Cost Of Convenience: Are India's MSMEs Losing Out To Ecommerce Giants?

Recently, industry experts raised concerns that India’s approach to ecommerce regulation risks undermining micro, small, and medium enterprise (MSME) growth in the country. They stated that by focusing on only one segment of the market, current regulations may hamper MSME competitiveness and seller autonomy.

Some experts stated that India's ecommerce landscape presents immense potential for MSME growth, due to the contributions of both Indian and international platforms. However, many pitched for a cohesive regulatory framework to ensure MSMEs can compete fairly, boost transparency and support India’s economic vision of reaching USD 1 trillion in exports.

Earlier in September, the Confederation of All India Traders (CAIT) strongly criticised and claimed unethical business practices and modus operandi of the ecommerce giants and claimed that they continue to engage in harmful practices.

The trade body emphasised that while the discounts provided by them are aimed at attracting consumers, they flagrantly violate rules governing fair trade and pricing. Such excessive discounting not only distorts market competition but also creates an uneven playing field, particularly harming smaller retailers and businesses that cannot compete with these deep discounts.

Notably, regulatory arbitrage in ecommerce affects every part of the value chain, particularly MSMEs. In an inventory-based model, the risk of inventory is passed on to the larger platforms which can afford to bear the risks. In a marketplace model, in which platforms are not permitted to hold inventory because of foregin direct investment (FDI) regulations, this risk of inventory remains with the MSME seller.

Nirupama Soundararajan, Founder, Policy Consensus Centre said, "We must remember that ecommerce is a channel of sale that can be adopted by any business, including MSMEs on their own. However, whenever ecommerce draft regulations have come out, they are made keeping in mind larger platforms instead of acknowledging that even smaller standalone MSME businesses may have their websites for online sale. These kinds of siloed regulations that create regulatory arbitrage can undermine MSME growth by increasing their regulatory burdens and compliance costs. How can India meet the Digital India objective, if regulations make it arduous for small businesses to adopt digital?"

Hindering Growth?
The Indian ecommerce sector, valued at USD 46.2 billion in 2020, is set to reach USD 200 billion by 2026, driven by rising incomes, increased internet access, and a preference for convenience. However, MSMEs face a range of regulatory challenges in the ecommerce landscape, largely due to an absence of a cohesive and dedicated framework tailored to the digital economy.

Unlike traditional B2B exports, ecommerce often deals with low-value, high-volume transactions— like exporting USD 25 products—which existing regulations were never designed to accommodate. This gap leaves MSMEs at a disadvantage, especially as many policies and tax structures are geared toward large-scale exports rather than the unique demands of ecommerce.

Despite government initiatives like Digital India to enable MSMEs to independently manage operations such as digital marketing and order fulfillment, other hurdles remain. For instance, hefty banking fees on low-value transactions and inefficient return processes create unnecessary costs that impact competitiveness.

"These challenges mean that, despite having access to the tools needed to scale, many MSMEs struggle to reach their full potential due to a lack of regulatory support that aligns with the modern ecommerce model. To truly unlock the potential of ecommerce for MSMEs, it’s essential to push for a future-proof regulatory framework. This would involve updating policies to reduce friction in cross-border low-value transactions, create better support for returns, and ease banking costs, helping MSMEs compete globally," said Vinod Kumar, President, India SME Forum.

Notably, MSMEs contribute around 30 per cent to the country's gross domestic product (GDP) and 40 per cent to exports. Experts told BW Businessworld that when it comes to exports, their interaction with the Reserve Bank of India (RBI) must be eased when it comes to reconciling their foreign payments.

Also, these businesses are not used to interacting with financial sector regulators, but they have to since foreign exchange is involved. Hence, there is a need for a simplified and easy process so that small businesses and MSMEs are not intimidated or deterred by the current FEMA regulations and framework.

"In India's ecommerce environment, MSMEs encounter numerous regulatory obstacles. Such as Tax rules, ambiguous ecommerce legislation, data security issues, difficulties protecting intellectual property rights, and restricted access to funding. For instance, the Consumer Protection (E-commerce) Rules, 2020 aims to ensure fair practices, but small businesses often find keeping up with these rules costly and time-consuming. Similarly, complying with GST regulations and the need to deduct 1 per cent TDS. A unified regulatory framework is essential to addressing these problems," said Shashank Singh, Co-founder, Poshn.

Fairness, Accountability And Equity
During the same event where MSME leaders slammed ecommerce platforms for over-seller autonomy and fair practices, a seller on Walmart’s Flipkart shared her experience. The seller revealed, “We generally have the freedom to set our own prices, but recently, there’s been an issue. Locking prices based on an average of the last 6 to 12 months and binding us to that is unfair.”

