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Economic implications of e-commerce.


Business and economy are inextricably linked with the development and implementation of new technology. While e-commerce clearly has a positive impact on the business sector, doubts have been raised about its impact on the macroeconomic growth and development. Impact of Internet and e-commerce on business in industrialized, and to a limited extent, in less industrialized countries, has been extensively discussed. There are very few studies which have focused on the impact of internet and e-commerce on the economic activities. In fact, this domain of Internet activity has received relatively little attention. Therefore, it has become pertinent to analyze the implications of e-commerce and internet on the economy. The present paper aims to study the economic implications of e-commerce. Impact of e-commerce on the different segments (intermediation process, agriculture, labour market, transportation, taxation, cost price and competition, monetary system) of economy has been studied in this paper. In the end of the paper, concluding remarks are given.

JEL Classification Codes: 02, 03, 04, I2

Keywords: E-Commerce, Implications, Impact, Economic Activities, productivity


The information revolution aided by the revolution in the telecommunications and institutional innovations had initially promised to change the nature of the market altogether. The market's primary role as merely a place where buyers and sellers meet (it had seemed) now has been revolutionized by the impact of the information revolution on its subsidiary role, i.e., as a transmission belt of information. Today market is a place where there is no intermediaries between a seller of a good and its final buyer to the mutual benefit of both parties (Sengupta, 2004). The Internet and its enabled technologies (especially electronic commerce) have caused the costs of many kinds of market mterachon to plummet (Saloner, 2001). Not only cost reduction, e-commerce has the potential to stimulate growth and employment in industrialized as well as developing countries. Further, e-commerce allows economics agents (both buyers and sellers) to interact more effectively by creating new market opportunities (Mukhopadhyay, 2002). Thus, e-commerce has strong economic implications at both micro and macro level.


While e-commerce clearly has a positive impact on the business sector, doubts have been raised about its impact on the macroeconomic growth, and productive growth (2) in particular. Various studies show that e-commerce had an impressive performance particular in terms of productivity growth (Solow, 1987; Liebowitz, 2003; Lichtenberg, 1995; Sichel, 1997; Brynjolfsson & Hitt, 1996; Berndt et al., 1992; Dedrick et al., 2003 and Parson et al., 1993). The US, which leads the world in IT and e-commerce, has had a notable economic performance, particularly in terms of productive growth, since 1995. But, the same was not happened with the developing countries as they failed to catch up technologically with the industrialized world. To assess the broader economic impact of e-commerce and the ramifications of developing countries' catching up or not, UNCTAD has conducted a quantitative analysis based on two scenario: one in which the developing countries fall behind technologically and one in which they catch up with the developed countries. The analysis is centered on cost saving and assume that e-commerce can reduce costs of services, particularly in retail and wholesale trade, transport and financial and business services. Cost savings in services are stimulated through a productive growth scenario, which allow for the analysis of such macro-economic variables as GDP, welfare, wages and terms of trade. The analysis is a unique application of a computable general equilibrium model to e-commerce at the global level.

According to the report, under the first scenario developed countries would have welfare gains of $117 billion, while the developing world (excluding Asia) would lose welfare of $ 726 million. The Asian region, on the other hand, would gain $ 802 million, largely attributable to the transport services sector. Besides welfare and GDP losses, developing countries would also experience a reduction in wages and deteriorating terms of trade.

E-Commerce could therefore end up actually widening, and not narrowing, the gap between the developed and developing countries.

Under the second scenario, however, if developing countries were to catch up with developed countries in productivity, they would increase output, wages and welfare.

A 1% productive growth m the service sector in Asia for example, would result in welfare gains of $12 billion, GDP growth of 0.4% and a 2 to 3% growth in the service exports (Table 1 & 2). By reducing costs, increasing efficiency, reducing time and distance, e-commerce could thus become an important tool for development.


Business and the economy are inextricably linked with the development and implementation of new technology (Tassabehji, 2003). Growth and development of any modern economy has been recognized by many economic theorists, such as Kondratieff, Schumpeter, Mensch and Porter, to be based on innovation of new technology. In the early twentieth century, the economist Kondratieff introduced his 'Long Wave Theory (3)' of economic growth. He detailed the numbers of years that the economy expanded and contracted during each part of the half-century long cycle, which industries suffer the most during the 'downwave' and how technology plays a role in leading the way out of the contraction into the next 'upwave'. Building on this theory the economist Schumpeter (1961) assigned technological innovation an almost exclusive role, as engine of economic development: the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new market, the new forces of industrial organization that capitalist enterprise creates. Mensch (1979) updates the Schumpeter theory, giving it an empirical base in history, where clusters of innovation take place and generate completely new sectors. He stressed that only technological innovations can overcome depression and that government must implement an aggressive innovation policy to stimulate the search for new and basic innovation. Further, Porter (1990), emphasizes that the prosperity and competitive advantage of a nation is no longer as a result of a nation's natural resources and its labour force, but rather the ability of its industry to innovate and upgrade. This can be seen as a disruptive technology on a macro environmental level. And today, whether economic community subscribes to these economic theories or not, the impact of new technology on the economy of a nation is indisputable. Continuous growth of e-commerce is expected to have deep impact on structure and functioning of economies at various levels and overall impact on macro-economy. Some key areas are discussed below:


Traditional production, transportation and distribution process is characterized by the liner-point-to-point path (4). In this process intermediaries play an important role (see figure 1). In physical world (5), because of large distance between production units and consumer units, it is not possible for consumers to approach producers directly and vice versa. The existence of intermediaries namely, distributors, wholesalers and retailers, this increase the transaction costs for both the producers and consumers.


