India attracts global big guns for e-commerce boom

India is on track to dethrone the US as the second largest e-commerce market within the next 20 years, bolstered by a powerful Gen Y led middle class and supported by a robust digital economy.

The confluence of an up and coming, affluent young middle class, good digital infrastructure and an appetite for consumption means that the Indian e-commerce industry is hot property right now. According to WorldPay, the online retail market is set to grow by 28% annually over the next four years, making it worth US$63.7 billion by 2020.

Digital connectivity continues to be a key factor driving growth and opportunity, with 4G connectivity growing to 38% of the population in 2016 compared to 18% in 2014.  India is considered a mobile-first nation with mobile penetration tipped to reach one billion handsets by year end. Currently, India is the world’s second-largest smartphone market with over 220 million users. Yet, despite the significant numbers the potential is even more staggering as smartphone penetration is only 30% of the total 700 million plus mobile phone users owning smartphones.

Significantly, by the year 2030, more than one billion Indian people will be online and by 2034, India's digital shoppers will be spending $2,039 billion, making the country the world's second biggest market behind China.

All this growth is being driven by a combination of technological shifts, rising income levels and favourable demographics. It’s no wonder the world’s biggest digital players are fighting to get a stake in the digital land grab.

The Indian e-commerce game of chess

E-commerce is in high demand and the big players are investing heavily. This includes Amazon which has invested US$3 billion into the region. 50% of Indian internet users have used Amazon at least once in the last two years. China’s Alibaba has India firmly in its sights as a target market and has taken a stake in local e-commerce player, Flipkart. India’s dominant mobile payment and commerce platform, Paytm, is planning a spin-off before year end which will allow China’s Alibaba to have a direct presence in India. Paytm has been valued at US$3.4 billion after raising about $680 million from Alibaba and Ant Financial. It already has 120 million accounts, which is nearly six times the number of credit cards in India.

Yet all these players face some hurdles including delivery logistics and payments.  Despite strong digital usage, consumers still prefer cash on delivery while actual delivery is also an issue in non-urban areas.  There is also a significant digital divide in urban versus suburban or rural areas. But a strong government led drive for digitisation may shift the tide.

Millennials in the middle

The sheer density of India’s emerging middle class is shifting the potential of the digital economy.  By 2020 India and China alone will have a middle-class population of over 1 billion.  As such they will have the most significant impact on demand for products and services, and the highest purchasing power.  For the new Indian middle class, consumption is not simply a necessity but also a source of identity. New social norms such as shopping malls, multiple mobile phones and digital media usage are all products of middle class demand.

Another key driver for digital and ecommerce growth will be the fact that by 2021, 64% of India’s population will be between 20 and 35 years old.  The millennials, who are cash rich, asset poor and mobile are poised to reshape the economy. Like their global millennial clan, the Indian Gen Y is geared towards high end luxury goods, rather than long term acquisitions of property. They are the ‘uber’ generation, moving away from the notions of an owned economy towards a shared economy.  As such, e-commerce already plays a central role in their consumption patterns, and this will only escalate. Behaviourally, they have been brought up to buy online and look for global brands that often they can only get through online merchants. Rather than shifting their mindset to a digital economy, they have already been moulded into that being the norm.

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