McKinsey: India must equip small businesses with the digital tools to unlock the next phase of e-commerce growth

In these simple yet meaningful ways, small businesses across India are leaning on direct channels and tech infrastructure to connect with buyers.

India’s over 60 million micro, small and medium enterprises (MSMEs) contribute roughly 30% of our gross domestic product (GDP). Small and scattered, they could drive half of India’s e-commerce growth by 2030, growing especially fast in Tier-2 and Tier-3 cities. And their channel of choice to connect with buyers is increasingly direct-to-consumer (D2C).

A survey of over 1,000 Indian MSMEs conducted by McKinsey to evaluate the e-commerce opportunity—and which forms a part of its report The Great Unbundling of Indian E-commerce: MSMEs and the Direct-to-Consumer Revolution—finds that these businesses are almost evenly split in their channel preferences: 47% rely on marketplaces while 53% favour D2C routes, reaching buyers through channels they can own and control, such as social media storefronts, independent websites and hyper-personalized WhatsApp or Telegram groups.

D2C channels also appeal to these small businesses by virtue of being economically viable even at smaller order volumes and offering a platform for brand stories and customer engagement.

With D2C adoption among MSMEs growing three times faster than in traditional marketplaces, the D2C market could reach $60 billion in e-commerce sales in India by 2030 from $10-$12 billion today. However, they have pain points that range from a lack of insights into customer behaviour or product performance at the pre-sales stage to cart abandonment, the absence of buyer support mechanisms to see a sale through, limited courier options and challenges with tracking orders and returns (which must be managed in a way that doesn’t undermine consumer trust).

To resolve these, they need technological support and infrastructure.

There is a nearly $30 billion opportunity—50% of the projected D2C channel size by 2030—for service providers to step in with solutions that blend affordability with intuitive design, offer a range of features, leverage artificial intelligence (AI) for insight-driven decision-making, ensure strong data governance and support seamless omnichannel integration.

Solutions for e-commerce sellers that integrate both software and hardware components function most effectively. The software layer—comprising the workflow layer, operations layer and intelligence layer—manages processes, day-to-day operations and data-driven decision-making; this is essential for virtually all sellers. The hardware layer, which includes warehousing, transportation and other physical assets, supports fulfilment and logistics at scale.

While structured marketplaces offer both software and hardware as a bundled package, MSMEs often do not require the full spectrum of physical infrastructure. At the market-entry stage, a bundled offering may be helpful, inspiring trust through solutions for reliable fulfilment, transparent pricing, secure payments, verified identities and consistent customer support. For fast-growing MSMEs, however, bundled solutions often create rigidities and fixed costs.

Modular building blocks—payment gateways, checkout optimization, logistics integration, inventory tools, customer analytics and credit access—that let them pick and choose what they need are seen to offer the right flexibility and value for money.

For service providers, this is more than an opportunity to build software-as-a-service; it is a window to create the open commerce infrastructure of the future. Whether this includes developing point-of-sale software that works in vernacular languages, logistics platforms that ease delivery to remote pin codes or payment systems integrated with the Unified Payments Interface (UPI) and digital wallets, immense possibilities lie ahead.

Rapid D2C channel growth does not imply a decline in the traditional e-commerce marketplace. Market fragmentation will continue, with large e-commerce platforms remaining popular. Sales through such platforms could reach up to $100 billion by 2030.

MSMEs will remain at the heart of e-commerce, however, and can keep growing through new infrastructure. The Open Network for Digital Commerce (ONDC) architecture that unbundles marketplace functions into interoperable micro-services is an example of what’s possible. In another example, an e-commerce enablement platform for MSMEs offers a full stack of modular unbundled solutions through plug-and-play architecture and pay-as-you-go pricing, allowing the merchant to select the most critical services.

These vital infrastructural rails can unleash the potential of Indian MSMEs. They need to be equipped with the right digital tools to engage consumers, expand their market reach, win loyalty and make repeat sales.

The authors are, respectively, senior partner and partner with McKinsey & Company.