But in the emerging economic scenario, liner-point-to-point information and knowledge flow no longer represent the reality. In the process of e-commerce transactions, it is possible for the consumer to conduct and place an order with the manufacturer instantly and directly (Singla, 2000). And same is possible within the various agents of this process (i.e., between producer and Retailers, Retailers and Distributors, Distributors and Retailers etc.). E-Commerce technology brings about the benefits of more accurate and timely information flow, administrative saving, lowering total distribution cost (6), closer trading relationship (see Figure 2), improved cash flows, and moving closer to the end consumers (Gattorna & Walters, 1996).


No doubt that online ordering and delivery of product is reducing the role of intermediaries. Therefore, it is also feared that intermediaries would be completely eliminated in the e-commerce economy. However, this fear may be unfounded. In 'e-commerce economy, though it is possible to deliver a number of goods and services online, it may not be possible to eliminate the physical delivery of many goods because of their vary nature. Goods such vegetables and grocery, garments and shoes, toys etc cannot be delivered online (they have physical existence). Though intermediaries like wholesalers and retailers can be eliminated in such transactions, it may not be possible to eliminate distributors and transporters. The demand for distributors and transporters is in fact expected to increase tremendously (Westland and Clark). Even with the advent of e-commerce technology, the functions of intermediaries will not change, because collecting information is a labour and time intensive task. However, this group can exploit new opportunities (7) and challenges.


The open access architecture of the Internet, declining information technology costs, and high volume have resulted in progressive steps forward for the entire marketing system. Parallel changes in the structure of agriculture have also contributed (8) to the popularity of the current generation of information technology. Chief among the changes is in the need for closer coordination of the supply chain-both upstream and downstream from the producer-and stretching' from seed, fertilizers, and machinery suppliers, to the food processors and retailers (9). Thus, technologies like electronic commerce have forced new relationships between and among the buyers of agribusiness to form a complex web interaction (Ehmake et al., 2001)

Various studies show that there is much about the potential success of e-commerce's in agriculture. Common agribusiness business-to-business transactions such as buying, selling, trading, delivering and contracting seem to be natural targets for conversion to e-commerce (Shapiro and Varian, 1999). Many theoretical benefits of e-commerce in agriculture have been identified such as: (1) promotion of information flow, market transparency and price discovery (Poole, 2001); (2) facilitation of industry coordination (Nicolaisen, 2001); and reduction or elimination of transaction costs (Porter, 2001; Thompson, 1996). Internet based e-commerce also offer tremendous opportunities to create collaborative marketplaces in low-cost and effective way (Nicolaisen, 2001). E-commerce in agriculture could also potentially tighten the supply chain and cut marketing margins and transactions costs in way that benefit smaller, local producers as well as local agribusinesses. It also enables a vast array of products to be transacted, usually at a price that is competitive with local retailers. E-commerce can also change the situation of hard bargain caused by scattered farmers and lack of information. At the same time, the fast and convenient electronic bargain manner can accelerate the circulation of commodities, and lessen the risk, and increase the competitions of agricultural products in the international market (Cao and Chen, 2001). These theoretical benefits appear to be undisputed. However, these have yet to materialize into profitability. Study of Golman Sachs (2000) discussed the general barriers citied by business to Internet based e-commerce adoption and explained that these barriers also apply to agribusiness as well. These barriers include: (1) unclear return on investment (2) lack of budget (3) lack of stakeholders support and (4) complicated technology. Added to these, there may be some other factors (10) slowing down e-commerce adoption in agriculture. In fact, many of the issues faced by e-agribusinesses are the same as those faced by the firms in other sectors similar to changes brought by other new agricultural technologies (Hooker et al., 2001).However, characteristics of the agricultural sector and its participants present some inherent impediments to the implementation of e-commerce practices. Nonetheless, despite these challenges, there is room for creative solutions potentially leading to successful adoption. Those potential strategies touch on: structure of industry; market and product expertise; and organizational development. At this point of time it is not very clear-the impact of e-commerce on farms, agribusiness firms, markets, and rural communities. Are there only winners or are losers too? If so, who are they? What will government to do, with or against e-commerce in agriculture? Since e-commerce is still evolving, it is too early to definitive answer (Mueller, 2000). An inspection of current practices; however, suggest that success of e-commerce in agribusiness is undeniable. Factors specific to agriculture will create additional challenges, which must be overcome before success may be attained. The ability of each player to work though these challenges will determine the speed of implication of e-commerce in agriculture.