Notably, the seller also raised concerns about onboarding practices by Indian ecommerce players like Reliance and Tata, highlighting challenges faced by independent sellers in navigating these platforms. "Sellers often feel cheated/disheartened where there is no coverage on the platform's margins. This lack of information can lead to unexpected costs and reduced profitability for sellers, undermining their trust in the platform. Ecommerce platforms should prioritize transparency and fairness by ensuring that all parties involved, including sellers, are fully aware of hidden charges and commissions," stated Singh.

With the growing demand for ecommerce services, it becomes essential that fair competition takes place, this can be done by clearly outlining the rules of engagement and establishing non-discriminatory policies. "Allowing MSMEs the freedom to set their own prices and manage their inventory independently is essential for their growth and sustainability. Platforms should avoid sudden policy changes or restrictions, which can disrupt business operations and cause undue stress on sellers. Instead, changes to platform policies should be gradual and involve open, transparent discussions with MSMEs," stated India SME Forum's Kumar.

Government Initiatives
On the government front, the Directorate General of Foreign Trade (DGFT) offers benefits, including expense savings and export incentives, to help MSMEs expand internationally. For instance, the Transport and Marketing Assistance Scheme (TIES) was started to improve logistics infrastructure access, covering transportation, warehousing, and digital payment gateways. Streamlined export processes and compliance under DGFT were introduced to reduce barriers, making it easier for MSMEs to navigate complex regulations.

However, despite these efforts, financial constraints are a major hurdle, with only 16 per cent of SMEs having timely access to finance, forcing them to rely on their own resources. Lack of formalisation is another issue, with 86 per cent of manufacturing MSMEs remaining unregistered. This limits their access to data and credit facilities.

Notably, access to technology is also a challenge, as most MSMEs use outdated technology, hindering their ability to compete in the modern market. Skill development is crucial, but small-scale businesses struggle to upskill their workforce. Competition from large corporations and global counterparts is intense, making it difficult for MSMEs to sell their products domestically and internationally.

Red-tapism and regulatory risks further limit MSME growth, with entrepreneurs facing numerous approvals and bureaucratic hurdles. To address these challenges, the government has launched initiatives like the Prime Minister's Employment Generation Programme, Credit Linked Capital Subsidy Scheme, and Raising and Accelerating MSME Performance (RAMP).

Kumar stated, "MSMEs can leverage the Foreign Trade Policy (FTP) to significantly enhance their export capabilities. The FTP provides simplified procedures, duty exemptions, and incentives specifically designed to support small businesses entering international markets. By using DGFT’s initiatives—such as Export Promotion Capital Goods (EPCG) schemes, duty-free import authorizations, and various export incentives—MSMEs can streamline their export processes, reduce operational costs, and improve global competitiveness."

"The demand for global goods may be there, but Indian brands unfortunately lack branding. Sellers have to work on creating a good brand identity so that global consumers are able to recognise them and build brand loyalty. MSMEs must also focus on quality," added Soundararajan.

Quick Commerce, Ecommerce And Growth
In India, quick commerce is a new, but fast-growing phenomenon. Its success is fueled by consumer demand and this is today's reality. MSMEs should consider strategic partnerships with these platforms so that they may also get a share of this growth. Soundararajan told BW Businessworld that such partnerships were there during the pandemic. It is time to examine what kind of partnerships will work in everyone's favour.

"While I strongly feel eventually Ecommerce will merge into Qcommerce forming a centralized ecosystem and MSMEs will be leading it. Since tier 2 and 3 cities have less disposable income, players can work their way by initially focusing on essential goods, this can later offer them the opportunity to deal in hyper-local products. The operating costs will also be lower which MSMEs can capitalise on," Poshn's Singh added.

Talking more about quick commerce driving ecommerce growth, experts noted that local MSMEs have a deep understanding of their communities and can quickly meet demand in their catchment areas.

Kumar stated, "For MSMEs to truly drive Q-commerce growth, they need digital tools that streamline order-taking, inventory management, and logistics, allowing them to compete with larger players while capitalising on their local knowledge. With the right technology in place, MSMEs can become powerful drivers of ecommerce growth, building local shops that cater to immediate neighbourhood needs and potentially expanding to broader markets."

Amid the growth of the ecommerce landscape and government initiatives, the lack of a cohesive and dedicated regulatory framework tailored to the digital economy undermines MSMEs' competitiveness. The current regulatory arbitrage affects every part of the value chain, particularly MSMEs, leaving them vulnerable to unfair practices and limited access to finance.