Indian E-Commerce: The Future of the World's Fastest Growing Market

The fact that India has the world's fastest-growing e-commerce sector is well publicized. Although internet penetration is still relatively low relative to total population, Worldpay forecasts that India will become the second largest e-commerce market by 2034. Thanks to the swelling millennial population and increase in smartphone usage, the 'Global Payments Report 2016' found that the sector is set to reach US$63.7 billion by 2020, and overtake the US by 2034. The future of e-commerce in India certainly looks bright.

However, projections are one thing, but realizing this potential is another thing entirely. With increasing competition from foreign e-commerce, as well as the long-standing challenge of distribution and payment in Indian e-commerce, the continuation of the boom is not a guarantee. Depending on how these concerns pan out, a bust similar to the dotcom bubble of 2000 is a possibility. Here we take a look at how developments in competition, distribution, and payment are shaping the future of the India's e-commerce sector.

International competition

The relatively untapped potential of e-commerce in India is attracting the attention of big business. Amazon, for example, has been investing billions into their Indian operations since 2014 in an attempt to crack the market, having failed to do so in China. The Chinese e-commerce giants Alibaba have also signaled their ambitions to lead the Indian market by acquiring even larger stakes in the e-commerce and online payment startupPayTM. These moves not only underline the confidence in Indian e-commerce, but have also set the stage for a battle for supremacy that could be transformative for the entire sector.

The sheer amount of capital Amazon and Alibaba are able to invest in Indian e-commerce could go a long way to help modernize and improve the infrastructure of the industry. Plus, stronger competition is likely the drive prices down for consumers. However, it also poses a threat to home-grown firms like Flipkart and Snapdeal, who have already seen their market share diminish at the hands of Amazon. Sachin Bansal, co-founder of Flipkart, has responded by calling for government protection: "What we need to do is what China did and tell the world: we need your capital, but we don't need your companies." However, this is unlikely to happen due to the Indian government's desire to foster a more open environment for foreign companies.

Distribution

Finding ways to optimize product distribution and improving the speed and reliability of delivery is important to any online retailer, but it's especially crucial for the growth of the Indian e-commerce sector as a whole. As internet access and demand for online shopping increases, the so-called 'last mile' stage of delivery has become pivotal in this regard. On a national level, the logistical infrastructure is not yet sophisticated enough to keep pace with the growth of e-commerce. As a result, some e-retailers are turning to more traditional forms of distribution such as Dabbawalas, who deliver home-cooked meals, and kirana stores, who also offer in-store collection. These innovative partnerships take advantage of local knowledge and pre-existing local infrastructure to improve the 'last mile' stage of delivery.

Nevertheless, it's likely that these local solutions won't be enough to support the predicted growth of Indian e-commerce in the future. For online shopping to achieve widespread success across the country, more investment in logistical infrastructure will be required.

Shifting to cashless payments

Cash on delivery (COD) was the dominant payment method for online shopping in India for a long time, reflecting the largely cash-based economy as a whole. The status quo is beginning to change quite rapidly, however, not least because of the surprise demonetization initiative announced by Prime Minister Modi last November. When the ban on 500 and 1000 rupee notes was enacted, it forced online retailers to abandon COD payments. Initially, this was damaging for companies dealing mostly in cash, but it also presented an opportunity for digital payments to flourish. Sure enough, consumers started to embrace these payment methods to a far greater extent. This potential is further bolstered by the government's commitment to financial inclusion through various initiatives to make banking more accessible to all, particularly the Jan DhanYojana (JDY).

If this shift towards cashless payments continues to gather pace, it will be hugely significant for the sustainable development of Indian e-commerce. The phasing out of COD would not only improve the efficiency of online shopping for both retailer and consumer, but also make payments far more easily traceable and taxable.