E-Commerce, consisting of marketing and other business processes conducted over the computer-mediated networks is changing the way organizations in many industries operate. It leads to the automation of some job functions and replaces others with self service operations, raising output per worker and dampening employment requirements in some occupations, as well as in the industries in which these occupations are concerned (Hecker, 2001). The introduction and implementation of new technologies has posed important challenges for the commercial workers and their trade unions worldwide. Among the issues that unions have to deal with are, both B2B and B2C, self-scanning, logistics system, multimedia and other in store sales support applications. In many ways, they are already deeply affecting labour market (Gottardi et al., 2004). In contrast, e-commerce has spurred (11) employment in industries producing software, and systems used by e-commerce and other occupations associated with websites and networks.

Various studies (12) showed that e-commerce has a positive impact on the labour productivity. At the theoretical level, since e-commerce reduces coordination costs between different work processes, they facilitate firms to fragment tasks to enable them to improve the labour productivity. At the same time when the routine tasks can be automated, e-commerce reduces unskilled work. In a recent study, Atrostic and Nguyen (2004) considered the impact of computer networks on the labour productivity in the US manufacturing sector, using micro data predominantly for 1999. They found a positive and significant impact of computer networks on plant level labour productivity, suggested that networks increase labour productivity by around 7.5 per cent. Motohashi (2001) provides evidence for the positive impact of different information networks on labour productivity in Japan. In the UK a recent study by Criscuolo and Waldron (2003), based on Annual Business Inquiry, shows that buying online positively affects the labour and total factors of productivity, while selling online has a negative impact on productivity.

But, perhaps the larger impact of e-commerce on labour market can be seen in the form of online job search. However, very little is known about the importance of online job applications or direct employer initiated contracts with potential candidates. Even then, online job posting has grown spectacularly (Autor, 2001). Estimates place the number of online job boards (13) at over 3000, the number of active resumes online at over 7 million, and the number of job posting at 29 million (Boyle et al., 1999; Computer Economics, 2000). Kuhn and Skuterud (2000) reported that 7 per cent of employed workers regularly use the web to search for a new job in 1998. The leading job board (14), Monster.Com, offered 3.9 million resumes and 4, 30,000 jobs in August 2000 (Nakamura and Pugh, 2000). Further, the Internet is likely to change how some workers deliver labour services. For example, falling telecommunications traffic regardless of where it originates (Call Centres, 1997; Uchitelle, 2000). Improvements in communication and control technology likely mean that people who monitor equipment or other workers can perform their task at the greater physical remove. Remote access to e-mail and company documents will enable many workers to perform some or all of their work from home to elsewhere.

On the flip side, it has also been feared that the reduction in number of intermediaries (15) and sales persons due to reduction in number of supermarkets and showroom would reduce employment world over. The worst affected are expected to be the unskilled manpower. It is true that unskilled labour is getting displaced in a big way in the e-commerce economy. Internet and e-commerce by facilitating firms to employ home-workers on a contractual basis are seen to promote insecure employment opportunities. In India, as well as in the other low-income economies, the potential of e-commerce is seen to employment from the formal sector to small firms in the unorganized sector where employment is not protected by any legislation. Further, if this feature of e-commerce encourages the formation of small firms that are narrowly specialized, it also implies that there is less room for employee mobility within the firms, transforming the careers paths of employees (Francis, 1986).Added to this, as with other tools, the internet is not without its limitations as a means of attracting qualified candidates. For example, companies listing opportunities on major job boards may receive applications from a much wider geographic region-and sometimes less qualified applicants-requiring additional sorting and review. Firms are also noting that some candidates who post their resumes online may be more passive job seekers; they want to "test the waters" and wait the results, versus proactively applying for open position.


In a very short time span common sense has emerged within the world of transport, about the assumed huge impact of e-commerce and especially the Internet on relationships between companies (and consumers). Dholakia et al, (2000) concluded that in those regions of the world where there is old, established and often congested road infrastructure, any e-commerce-based methods that could lead to trip reduction and/or trip rationalization can contribute to an improvement in the quality of life. At least from a theoretical point of view, it seems quite clear that the online shopping (16) could lead to reduction of transport demand. In some cases, online shopping eliminates any kind of physical transport (when goods can be dematerialized as software, books, music etc.). In other cases, a goods transport is still necessary, but the journeys to shops are eliminated or reduced. Even if the purchase is finally made at the shop, the consumer can have used the Internet, looking for information, instead of visiting different shops (Keskines et al., 2001). Thus, electronic commerce transactions have strong implications on transportation. In this context, numbers of studies have been conducted to measure the impact of e-commerce on the number of trips. Browne (2001) first quoted the study made by Farahmand and Young (1998). It modeled the effects of the number of trips by switch to home shopping of 10 per cent of the customers of a grocery store and a DIY store (of a typical size) in the UK. They assumed that delivery vans would carry the loads of nine customers on each round trip. In both the cases, the reduction in total trips is around 9 per cent. The vehicle kilometer made by the delivery vans for the 10 per cent of home shoppers suppose a reduction of 87 per cent in comparison with the vehicle kilometers previously made by car. Further, the study (Coirm, 1999) also modeled a case of grocery home delivery in UK and their result shows that if 10-20 per cent of shoppers use home shopping, the reduction in the trips could arrive to 7-16 per cent. For the purchase made from home, the reduction in vehicle kilometers is 70-80 per cent even if each van only carries eight loads. Against this, study of Colin (2001) revealed that commerce has not had as great an impact on transport lows as some had expected, at least in terms of the volumes carried. However, some substitution effects are to be expected.

