Taking Advantage of E-commerce

Liberty Institute Briefing Paper on Trade and Development "Taking Advantage of E-commerce" was published in November 1999.

The world e-commerce transaction is said to have touched $500 billion this year according to one estimate (including goods sold and purchased over the internet). There are over 2 million people whose jobs are now dependent on it. And this is just the beginning.

India with a substantial presence in the computer software segment, and a large well-trained manpower, has the potential to gain significantly from e-commerce. However, there are serious bottlenecks. With barely one million PCs and 15 million telephones in India, India needs radical policy reforms in many areas if she is to take advantage of this emerging area of e-commerce. On the other hand, e-commerce has the potential of freeing the Indian economy and her people from the restrictive influence of the state.

1. How can India benefit from e-commerce?

A. India has shown itself to be competitive in information technology and in services. E-commerce dealing in intangibles combines these two together. Solving Y2K bugs was an excellent example of e-commerce. India can be confident of doing well in the service side of e-commerce. After software, e-commerce is likely to be the next wave of information technology business. If India is not actively involved, its famed software industry will become a historical relic.

B. By eradicating the disability of geography, e-commerce allows service providers to compete directly on labour costs and other factors like time difference. India's labour prices are extremely competitive against any Western country. And few third world countries have India's lead in information based services. India is also nicely placed between east Asia, Europe and the Americas to tap time zone difference. Already, Indians work on projects for US companies while the latter sleep.

C. E-commerce greatly reduces transaction costs and overcomes infrastructure failures. For Indian companies, especially small companies, who have a hard time with overhead costs and overcoming infrastructural bottlenecks, e-commerce is a cheap way to become a global market player.

D. E-commerce gives India an opportunity to rebuild a large portion of its economy without the red tape and regulation that strangled its manufacturing sector during the past 50 years. India's software industry has shown how well information based industries can do if the government is not involved. E-commerce could expand that lesson to many other sectors of business including retailing.

2. Few will oppose e-commerce at the WTO. But they will propose regulatory mechanisms that could throttle the business before it starts or, worse, provide means for countries to put up barriers to e-commerce across borders.

A) The European Union has proposed an international regulatory body for e-commerce. But this could easily become hostage to politics, parochial national concerns and rivalries. A multilateral body would tend to seek the lowest common denominator among its members and this is likely to be the most restrictive measure.

B) Countries will try to bring in taxes and tariff systems that mimic those in normal physical trading. This would automatically rob e-commerce of much of the speed and flexibility that is its advantage. It would also bring in an enormous amount of national government regulation that would suffocate e-commerce development.

3. What India should support about e-commerce?

A) It should oppose international regulation. Self-regulation is probably the best way. In other words, beyond a basic legal framework establishing the authenticity of electronic signatures, contracts and so on. Let the market generate the credit rating and security measures in the form of private firms. These themselves will be forms of e-commerce which Indian companies can profit from.

B) There are two types of e-commerce. One is the business of intangible services and products. These should be declared tariff and tax-free. This would encourage such business and remove a major government headache on how to regulate this. The other type of e-commerce will result in the movement of a tangible product or good from one hand to another. India should consider at least introducing a tax and tariff holiday in such services for a few years, if not a total ban altogether. Taxes could perhaps be shifted to consumption rather than transaction based means.

C) India should reassure other third world countries about the importance of e-commerce and the fact all countries will benefit greatly from allowing free trade in cyberspace.

However, to take advantage of this new technology, a new mindset is necessary. First, it would be necessary to realise that the industry grew precisely because the state failed to realise the potential of software and therefore, did not place the kind of obstacles that other sectors of the economy had to go through. But now the state is planning to step in. While it talks of promoting the IT sector, it now seeks to impose a 49% ceiling on foreign investment in e-commerce ventures. Clearly the state has failed to understand that e-commerce operates in a borderless world. A cap on foreign investment will severely handicap the Indian operations right at the dawn of this new era.

E-commerce is a very good example of brain drain in the other direction. Foreign companies setting up in India a range of e-services, data communication, backroom activity, ticketing, data processing, call services, has the potential for a lot of employment, and income. Let us not close this window of opportunity on ourselves.