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Inside the World of E-commerce

Arvind Panagariya

            Internet is undisputedly the most important mode of commerce invented in the last two decades.  The same way that advances in shipping brought down the cost international trade in goods during 1960s and 1970s, Internet has brought down the cost of international trade in services.  Thanks to this mode of "transportation," many previously nontradable services are now internationally traded.  In the United States, electronic commerce (e-commerce) has become the fastest-growing sector of the economy.

            For many services, Internet has eliminated the need for physical presence of the provider.  If a City Bank official in New York encounters a programming problem late in the day, she does not have to wait for a consultant to come to the office to solve it.  Instead, using Internet, she can instantly ship the problem to a firm in Bangalore.  Taking advantage of the time difference between the two cities, the firm can ship back the solution before the official returns to work the next morning.

            The reach of Internet is not limited to services, however.  Today, in the United States, many goods are ordered and paid for on Internet, with actual delivery taking place by traditional modes.  More interestingly, Internet is even delivering some of the goods.  It digitizes (that is, converted into strings of 0 and 1) books, music CDs, films and computer programmes and delivers them in no time to distant customers.

            This ability of Internet to deliver goods poses new challenges for tax authorities as well as the World Trade Organization (WTO).  When a CD is imported in physical form, it is subject to a custom duty.  But what if the music on the same CD crosses the border in digitized form without anyone able to observe it?  WTO is currently wrestling with the dilemma whether it should classify the "digits" transported on Internet as goods or services.  The issue is substantive since trade in goods is subject to the discipline of the General Agreement on Tariffs and Trade (GATT) while that in services is governed by the General Agreement on Trade in Services (GATS).

            Because of its large pool of skilled labor, India is uniquely placed to take advantage of the opportunities offered by international e-commerce.  I had long held the view that we had greatly over-invested in higher education.  On the one hand, many of the talented individuals left the country and, on the other, we were faced with a large pool of educated workers whom the economy could not readily absorb.

            The advent of computer technology in general but Internet in particular now undermines this view.  Today, India has the world's second largest pool of English speaking scientific manpower.  Aided by the power of Internet, this pool has become the source of exports worth as much as $4 billion annually.  Starting with simple data entry services, we now supply sophisticated back office services including electronic publishing, website design and management, medical records management, hotel and airline reservations, mailing list management, technical on-line support, indexing and abstracting services, and technical transcription.

            Given the large differences in the wages of skilled workers between developed and developing countries, the potential gain from increased movement of natural persons between them is large.  To take advantage of this fact, India has long sought a relaxation of restrictions on the entry of temporary workers in developed countries.  But we have not had much success in this endeavor.  The beauty of Internet is that, for many services, it opens up developed country markets for skilled labor without requiring the movement of natural persons.

            Of course, this does not mean that Internet has eliminated the need for the movement of natural persons.  For one thing, the wages received by skilled workers in Bangalore are no where near those paid in New York for the same work.  Moreover, the growth of e-commerce itself may depend on the flexibility in the movement of natural persons.  Confidentiality or security considerations may require consultants to move to the site where the service has to be provided.  The most striking recent example relates to Y2K contracts.  The ability of Indian firms to secure these contracts was hampered by the availability of visas to visit the United States.  Installation and maintenance of software may also require physical presence of the supplier.

            To maximize the benefits from e-commerce, several policy measures may be recommended.  First, despite much improvement in the past decade, our telecommunications services remain inadequate and expensive.  Within Internet sector, free entry of service providers is essential.  The monopoly of the Videsh Sanchar Nigam Limited (VSNL) on Internet service provision for a long time held back the growth of this important sector.

            Second, unreliable supply of power has been a serious constraint on the growth of e-commerce.  Unanticipated interruptions of power can have a catastrophic effect on the productivity of software industry.  It is my impression that frustrated by supply interruption, many firms in Bangalore have switched to generating their own power.

            Third, if e-commerce is to flourish, eventually, we will need to develop electronic means of payment both internally and externally.  This is complex problem.  Internally, the use of credit card is still limited.  Externally, even though e-commerce in goods and services is covered by the current-account convertibility to which we adhere, freedom of payments by the electronic medium can open the door to capital outflows.  But at some stage, we will have to cross that bridge and it is worthwhile to start thinking how.

            Finally and most importantly, we need to ensure that access to communication networks in other countries remains free and developed countries progressively liberalize the imports of services that we are able to supply electronically.  Access to communication networks of other countries is essentially guaranteed under GATS and the Agreement on Basic Telecommunications signed in February 1997.  But access to markets in services that we can supply electronically is still limited.  In the forthcoming WTO negotiations in services, due to begin on January 1, 2000, India must seek greater access to markets in these services.

Economic Times, July 28 1999