Not only on the retail transportation, e-commerce does have impact on the companies where heavy transportation is needed. E-transportation tool can enable seamless connectivity, provide dock-to-dock visibility of the supply chain, and deliver real time information that leads to better and faster decisions (17). E-transportation also enables shippers a choice of carriers to be used for shipments of merchandise varying in weights and service, and identifies all shipping packing, marking, labelling and communications requirements as well. (Vevaldi and Prasad, 2002). But many shippers still are not quite ready to put their faith in this relatively new e-commerce tool. Indeed, as with the introduction of new technology, e-commerce as it relates to the transportation industry, is going to take time to catch on.

For transportation companies it is expected that, with e-commerce, a whole new market will open up for transportation and logistics companies, or whatever they may be called in the future. At present e-commerce is pursued to a fairly high degree between companies, but is still not very developed between companies and private persons. The business-to-consumer (B2C) relation is expected to grow rapidly though, and when this happens it will result in several changes for actors in the logistics area. When delivering to private persons instead of companies, the demand for fast and accurate deliveries will increase. This is because one or more of the physical nodes will disappear when the goods can be transported directly from the producing company to the end customer. Direct home deliveries will request shorter lead times, and more complex distribution systems will be necessary to make this possible. Expected trends in traffic and distribution from a widely spread use of e-commerce are fewer passenger cars, an increased number of pickup trucks, and smaller consignments, especially on international transports. Further the study of Hultkrantz and Lumsden (2000) concluded that the logistics industry has to face the challenges and opportunities created by e-commerce, both from within the industry and from external players. The industry has always been pressed to cut costs and squeeze margins, and the future will be even more formidable as competition forces most companies to continue the streamlining of their business.


When new technologies evolve, can taxation issues be far behind? If e-commerce is being billed as one of the greatest economic developments of the 21st century the taxation issues (18) arising therefrom poses the single biggest challenge of the century to both-the businesses and the taxman's. (Girish, 20001) This is particularly true in the context of digitized products because transactions of such products are not backed up by any physical of goods. As e-commerce transcends the barriers of geographical boundaries the concept like the place of transactions and place of consumption become immaterial. Therefore, it is often difficult to determine national jurisdiction and revenue rights particularly in the case of digitized products.

International tax issues in the area of e-commerce are manifold and include nexus 0fthe vendor and tax enforcement agencies. Taxing authorities may have great difficulty collecting revenue form vendors conducting commerce through foreign Internet addresses. The foremost problem associated with Internet based commerce is fixing the place of transaction. The place where a web-server is located, the place where the user initializes the transaction and the server where payment is collected may be different. Electronic transfer of funds heightens the risk of money being sent to tax havens. Further, many jurisdictions rely on the taxpayer to voluntarily identify himself, herself or itself as falling within its tax system. Tax authorities may not be able to effectively enforce their rights to collect tax in such an environment, especially if a business does not consider itself to be within a tax jurisdiction and simply choose not to disclose its activities to the relevant authority.

It is trite, but true, that taxation of e-commerce is a major concern for the international agencies and the tax authorities worldwide. In Europe, North America, and Australia and in many Asian Countries (particularly India and Singapore) substantial research (19) have been conducted on the impact of the e-commerce on taxation. Among the plethora of books, reports, articles and papers produced on this topic however, the work of Organization for the Economic Co-Operation and Development (OECD) stands out as the most significant (20), given its commitment to consulting broadly with the governments worldwide as well as with the business community to develop an integrated and comprehensive approach to the taxation of e-commerce.

The identification and analysis of the inter jurisdictional measures imposed by e-commerce is one thing. The formulation of domestic and treaty policies for dealing with e-commerce is another, even more controversial challenge. Perhaps, the most fundamental threat to the international tax system is the erosion of the worldwide tax base. It is increasingly possible for a company to try to divert income to a tax haven by locating its server there. This raises issues of allocation of business profits between the residence and source countries and leakage to tax haven (Cidambi, 2000). The debate over how international tax principles ought to be revealed and may be reformed is still in its formulative stage. It would be necessary to equip the tax administration after reviewing the entire procedure in the light of the advent of e-commerce. First, the procedures have to be simplified. Second, it would be necessary top create an environment within the tax department to ensure that the tax laws are implemented appropriately, and that integrity of the tax base is maintained (21). (Mantravadi and Chowdary, 2002).

