Indian Small and Medium Enterprises (SMEs) play a pivotal role in the nation’s economy, contributing nearly half of the country’s exports and accounting for 29% of the GDP. Despite the impressive performance, these enterprises face numerous challenges, especially in the wake of the COVID-19 pandemic, which has significantly disrupted global trade dynamics. This article explores the opportunities and challenges faced by Indian SMEs in the export business, with a particular focus on the services sector and the implications of shifting global value chains (GVCs).
The Contribution of Services to India’s Exports
The services sector is a cornerstone of India’s export economy, comprising over 38% of the country’s total exports. This sector not only boosts foreign exchange reserves but also stabilises the economy by mitigating the deficits from goods trade. The General Agreement on Trade in Services (GATS) by the World Trade Organization (WTO) classifies trade in services into four modes: Mode 1 (cross-border trade), Mode 2 (consumption abroad), Mode 3 (commercial presence), and Mode 4 (temporary movement of natural persons). The pandemic, however, has severely impacted these modes, particularly Modes 2 and 4, due to travel restrictions and reduced international mobility.
Impact of the Pandemic on Services Exports
The pandemic’s effect on India’s services exports has been profound but relatively less severe compared to other major economies. The adaptability of India’s IT and digital services, which fall under Mode 1, has mitigated some negative impacts. Nevertheless, sectors like tourism, hospitality, and education, which rely heavily on Modes 2 and 4, have seen significant declines. This disruption underscores the vulnerability of developing countries like India, which have a substantial share of services in their export basket.
Opportunities for Indian SMEs in the Global Market
Despite the challenges, several opportunities have emerged for Indian SMEs in the export business: The export business offers numerous opportunities for Small and Medium Enterprises (SMEs), which are vital contributors to global trade and economic development. Here are key opportunities for SMEs in the export sector:
- Shifting Global Value Chains (GVCs)
The pandemic has accelerated pre-existing trends such as the adoption of emerging technologies, the imperative of environmental sustainability, and the reconfiguration of globalisation. This shift presents a window of opportunity for India to become a preferred manufacturing hub. The potential for significant domestic demand, governmental support for manufacturing, and a favorable demographic profile position India well to capitalise on this opportunity. SMEs in India can capitalise on this shift by becoming reliable partners in these reconfigured supply chains.
2. Digital Revolution:
The adoption of digital technologies offers a cost-effective means for SMEs to enhance their global reach. E-commerce platforms and digital marketing can help SMEs overcome traditional barriers related to market access and information asymmetry. The government’s initiative to promote e-market linkages for SMEs is a step in the right direction, facilitating virtual trade fairs and online exhibitions in place of physical events.
3. Government Support:
The Indian government has introduced several measures to support SMEs, including emergency collateral-free credit, revised definitions of MSMEs, and the promotion of e-market linkages. These interventions aim to provide financial relief and market access, helping SMEs navigate post-pandemic recovery.
India Exports Scheme: Facilitating Growth for Exporters
India’s export sector benefits from a variety of schemes designed to incentivize and support exporters by offsetting infrastructural inefficiencies and associated costs. Key among these are the Merchandise Exports from India Scheme (MEIS), the Rebate of Duties & Taxes on Exported Products (RoDTEP), and the Service Exports from India Scheme (SEIS), along with various duty exemption and remission schemes.
a) Merchandise Exports from India Scheme (MEIS)
The MEIS rewards exporters by providing duty credit scrips to offset losses from paid duties, offering incentives of 2-5% of the Free On Board (FOB) value of exports. This scheme is set to be replaced by the RoDTEP scheme as MEIS is not compliant with World Trade Organization (WTO) regulations.
b) Rebate of Duties & Taxes on Exported Products (RoDTEP)
Introduced in December 2020, the RoDTEP scheme aims to refund hidden taxes not previously covered under other export incentive schemes. These include central and state taxes on fuel used for transportation, duties on electricity used in manufacturing, mandi tax, toll tax, and stamp duty on import-export documentation.
c) Service Exports from India Scheme (SEIS)
The SEIS incentivizes the export of notified services, offering an incentive of 3-7% of net foreign exchange earnings to service exporters. To qualify, service providers must have an active Import-Export Code (IEC) and a minimum of US$ 15,000 in net foreign exchange earnings.
d) Duty Exemption/Remission Schemes
- Advance Authorisation Scheme (AAS): Allows duty-free imports of raw materials required for producing export goods.
- Duty Free Import Authorisation (DFIA) Scheme: Similar to AAS but applicable post-exports, allowing duty-free imports after the export of finished goods.
- Duty Drawback Scheme (DBK): Compensates exporters for customs and central excise duties incurred on materials used in the manufacture of exported goods.
