Back to the Main ET Page
Inside the World of E-commerce
Arvin d 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
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
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
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
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
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
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.
Times, July 28 1999