For India, it is high time to learn from the experience of the work of OECD, Japan and the US to suggest a strategy to encourage e-commerce and integrate the tax system in such a way that it takes care of the twin problems of determining the sites of sales and also identifies the jurisdiction with regard to its authority to tax transactions. In doing so, we have to keep in mind the associated risk for the tax compliance.


Logically, e-commerce reduces search and transaction cost (Mukhopadhya, 2002).Reducation in transaction costs are motivating businesses to incorporate e-commerce into their business strategy (Garcia, 1995 and Kambil, 1995)The net impact of e-commerce on UK Economy has been estimated to be between 2% to 3% of GDP (Landon Economics, 2000). It has also been estimated that improved demand forecasting and stock management as a result of e-commerce will enable reduction in overall inventories by as much as 25% in the US. At the micro level, there is evidence that this will provides an one-off sustainable improvement in the profitability by an average of 5% or more for the enterprises currently working with low margin (Goldman Sachs, 1999). The e-commerce lowers costs because (22), the Internet lowers selling search costs as well as, by allowing seller to communicate product information cost effectively to potential buyers, and by offering sellers new ways to reach buyers through the targeted advertisement and one-on-one advertising. Thus it is helpful in reducing the search costs on both the sides. By reducing search costs on both sides of the market, it appears likely that buyers will be able to consider more product offering and will identify and purchase products that better match their needs, with a resulting increase in economic efficiency. But the reduction in the cost combined with new capabilities of technology can set off more complex market dynamics (Bakos, 2001).

The lower search and information cost should push markets towards a greater degree of price and competition, and this outcome is certainly possible, especially for the homogeneous goods. On the other hand the use of Internet technology to provide differentiate and customized products, and thus avoid competition purely on the price.

Lower search costs in the digitized markets will make it easier for the buyers to find (23) low cost sellers and thus will promote price competition among the sellers. Thus e-commerce economy comes quite close to the features of the prefect competition, as larger numbers of buyers and sellers can instantly interact with each other. Many characteristics of e-commerce should increase competition because buyers will have access to a global marketplace and the ability to easily compare price and product features (Fletcher et al., 2000). E-Commerce technologies have the potential to significantly increase competition by increasing consumers' choice of products and traders (ACCC, 2001). However, some of the distinguishing characteristics of the e-commerce set up also have the potential for creating the monopoly power in the certain lines of products. The e-commerce set up has negligible distribution cost for the intangibles and therefore marginal cost of the production and distribution is almost nil for these goods. Sales of these goods to a particular customer does not reduce its availability to the other potential customers. Economies of scale arising out of negligible marginal cost, along with network externalities and consumer preference for the already acquired skills, provide natural monopoly power to some of the products in the e-commerce set up. Early birds are thus expected to reap the benefits in these lines of production. Therefore, in the e-commerce environment, monopoly is expected to exist along with the prefect competition. Competition would be especially seen in those areas where goods and services cannot be digitized and economies of scale are not very prominent. Breaking the monopoly power to remain in the competition would require high speed of innovation and making the product visible all the time, whether there is a demand for the products or not. Competition would be basically in the forms of converting ideas, knowledge and brainpower into innovation.


With the new economic landscape now outline, let us return to the money. Not surprisingly, in the intangible (e-commerce based economy) economy, money is also becoming increasingly intangible. The relative weight on non-cash monetary transactions now exceeds the value of cash money by the factor often (Goldfinger, 2002). Money and payments are delivered via electronic networks as data bits and database entries. At the wholesale level, money representation and manipulation are fully automated. Beyond the alteration of the appearance and mechanics of money, there are deeper structural changes. The triumph of markets means that money is increasingly used to settle multilateral transactions rather that the bilateral commercial transactions. The functional evolution in turn leads to profound modification in the design of the clearing system and networks, which need to handle large volume, work in real time, and offer more open access. Growth of e-commerce and development of various payment alternative channels (ie. Debit and Credit Cards, E-Cheque, Digital Purse, E-Cash etc.) assist payment channels. The delivery channels greatly impacted the retail banking and the wholesale markets of banks (Avasthi and Sharma, 2001). And today, these new technologies have transformed the banking business almost beyond the belief in the last decade and the half (24). Most of all the customers have benefited (25), as have the bank themselves (Sumanjeet and Mehlawat, 2005). Added to this, digital currencies have many other advantages; some of the important are: cheaper, faster, safer, global, and more private than traditional credit cards and bank wires. In other words, digital currencies will prove to be as world-changing as the invention of the printing press and gunpowder. Digital currencies link together financial institutions and markets across the globe in a way that allows instantaneous value transfers with a mere fraction of the cost associated with traditional bank wires and credit cards. But, this new forms of money has also posed certain challenges before the banking sector, most of them are related to IT plans (26) (Kamesan, 2003). Many schemes have been piloted or rolled out but the use of e-money is still tiny. This raises the question why e-money has not been more successful. One explanation may be that there is not sufficient demand. Another explanation is that we are merely observing the slow start that is typical for many inventions. Once critical mass has been reached, e-money will take off. Finally, the problems of e-money may stem from regulation.

