expansion even further. According to The Hindu BusinessLine (2023), convenience, discounts, and other amenities have attracted consumers in Tier-2 and Tier-3 cities to online platforms. During the COVID-19 pandemic, ordering online became an essential requirement rather than a choice, as individuals could not leave their homes and turned to online platforms to order medicines and other necessities. This purchasing habit seems to have persisted long after shops reopened, with commodities being just a click away rather than requiring a trip to the store. It seems to be a win-win situation, with consumers having more options to choose from and sellers expanding their customer reach.

While this may seem like a seamless process, various barriers arise in this transition of enterprises from local marketplaces to e-commerce sites. The foremost is the requirement of GST compliance associated with MSMEs on e-commerce platforms. This acts as a hindrance for small businesses like artisans and weavers to join the platform, who do not clear the revenue threshold for mandatory GST registration. In 2022, it was announced that registration under GST registration was not compulsory for MSMEs with a turnover of up to Rs. 40 lakh which was not the case earlier for online businesses. However, such small businesses were only exempt from the GST scope provided the transactions were intra-state, thus limiting their revenue potential. Different principal places of business registrations for firms in different operational states further make the process tedious. Additionally, nano entrepreneurs often lack the proper knowledge regarding the compliance requirements and the associated restrictions compounded by limited financial resources hindering their ability to hire experts to assist them to understand and adhere to these regulations.

Another major hindrance is that businesses having operations across multiple states are required to get different registrations for each state where they conduct business, making it difficult to manage the additional costs of the registration process. Other compliance requirements like ‘Tax Collected at Source’ also lead to inefficiencies in working capital for MSMEs. Complicated customs procedures and regulatory requirements have also prevented small enterprises from exporting their products.

The e-commerce ecosystem itself is not without its problems. The cost burdens such as platform registration costs and commissions on different sites also act as barriers (Gupta & Modi, n.d.). The dominance of a few e-commerce platforms gives them a monopolistic advantage allowing them to charge high commission costs, leaving small businesses at a disadvantage. Experts have pointed out that if for some reason, an entrepreneur decides to leave one platform and join another, they lose all their customer base, and reputation gathered through ratings and reviews, and need to start afresh from catalogue creation on the new platform. This makes the entrepreneurs bound to the platform, even when the revenue, profits, or platform terms and conditions are not that favourable for them.

Entrepreneurs often also lack the proper resources and digital literacy to manage an online business. Setting up an online business is synonymous with having infrastructure such as proper internet access and an online payment system, which may not be available to small artisans and entrepreneurs. Furthermore, given their limited resources, some enterprises may not be able to tackle challenges like increased orders, supply chain management, and delayed payments due to exchange and return options on the websites. A flip side of the enhanced market access is also the cut-throat competition that is associated with e-commerce platforms. Apart from genuine competition for consumer attention and approval, entrepreneurs also face illegal means such as cost-cutting through copying product or service ideas, product appearance, cheap variants, creating fake websites, and counterfeit products.

In addition to cost and technology barriers, other issues may also arise in the shift of nano-entrepreneurs to online platforms. Lack of awareness among entrepreneurs regarding cyber-security and data privacy can create various challenges like identity theft, online theft, or fraud. India is observing an increase in platform fraud, with 57% of the total frauds attributed to it in 2022 leading to a loss of $1 million among 26% of organisations in India (PricewaterhouseCoopers, 2022). According to the RBI data, a 70.64% jump was observed in payments fraud from October 2023- March 2024 (The Indian Express, 2024). This is also related to the fraud associated with online transactions of MSMEs. Forbes Advisor statistics suggest that 54% of account-related fraud is associated with the E-commerce sector, and is further expected to increase in 2024 globally (Forbes Advisor, 2024). These issues should be factored in to ensure the benefits of e-commerce are availed by nano-entrepreneurs. 

