India is widely becoming known as one of the fastest growing e-commerce markets in the world. The e-commerce sector in India has grown by 34 percent since 2009 to reach $16.4 billion in 2014, and is expected to cross the $30 billion mark in the next five years. Yet, despite this vibrant growth and activity, the industry continues to operate in an uncertain policy environment.

The United Nations Conference on Trade and Development index ranks India 83rd among 130 countries in ability to serve online customers. India is behind many other emerging economies of the world, including Brazil, China and Sri Lanka.

Overall landscape

In absolute numbers, India is second only to China, with over 300 million internet users. Global companies and investors have been clamoring to build market share, creating intense competition between foreign and domestic companies. While India already has major home grown e-commerce companies like Flipkart, Snapdeal, InMobi, Quickr, Olacabs and Paytm, foreign players with deeper pockets like Amazon, Ebay, OLX, Groupon and Expedia continue to focus on acquiring and retaining customers.

Interestingly, many e-commerce market leaders in India are Indian ventures funded by foreign venture capital and private equity firms. Flipkart and Snapdeal have both attracted foreign backing. Chinese giant Alibaba is also evaluating several options to enter the Indian market this year. Companies are acquiring other players in an effort to differentiate themselves and consolidate their market – Snapdeal recently acquired mobile recharge service Freecharge which will give them access to over 40 million m-commerce users; similarly, Flipkart acquired fashion portal Myntra in a bid to become a leader in the fashion retail category.

India is also a particularly interesting market in the composition of its e-commerce revenue. India’s e-commerce market is dominated by travel-related sales rather than retailing. E-tailing accounts for less than 20 percent of e-commerce revenue and less than one percent of India’s total retail market, presenting a massive opportunity. By 2017-2020, some estimates put the size of the e-retail industry in India at $10 to $20 billion.

The Indian landscape today looks very much like China did before Alibaba took off, with growing penetration, lack of physical infrastructure and the unending debate over acceptance of online marketplaces.

Poor infrastructure

The lack of physical and financial infrastructure acts as a barrier between the e-commerce industry and its market. Challenges in the areas of logistics management, connectivity and transactions weigh down on the sector. A mere two percent of India’s population use credit cards, and anywhere between 50 to 80 percent of transactions are ‘cash on delivery’ – an Indian innovation that allows the buyer to pay upon receipt of the product. Companies struggle to set up warehouses in cities, given high real estate costs on par with most developed nations. However, there are reasons for optimism with respect to infrastructure due to the focus on the Digital India project and the modernization of India Post. While Digital India will increase internet literacy and improve digital infrastructure, India Post will offer greater access to non-serviceable areas. Moreover, the government is keen to co-opt e-commerce companies to generate a new revenue stream.

Regulatory challenges

India allows foreign investment (FDI) in the business to business (B2B) e-commerce space but not in business to customer (B2C) e-commerce. To circumvent this restriction, e-commerce businesses are creating complicated structures to operate marketplaces that connect buyers with domestic third-party merchants. In this model, the question of who should be made to pay the tax generated by the transaction – the e-commerce platform hosting the sellers, or the sellers themselves – is unresolved, triggering standoffs between individual state authorities and e-commerce companies.

Another challenge comes from trade unions, which have expressed concerns over predatory pricing strategies of e-tailers, accusing them of “killing domestic players” and demanding the intervention of the Commerce Ministry, even though jurisdiction is still unclear.

Apart from certain security, vigilance and privacy regulations under the Information Technology Act, 2000, there is also little in the form of governance for the e-commerce industry and regulators in India are struggling to keep pace.

Going forward

India’s attitude towards the e-commerce sector is reflective of the lack of clarity in the sector. However, even from within this quagmire, India’s overall e-commerce opportunity is attractive: while the government has broadly remained non-committal on the subject of e-commerce, it has shown signs of being open to a conversation. Last December, the Department of Industrial Policy and Promotion (DIPP), recognizing the impetus e-commerce can give to manufacturing in India and the capital it could bring, asked American companies to make a consolidated representation to India to allow FDI in B2C operations.

Over the last year, the Modi government has made it clear that it will not shy away from making decisions that will attract investment, revitalize the economy and enhance the ease of doing business in India. In many cases, such as that of the highly contentious Land Acquisition Bill, the ruling government has not only taken a firm stand amidst resistance from opposition parties, but has also shown willingness to defy its own ideological mentors.

With an increasingly young population, rising internet penetration and a vast middle class, India’s growth is driven by the increasing use of smartphones and devices. If the e-commerce industry can demonstrate potential economic and diplomatic dividends, it could open the door to a largely untapped market.