No doubt, these changes make money more visible and pervasive but also less stable, more volatile in its value and more elusive. Therefore, in the new economy, monetary policy become more important as a lever of economic management at the same time that the classical monetary aggregates-[M.sub.1], [M.sub.2], [M.sub.3]--lose their reliability as signals of the future economic growth and inflation' (Goodhar, 1984). Nevertheless, one thing appears certain, electronic money will continue to emerge, rendering the overall money landscape more intricate and multifarious. To facilitate the emergence of electronic money, it is important to be open minded, to accept innovate vision of money and money transaction. At the same time it is also essential to recognize that many of these visions will either never be implemented or fail the critical test of customer acceptance.


The emergence and rapid growth of Internet and E-Commerce has strong implications on economic and social actitivities. It is quite possible that these new technologies might transform the future of economic and societal landscape. At the economic front, there is a clear evidence that E-Commerce and Internet techonolgy have positive impact (UNDP, (2003), Pohjola (2000), Dewan and Kramer (2000), Kraemer and Dedrick (2000)}. To study the economic implications of e-commerce, few areas of economy (transportation, Intermediation, Agriculture, Labour Market, Taxation, Cost, Price and Competition, and money) has been selected. On the basis of various studies it is revealed that e-commerce technology have strong economic implications. At the general level, there are two types of potential economic gains from the use of E-commerce and IT enabled technologies. First, are the gains in efficiency, both in static and dynamic. Static gains are one-time, and come from more efficeint use of scarce resources, allowing higher consumption in the present. Dynamics gains come from higher growth, potentially raising the entire future stream of consumption and population. Efficiency gains of e-commerce also come about through the enabling of new digitized goods and services. The second type of potential benefits comes from cost reduction. Studies indicates that e-commerce is helpful in reduction of search cost, administration cost, distribution cost and even the labour costs. However, all these opportuities are yet to materlize in to profitability i. e. in agricultural sector, benefits of e-commerce exists, but, only theortically; not practically, as the implemetnation of e-commerce technolgy in agricultural sector has certin challenges. Addes to this, e-commerce based economic models has also posed number of challenges beofre the concerned people and community. The area of e-taxation is one of the best example and most controversial issue all over the world. As e-commerce transaccends the barriers of geographical boundaries, the concept like the place of transactions and place of consumption become immaterial. With the emergence and growth of digital money in the economy, the chances of frauds have also incresased. Another most difficult issue is the planning regarding the adoption and implemetation of e-commerce technology in the various economic activities. In nutshall, with the e-commerce based economic models, there is little to lose and more to gain.


While bearing full responsibility for any remaining mistakes, I wish to thank to my supervisor Prof. L. N. Dahiya for reading the earlier versions of this paper and making a number of helpful comments and constructive criticisms. In fact, his academic spirit is an inspiration to me. I am particularly indebted to Prof. Kishore, G. Kulkarni (Editor) and anonymous referees of this paper for their valuable comments, which assisted me in the process of revision; however I am alone responsible for all the remaining errors and inadequacy


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Omkaranada Institute of Management and Technology (OIMT)



(1.) This section of the study is based on the data, facts collected from the Report of UNCTAD on E-Commerce and Development, 2001. However, the analysis is done by the researcher.

(2.) In previous technological revolutions, productivity gains have managed to provide for one of the main goals of development in the long run, that is, to improve living standard.

(3.) The theory was based on a Study of 19th Century price behaviour, which includes wages, interest rates, new material, prices, foreign trade, bank deposits and other data. From this he suggested that a long order of economic behaviour existed and could be used for the purpose of anticipating future economic development. He mentioned that an economy goes through the phase of prosperity, recession and recovery in cycles of around 50-60 years.

(4.) In a typical (point-to-point) supply chain, physical goods flows from up stream to down stream (i.e., products from manufacturers to wholesalers, wholesales to distributors, distributors to retailers and retailers to the customers).

(5.) Physical world here mean, an environment in which all commercial activities are conducted without the help of any electronic media.

(6.) E-Commerce can coordinate distribution, transport, buying in bulk, which has the effect of lowering total cost of distribution.

(7.) The corresponding fall in the cost of and time required to collect this information will increase the productivity and customers will respond accordingly by asking for more services from the intermediaries. Within this activity, intermediaries will contribute in a positive manner to the value of the product and to their customers and as purchasing costs are lowered; they will generate more demand for their services.

