The critical role of digital technology has been highlighted during the COVID-19 pandemic. Therefore, realizing its full potential is one of the top agendas of the G20.
The adoption of digital technologies by small and medium enterprises (MSMEs) is critical to their competitiveness. The contribution of micro, small and medium-sized enterprises to the GDP is about 30%.
The Jaipur Call to Action issued by Commerce Minister Piyush Goyal highlights the need to enhance MSMEs’ access to trade databases and information, using the Global Trade Helpdesk at the International Trade Center in Geneva.
In his speech at the 2023 India B20 Summit, Prime Minister Narendra Modi said that India has become a representative of the digital revolution in the Industry 4.0 era, in which micro, small and medium enterprises will play a key role. In this context, the free flow of cross-border digital transmissions is crucial for the continued growth of MSMEs.
India is ahead of advanced economies in both domestic and export terms in the speed and scale of digital transformation.
According to the 2018 UNCTAD report, India’s exports in digital delivery services reached US$89 billion in 2016-17. The OECD found that India’s share of global estimated digital trade exports grew by about 400%, from 1% in 1995 to nearly 4% in 2018.
It is now expected that the number of internet users in India will reach 800 million by the end of 2023, and small businesses are beginning to incorporate digital services into their operations. Examples of common B2B service imports include e-commerce platforms, social media for marketing and communication, and digital payment applications.
On the import front, Indian MSMEs are also starting to integrate digital service inputs, such as smartphone-based marketing and communication services, into their business operations. Typical goals include expanding market reach and deepening connections with customers.
Suspension of tariffs
In 1998, the World Trade Organization adopted a Global Declaration on Electronic Commerce, which included a two-year moratorium on tariffs on cross-border electronic transmissions.
Since then, the moratorium (or tariff cap) has been renewed every two years. New Delhi had raised a series of concerns at the 12th Ministerial Conference (MC) of the WTO in June 2022, fearing loss of nominal tariff revenue. However, it can be argued that the moratorium will actually benefit India’s services imports and exports.
WTO members have allowed the moratorium to continue, with the current moratorium set to last until March 31, 2024, and will be debated at the next ministerial conference in 2024.
However, if the ban no longer exists, the resulting disruption will affect a wide range of routine cross-border data transfers, including the transfer of semiconductor design information to research and development, software as a service, and digitized music, movies, books, and entertainment.
Furthermore, allowing a range of new tariffs on digital services will distort supply chains and hinder the growth of MSMEs.
A recent study by the Institute of Governance, Policy and Politics concluded that cross-border digital transfers will benefit MSMEs. For every 1% increase in the production input of imported digital services by small, medium and micro enterprises, the number of employees in small, medium and micro enterprises will increase by 0.4-0.8%, the value added of small, medium and micro enterprises will increase by 0.1-0.2%, and the value added per employee will increase by 0.04-0.08% (labor productivity ).
Given the clear benefits of using digital tools, any actions that make it harder for MSMEs to import such services, such as tax increases, appear to be counterproductive. New barriers to digital services will increase costs, hinder efficiency and harm small business growth.
This study, based on evidence and stakeholder interviews, has relevant implications for policy: In short, measures that make it difficult to import digital services will have a negative impact on India’s MSME sector.
Digital import tariffs may have some impact on MSMEs by raising their costs. It must be noted that Indian digital service providers have risen to the challenges posed by their foreign counterparts and have even emerged as leading exporters. Training and education on the adoption of digital tools can further benefit MSMEs.
Therefore, any changes to the status quo of the WTO suspension will affect the stability and predictability of the global digital industry, which are factors that promote the growth of the digital industry. If this ban is lifted, Indian exporters and importers of digital and other services will face uncertainty.
To help Indian small businesses expand and attract new customers, policymakers should implement policies that make it easier (not harder and more expensive) for them to obtain inputs for digital services, including from abroad.
In line with External Affairs Minister S Jaishankar’s call for a “more pluralistic and democratic” re-globalization at the B20 summit, the suspension will help countries in the Global South emerge as producers.
Mathur is an associate researcher at NCAER. Badri Narayanan Gopalakrishnan is a fellow and former head of trade and commerce at NITI Aayog.The views expressed are personal only