The introduction of too many channels for the online presence of enterprises like social commerce and quick commerce has created opportunities on the one hand and harmed growth on the other. Enterprises, particularly small shops like Kirana stores, are required to incorporate various strategies to adapt to the changing consumer behaviour attributed to quick commerce websites, disincentivizing people to visit the stores and order online instead (The Ken, 2024)

Sustained Initiatives to Empower Nano-entrepreneurs

The Consumer Protection (E-Commerce) Rules, 2020 aims towards the protection of consumers engaging in e-commerce transactions and ensuring transparency in the sector. It bridges the gap between buyers and sellers by providing comprehensive sellers’ information, and consumer data protection among others to maintain the authenticity of the transactions. This is ensured through certain liabilities on the part of the e-commerce platforms like proper undertaking from the sellers to check their legitimacy, proper complaint redressal such as allotting ticket numbers to each complaint, and maintaining the trust of the consumers by addressing the genuineness of the sellers engaging on the platform and also in the form of duties on the part of the sellers like return and refund policies and grievance redressal systems in place (PricewaterhouseCoopers, 2020)

With the motive of removing barriers for small entrepreneurs like weavers and artisans to enter the e-commerce space, Flipkart initiated the Samarth initiative. In 2022, a 300% growth in their seller base under this initiative was observed, with its initiative reaching 15 lakh businesses in India (The Financial Express, 2023a). Various success stories have been written attributing their success to the Samarth initiative. With this initiative, Chitrangan Pal, founder of Odisha Handloom has been able to go beyond the village market and sell Sambalpuri sarees pan- India. This has not only boosted his sales but also strengthened their culture and community. Another initiative ‘Nano-entrepreneurs Accelerate’ was introduced by Amazon to help businesses revive after the COVID-19 pandemic in 2020 with the help of deals and discounts. 

What Role Does Open Network for Digital Commerce (ONDC) Play?

Open Network for Digital Commerce was established to build an open network of transactions across all sectors such as e-commerce, financial services and mobility. It is a government-backed platform that came into being in December 2021. ONDC solves the problem of nano-entrepreneurs having to join multiple e-commerce platforms dominating the sector, thus reducing costs and simplifying transactions. ONDC will enable the creation of an ecosystem for startups that focus on one aspect of e-commerce at a time, thereby promoting innovation and security. It is particularly helpful for small entrepreneurs who are often caught in resolving technical constraints on e-commerce sites like ambiguous algorithms and lack of transparency between the sellers and the platform and between buyers and sellers. It can also cater to the financial needs of entrepreneurs by digitising their transaction data and offering financial products like working capital, invoice financing, project financing, and insurance (Deloitte, 2023). Inclusion and simplified transactions are a few of the major elements associated with it. To ensure enterprises maximise their growth on ONDC, they should look for Key Performance Indicators (KPIs) like increased sales, site traffic and engagement, customer loyalty, quick and efficient backend crew, and customer feedback (deAsra Foundation, n.d.).  Observing these indicators will enable entrepreneurs to identify bottlenecks and optimise their growth and profits. However, potential challenges like lack of awareness among entrepreneurs and onboarding barriers of both technological and behavioural nature should be addressed to ensure ONDC is at par with other e-commerce giants.

The Path Forward

With the exponential growth of sales on e-commerce sites, the gap between businesses leveraging e-commerce platforms and those abstaining from them is widening. Therefore, there is a need to encourage more enterprises to establish their digital presence, thereby unlocking opportunities for enhanced sales expansion. All the relevant stakeholders from government, technology, and finance should contribute towards making e-commerce more accessible to even small artisans and vendors.

Experts and practitioners have urged that the GST provisions need to be framed better considering the situation of nano-entrepreneurs in India. A single registration requirement instead of multiple registrations for different states will reduce working capital and other cost concerns arising from it. Additionally, there should be training programs to create awareness among nano-entrepreneurs to provide them with a push to establish their online presence and to ensure their sustainability. A reduction in compliance requirements will facilitate better clarity and transparency among enterprises. This will not only help nano-entrepreneurs to boost their domestic sales but also enable them to engage in the international market. Entrepreneurs are often not aware of the Intellectual Property Rights requirements on e-commerce websites making them vulnerable to scams. Additional efforts to safeguard enterprises from fraud and scams in online businesses are crucial since small businesses are affected greatly by such scams, impacting their sales and profits. E-commerce sites should incorporate IP protection systems to ensure the protection of the buyers and sellers on the platform, as has been adopted by Amazon to a certain extent. 

E-commerce has broadened the market base for nano-entrepreneurs from the local neighbourhood to the international market. It has created immense opportunities to increase sales and profits, but this has to be accompanied by further steps to ensure their smooth and sustainable partnership to promote business growth. Boosting the ingenuity of India’s entrepreneurs with the power of modern technology will help India fulfil its true potential.

Snigdha Misra is a student of Gokhale Institute of Politics and Economics and she interns with CEED.

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