(8.) USDA's annual National Agricultural Resources Management Study, showed 29% of the farms had Internet access by 1995 and about 15% of those had conducted some business (E-Commerce) over the Internet, mostly to purchase crop inputs (Morehart, M. and Hopkins, J. (2000), "On the Upswing: Online Buying and Selling of Crop Inputs and Livestock", Agricultural Outlook, September, p. 4. Further, study of Goldman Sachs estimates that 12% of all agricultural sales in the US will be conducted over the internet in the year 2004, compared to only 4% in the year 1999.

(9.) In traditional form of supply system products moved from the manufacturer to a series of wholesale distributors before reaching the retailers and the producers.

(10.) Lack of education' poverty, poor IT infrastructure and lack of technology savvy people (farmers and business people) may be another reason for the poor implementation of e-commerce in agriculture; this is especially true in the developing countries like India.

(11.) E-Commerce activities, in general, will spur employment needs for workers involved in e-commerce systems and organizations and its website design. More computers workers are needed to set up, maintain, and oversee the additional hardware and software systems that e-commerce require. Among the workers needed are computers and information system managers, computer system analysts, computer engineers, computer support specialists, database administrators, computer scientists and computer programmers. E-Commerce activities also require more artist and commercial artists, designers and writers and editors.

(12.) Their studies is based on companies that use all computer mediated networks, including Internet and therefore, it provides a useful reference for our analysis.

(13.) Job boards holds several advantages over their textual counterpart, newspaper help wanted ads. They offer more information about more jobs in more locations than is conceivable for paper equivalents. They are easier to search. They are potentially more up-to-date, because ads are posted more immediately and can be edited frequently. Job boards can also take an active role in matching, rather than waiting on workers or firms to find one to another, software can parse posted job listings and resumes to identify plausible matches and notify both the parties.

(14.) Some job boards are provided on a non-profit basis. For example, the US Department of Labour runs America's Job Bank, to be found at (, which makes the job listing and search services of the Us Public Employment Service broadly accessible, and Canada's CareerOwl job search facility, developed by the university faculty, volunteers and found at (, provides job search assistance for the Canadian Student.

(15.) However, these fears may not be unfounded. In e-commerce economy, though it is possible to deliver a number of goods and services online, it may not be possible to completely eliminate the physical delivery of many goods because of their very nature. Goods such as vegetables and grocery, garments and shoes, toys, etc. can not be delivered online. Though intermediaries like wholesalers and retailers can be eliminated in such transactions. It may not be possible to eliminate distributors and transporters. The demand for distributors and transporters is in fact expected to increase tremendously.

(16.) Online shopping represents about 10-20 per cent of total e-commerce (B2C+B2B) and just a little proportion of retail trade, less than I per cent in the US, the most developed e-commerce market. However, now it is growing very fast. Colin, (2001) estimated that online shopping could arrive to around 5-7 per cent of retail trade in 2005 in the US and Europe. (Colin, J. (2001), The Impact of E-Commerce on logistics, Paper Presented at OECD/CEMT Joint Seminar on 'The Impact of E-Commerce on Transport', Paris, June.

(17.) Other benefits of e-transactions are: (1) electronic execution of transactions (2) elimination of clerical error (3) compressed cycle time (4) increased asset utilization and increased incremental revenue for private fleets (5) streamlined procurement practices (6) direct savings ranging up to thousands of million of dollars and (7) automation of time consuming manual process.

(18.) Briefly, the following issues arise for consideration:

* Traditional "source" concepts were based on a strong connection between economic activity and a specific location. Traditional "residency" concepts were based on the parameters such as personal and economic relations, physical presence and place of effective control. These concepts were used as effective tools in a allocating taxing rights between various countries. As technological changes weaken the physical nexus of business with a specific geographical point, what are the implications for the above concept? With whom lies the jurisdiction to tax?

* A related issue to the above is about the constitution of a Permanent Establishment (PE) in a world where business is carried on its bits and bytes. Are the traditional principles of PE valid in the determination of the jurisdiction to tax? Can a server or a server space constitute a PE for the tax purpose?

* How can income from transfer of technology over the Internet be characterized? Does it constitute business profits or royalties? Is there is an erosion of source taxation?

* How can new technologies be used to improve the administration of taxes by checking problems of tax evasion, identifications and audit trails of the transactions and providing better services to the tax payers?

* What would be the transfer pricing issues arising out of EC transactions?

* What are the issues arising in relation to Value Added Tax (VAT).

(19.) A proactive and interesting conclusion is submitted by Krever (2000), "Electronic Commerce and Taxation--A Summary of the Emerging Issues", Asia Pacific Tax Bulletin, June, p. 151, who states: "a more sober study will reveal that in many respects much of the hyperbole about the e-commerce and tax is just that and in the overall scheme of thing the impact of e-commerce on tax systems may be limited. It is the case, however that e-commerce will place enormous strains on the some aspects of consumption tax bases and will test the boundaries of some important international income tax concepts such as the source of income and the definition of 'permanent establishment' ". See also Mattson (1997), "Demystifying Taxation of the Global Electronic Commerce: Let's Get On With the Business of E-commerce", Paper submitted to the OECD for round table discussion on November. And Boyle; Peterson, Sample; Schottenstein and Sprague (1999), "The Emerging International Tax Environment for Electronic Commerce", Tax Management International Journal.

