National Council of Applied Economic Research
Opinion: Somya Mathur and Badri Narayanan
However, WTO’s tariff moratorium on digital transmission must continue for the countries of the Global South, such as India, to become major players.
The crucial role of digital technologies was brought out during the Covid period. So to tap their full potential is one of G20’s primary agendas.
Micro, Small and Medium Enterprises’ (MSME) adoption of digital technologies is critical for their competitiveness. MSMEs contribute about 30 per cent to the GDP.
The Jaipur Call for Action made by Commerce Minister Piyush Goyal underlined the need to strengthen the access to trade databases and information by the MSMEs, using the Global Trade Helpdesk at the International Trade Centre, Geneva.
Addressing the B20 Summit India 2023, Prime Minister Narendra Modi said that India has become the face of digital revolution in the era of Industry 4.0 where MSMEs will play a pivotal role. In this context, free flow of cross border digital transmissions is vital for the MSMEs’ sustained growth.
On the pace and scale of digital transformations, India has stolen a march over advanced economies, both domestically and in terms of exports.
An UNCTAD 2018 report indicated that India had exported $89 billion in 2016-17 in digitally delivered services segment. The OECD found that India’s share of global estimated digital trade exports grew by roughly 400 per cent — from 1 per cent in 1995 to nearly 4 per cent in 2018.
With the number of internet subscribers in India now projected to touch 800 million by end-2023, small businesses have also begun incorporating digital services into their operations. Examples of common B2B services imports include e-commerce platforms, social media for marketing and communication, and digital payment applications, among others.
On the import side, Indian MSMEs have also begun to integrate digital services inputs, such as smartphone-based marketing and communications services, into their business operations. Typical goals include expanding market reach and deepening their connection with customers.
Duty moratorium
In 1998 the World Trade Organisation adopted a Declaration on global electronic commerce, which included a two-year moratorium on custom duties on cross-border electronic transmissions.
Since then, the moratorium (or duty cap) has been renewed every two years. New Delhi had raised a number of concerns before the WTO’s 12th Ministerial Conference (MC) in June 2022, being apprehensive of notional tariff revenue loss. However, it can be argued that the moratorium has actually benefited India’s services exports and imports.
WTO members have allowed the moratorium to continue with the present moratorium lasting till March 31, 2024, which is up for debate in the next MC in 2024.
If the moratorium ceases to exist, however, the resulting disruptions would impact a wide range of routine cross-border data transmissions, which range from transfers of semiconductor design information to R&D, software-as-a-service, and digitised music, movies, books and entertainment.
In addition, allowing a range of new tariffs to be levied on digital services would distort supply chains and stunt MSME growth.
A recent study by Institute of Governance, Policies and Politics concludes that cross-border digital transmissions will benefit MSMEs. A 1 per cent rise in imported digital services production inputs by MSMEs results in a 0.4-0.8 per cent rise in MSME employment, 0.1-0.2 per cent rise in MSME value addition and a 0.04-0.08 per cent rise in value-addition per employee (labour productivity).
Given the clear benefits of using digital tools, any action, such as a duty hike, that makes it more difficult for MSMEs to access imports of such services would appear counterproductive. New barriers to digital services will increase costs, hinder efficiency and undermine the growth of small business.
Policy impact
This empirical and stakeholder-interviews-based research has relevant implications for policy: in short, measures that would render it difficult to import digital services would have a negative impact on India’s MSME sector.
Tariffs on digital imports may have some impact on the MSMEs by raising their costs. It must be noted that Indian digital service providers have risen to the challenge posed by their foreign counterparts and have even emerged as leading exporters. Training and education on adoption of digital tools can further benefit the MSMEs.
Therefore, any changes to the status quo on in the WTO moratorium would affect the stability and predictability in the digital sectors across the world, which has enabled their growth. Indian digital and other service exporters and importers will face uncertainty if this moratorium is scrapped.
To help Indian small businesses expand and reach new customers, policymakers should implement policies that make it easier — not harder and more costly — to access digital services inputs, including those from abroad.
Acting on External Affairs Minister S Jaishankar’s pitch at B20 Summit for a “more diversified and more democratic” re-globalisation, the moratorium will help in the emergence of Global South countries as producers.
Mathur is Associate Fellow, NCAER. Badri Narayanan Gopalakrishnan is a Fellow and Former Head, Trade and Commerce, NITI Aayog. Views expressed are personal.