By Mandar Kagade
The Reserve Bank of India (RBI) issued a draft regulatory framework for Online Export Import Facilitators (OEIF) recently. The framework concerns payment intermediaries (Online Payment Gateway Service Providers, or OPGSPs, in the earlier iteration of regulatory vocabulary) that work with Authorized Dealer banks under the Foreign Exchange Management Act to facilitate inward (exports) and outward (imports) payments for a non-trivial fraction of India’s pool of small businesses. Per industry estimates, ~ 350,000 small-value service exporters use the OEIF “pipes” to transact with the world. There may be no respite for this segment if RBI goes ahead and enacts the framework in its current form.
A key reason, among other drawbacks, is that the framework excludes the services sector entirely from its ambit, thereby threatening the livelihoods of these 350,000 exporters. These small businesses range from website designing to SEO/SEM, consulting in AI/ML technologies to teaching yoga, tutoring to ed-tech start-ups, and even many in the Software-as-a-Service (SaaS) space. They serve consumers in 200 countries globally and support an estimated 1.2 million jobs indirectly. These services exports are a critical livelihood channel now more than ever, as the global economy emerges from the pandemic.
Moreover, the potential impact has both microeconomic and macroeconomic ramifications. India leads the world in the export of services, both large and small-value globally. International trade in services brought in approximately $27 billion of exports in May 2022, per data collected by RBI.
RBI has several guidelines and mechanisms for receipt of export payments against services. So, it is not clear why only the proposed framework excludes services from its ambit, especially when it is purpose-built for small-value online exports. Also, note that the framework limits the value of exports and imports to $15,000 and $3,000, respectively. There is extensive gatekeeping and deployment of safeguards. OEIFs have risk controls, velocity checks, acceptable use policy, and unusual pattern checks. In addition, AD banks of OPGSP/OIEF and the exporters’ bankers have continuous monitoring to detect any suspicious or unusual transactions.
Bad actors operate across every sphere. While RBI may have legitimate concerns, it may serve us to not throw the baby out with the bathwater and unintentionally hurt the majority of the small exporters competing globally to grow Indian exports and doing so business the right way. Disproportionate regulations such as the framework are a significant overhang to pursuing a robust export policy and should be avoided.
Second, a reading of clause 3.1 suggests that RBI has adopted a narrow understanding of e-commerce—that online export is only via websites and is limited to goods and not services. This view does not comport with commercial realities at present. E-commerce is now an omni-channel business. Consumer cohorts and TAMs now aggregate on the likes of Twitter, Facebook, Instagram, and Whatsapp. Across both goods and services, the online exporter has to be present on these channels and not just on a single channel such as a website. As part of the end-to-end experience, these exporters work with OPGSPs to receive export payments. These providers are popular and trusted by global consumers, given their presence in multiple countries across existing and new consumer engagement channels.
As a policy, regulators should be channel- and technology-agnostic. Instead of being too prescriptive (such as ‘website only’), it will serve the ecosystem and RBI well if the latter is export-channel- and technology-agnostic. Let the online exporter choose any channel to sell their services/goods. Regulators should focus on mitigating business spillovers and market failures, not micromanaging the future.
Finally, the framework covers “digital products” but does not define the expression. The expression is also undefined in India’s Foreign Trade Policy. A streaming service could be a digital product, and so could be the several API-based services that Indian SaaS providers and fintechs offer as part of their core proposition. Likewise, some might suggest software packed in a DVD is a digital product as well. And they would all have a point. It is trite to say that such regulatory ambiguity may discourage small value ex-im operators from using formal banking channels facilitated by OEIFs to receive and remit payments. That would impede the push towards small business formalisation—a goal that RBI shares with the Centre. Moreover, to the extent small businesses use informal markets to transfer or receive funds, it gives rise to money laundering risks.
Therefore including the services bucket in the regulatory framework for OEIFs and ensuring them a level playing field are critical reforms that RBI needs to introduce.
(The writer is the founder-principal of Black Dot Public Policy Advisors.)