(20.) the OECD has done some Pioneering work in highlighting not only issues connected with the Electronic Commerce, but on the overall e-commerce industry. For example, in 1992, the OECD revised its commentary on Article 12 of its model convention to incorporate the income characterization relating to the software transactions. It was the first attempt at issuing specific guidelines for the software transaction. The OECD convened its first informal discussion of EC tax issues with the business community in Turku, Finland in November 1997. The conference was one of the first initiatives taken on a collective basis by the member countries to identify the key issues involved in e-commerce.

(21.) For example the system of registration of dealers and submission of tax returns could be through e-mail. Dealers could submit their accounts, alongwith their software program to the development on a floppy disk,

(22.) E-commerce provides a new distribution channels, ideally suited to products and services that can be digitized (such as software, information etc.). These can be delivered for a fraction of cost of traditional distribution channels. Enterprises working online have greater reach, so that they are able to find the cheapest suppliers for their purchasers, e-commerce enables rationalization of the supply chains as more efficient intermediaries emerge to displace existing ones.

(23.) This effect will be most pronounced in the commodity markets, where lowering search costs may result in the intensive price competition, as customers can 'shop' around the world and conduct conduct comparison either directly by visiting different sites, or by visiting a single site where prices are aggregated from a number of providers and compared (example: for financial products and services)

(24.) The first bar, king system designed for the Internet was written in 1996 and the first Internet bank was set up in US. However, the concept of using IT in banking actually begun in the 1950s when the first automated book-keeping machines were installed at the few US Banks.

(25.) In the banking sector IT can reduce costs (according to American Banking Association, the cost of a single banking transaction at a traditional bank branch is $1.1, whereas an internet transaction costs barley 0.1, Indian rates are Rs. 35.38 though the traditional account, Rs. 14-16 though an ATM and only Rs. 1-3 via the Internet), increase volume, and facilitate customized products. It opens up new markets. Funds can be transferred electronically between accounts accounts, drastically reducing the need to keep hard cash. Besides, there are lower service fees but the higher interest rates of deposits. The investment for the setting up bank branches is reduced, as the online trading requires fewer branches. There is no need of manual updating of accounts. Relocation of customers does not matter. Internet based banking offers a bouquet of services-mutual funds, brokerage, consumer finance and credit cards. Last but not the least, very large data can be stored for information and decision-making. More secrecy is observed in using IT in banking sector as compared to the manual file system.

(26.) Deciding the IT plans for the bank as whole; working out the strategy for the implementation of plan' training requirements for the IT implementation data warehousing, data mining and other related areas; souring of IT requirements; standardization of the various components of IT-including hardware, software, operating system and application software platforms; interfacing across the banks-especially in the context of disparate systems across different banks and outsourcing of the various components of IT including maintenance.
Table 1
Welfare Impact of a 1% Increase in Productivity in Developed
counties ($Million)

 Trade Air Maritime Other
 Services Transport Transport Transport
 (1) (2) (3) (4)

Developed 47942 3365 2896 17238
Eastern Europe -55 -13 21 11
Asia -121 130 528 261
Latin America -197 -5 83 -19
Africa -45 -4 69 -40
Rest of the World -196 -38 96 -8

 Financial Business Services
 Services Services (1) to (6)
 (5) (6)

Developed 12071 35081 117869
Eastern Europe -8 -53 -93
Asia -8 1 802
Latin America -52 -123 -301
Africa -12 5 -23
Rest of the World -56 -124 -309

Source: UNCTAD, E-Commerce and Development Report, 2001

Table 2
Welfare Impact of a 1% Increase in Productivity in Each
Developing Region Only

 Trade Air Maritime Other
 Services Transport Transport Transport
 (1) (2) (3) (4)

Eastern Europe 6604 89 56 345
Asia 3601 1914 1530 2389
Latin America 1920 1199 860 1439
Africa 1214 144 139 1214

 Financial Business Services
 Services Services (1) to (6)
 (5) (6)

Eastern Europe 122 492 1770
Asia 863 1706 12012
Latin America 949 1236 7614
Africa 233 383 2663

Source: UNCTAD, E-Commerce and Development Report, 2001

Figure 3
Net Impact on Cost

 Decrease in the cost Increase in the cost

* Paperless transactions * Packing cost
* Reduction in the * Transportation and
 inventory level distribution cost
* Reduction in the middlemen * Payments to portals and
* Lower manpower e-retailers
* Reduction in the property cost * Increase in the number of
* Reduction in the warehouses
 advertising cost * High cost of e-advertising
* Increasing the return to scale * Web page development
* Lower transaction cost
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