- Rebate on State & Central Taxes and Levies Scheme (RoSCTL): Applicable to the apparel and made-up industry, this scheme refunds taxes such as VAT on transportation fuel, captive power, mandi tax, and electricity duty. RoSCTL will be merged with RoDTEP across all sectors.
e) Export Promotion Capital Goods Scheme (EPCG)
The EPCG scheme allows for the duty-free import of capital goods needed for production, aiding manufacturers and service providers in reducing capital costs. This scheme benefits a wide range of service exporters, including hotels, travel operators, and logistics companies.
These schemes collectively aim to enhance the competitiveness of Indian exporters by reducing the financial burden of duties and taxes, thereby facilitating growth in international trade.
f) Export Credit Guarantee Corporation (ECGC)
The Export Credit Guarantee Corporation (ECGC) provides crucial support to exporters facing significant risks, particularly amid global political and economic instability. ECGC safeguards exporters against non-payment risks due to political events like wars, coups, or economic sanctions, and commercial risks such as buyer insolvency or prolonged payment defaults. By offering credit insurance and financial guarantees, ECGC ensures that exporters can navigate these uncertainties, facilitating smoother international trade and securing payments even in volatile circumstances. This protection is vital for maintaining the stability and growth of India’s export sector in an unpredictable global environment.
4. Sectoral Diversification:
SMEs have the opportunity to diversify their export portfolio by tapping into new sectors and markets. Enhanced awareness and adherence to international quality standards can help SMEs minimize shipment rejections and expand their customer base.
5. Market Information Access
Access to comprehensive market information is increasingly available through digital channels, allowing SMEs to better understand global demand patterns, consumer preferences, and compliance requirements. This access can empower SMEs to make informed decisions, tailor their products to meet international standards, and effectively compete in the global marketplace.
Challenges Faced by Indian SMEs
While opportunities abound, Indian SMEs face significant challenges in the export business:
- Information Asymmetry:
SMEs often lack access to critical market information and business contacts, which larger firms typically acquire through dedicated resources. This information deficit hinders their ability to understand market differences, quality standards, and regulatory requirements across regions.
2. Logistics and Connectivity:
Efficient logistics and connectivity are crucial for international trade. The pandemic-induced slowdown in clearance procedures highlights the need for robust ICT infrastructure and digitization. However, the high costs associated with logistics improvements, particularly in remote areas, remain a significant barrier for SMEs.
3. Demand Contraction:
The pandemic has led to a contraction in global demand, particularly affecting SMEs that operate on thin margins. The lack of demand prevents SMEs from returning to an uninterrupted business cycle, making real-time information on global demand patterns critical for their survival and growth.
4. Trade Barriers:
Non-tariff barriers (NTBs) and protectionist measures by international governments pose additional challenges for SMEs. Understanding and complying with these regulations require resources and expertise that many SMEs lack.
5. Digital Divide:
Despite the potential benefits of digital technologies, low internet penetration in India limits the ability of SMEs to fully leverage digital platforms. The complex nature of digital information and language barriers further exacerbate this issue.
6. Comparative Performance and Need for Targeted Interventions
A comparison of Indian SMEs with those in ASEAN-4 countries (Indonesia, Malaysia, Philippines, and Thailand) and Vietnam reveals that while Indian SMEs have a strong presence, their international participation is relatively low. Only 16% of Indian SMEs engage in international trade, compared to higher rates in the reference group. This gap underscores the need for targeted interventions to enhance the internationalisation of Indian SMEs.
7. Market Information and Trade Facilitation:
Providing SMEs with access to comprehensive market information and trade facilitation services can bridge the information deficit. Simplifying and disseminating information on global demand patterns, compliance requirements, and market opportunities can empower SMEs to expand their export activities.
8. Capacity Building:
Capacity-building initiatives focusing on quality standards, regulatory compliance, and market diversification are essential. Training programs and workshops can help SMEs align their products with international standards, reducing the risk of shipment rejections and enhancing their competitiveness.
9. Infrastructure Development:
Investing in logistics and ICT infrastructure is critical to support the export activities of SMEs. Improving connectivity, particularly in remote areas, can reduce the cost and time associated with trade, making it easier for SMEs to access international markets.
10. Financial Support:
Access to affordable credit and financial services remains a significant challenge for SMEs. Enhancing the availability of financial support, including export financing and insurance, can help SMEs manage risks and invest in expanding their export operations.
Conclusion
The export business presents both significant opportunities and formidable challenges for Indian SMEs. While the pandemic has disrupted traditional trade mechanisms, it has also accelerated trends that favor the digitalization and diversification of export activities. By addressing the challenges of information asymmetry, logistics, and financial access, and by leveraging government support and digital technologies, Indian SMEs can enhance their global competitiveness and contribute more significantly to the country’s economic growth. The path forward requires a concerted effort from the government, industry bodies, and the SMEs themselves to build a resilient and inclusive export ecosystem.