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Bengaluru: What’s $70 billion?

It’s the difference between the most bullish estimate of the e-commerce market in India and the most conservative.

One extreme is Morgan Stanley, which has estimated that e-commerce sales in India will soar to nearly $120 billion by 2020; UBS Group AG is at the other end of the spectrum, predicting that online retail will rise only to $48-60 billion by that year.

A look at the estimates by brokerages and consultancy firms of India’s e-commerce market size reveals a wide gap in expectations. Apart from Morgan Stanley and UBS, Mint looked at estimates by three other firms: RedSeer Consulting—$80-100 billion; Goldman Sachs—$68.8 billion; Google-AT Kearney—$60 billion.

Online retail here refers to gross sales of electronics, fashion, books, furniture and home products, health and personal care products and groceries at e-commerce firms. Gross sales do not account for discounts, product returns and order cancellations.

The curious thing is that all the brokerages have cited the same factors, more or less, that will drive the growth of e-commerce in India. These are broadly: soaring sales of smartphones and mobile Internet connections, rising incomes, uninterrupted flow of capital, shortage of organized retail stores and improvement in e-commerce infrastructure such as logistics and payments.

But how fast will these factors combine to drive e-commerce in India? That’s where the differences arise.

Morgan Stanley believes India will see a similar kind of growth in online retail that China has seen over the past few years. The securities house said that India will have an Internet penetration rate of 59% by 2020, a number China may reach in 2018.

“Electronics and fashion have emerged as large categories in China. Online penetration in these categories increased from less than 6% in 2010 to 30% in 2013 in China. In India, online penetration was 3-5% in these two categories in 2014; however, we expect the growth trajectory to mirror that of China. Online penetration in 2020 should go to 25-30% for these categories, in our view, resulting in an online market of $88.5 billion combined," Morgan Stanley wrote in a February report.

UBS, on the other hand, said India will not mirror China’s growth levels.

“Forecast e-tail market size remains the key variable for e-commerce valuations and answering the bubble question (whether there’s an e-commerce bubble). Our discussions with industry participants and investors suggest that there is a wide range of estimates for market size, implying very different growth rates. The robustness of some of these estimates leaves a lot to be desired, in our view. For example, a common view is overlaying China’s growth trajectory onto India to arrive at India’s market size based on the comparable expected Internet penetration trajectory. This is flawed, in our view, given different income levels and consumption trends in India," UBS said in an April 2015 report.

To be sure, in the past, too, investors and companies attracted by comparisons of India’s consumption potential with that of China’s market reality have inevitably been disappointed.

And, currently, investors seem to be in the UBS camp.

After pumping more than $9 billion into Indian start-ups since the beginning of 2014, investors started pulling back late last year.

For the first time in years, online retail sales in April were at a lower level than December of the preceding year, according to executives at top e-commerce firms. This is mainly because e-commerce firms, struggling to raise fresh funds, cut discounts and advertising spending this year, hitting demand.

Additionally, new foreign direct investment rules introduced in late March that prohibit online marketplaces from influencing product prices led online retailers to put sales events on hold. Sales events have since restarted, Mint reported on Monday.

Experts said it is a worrying sign that customers seem to cut back the moment discounts are pulled.

“All of us had hoped that once we create the habit of buying online among consumers, they will keep buying even if discounts are reduced. Factors like a wide product range and convenience of getting products delivered at your doorstep would prove to be compelling, we had thought," said a Flipkart investor, requesting anonymity, as he isn’t authorized to speak on this topic.

“And this is happening with some consumers, but the fact is that a majority of them don’t buy unless you offer steep discounts. It’s true that e-commerce companies are yet to find new ways of growing the market quickly without the help of discounts," he added.

Interestingly, some assumptions by the analysts referred to above are plain wrong.

A common assumption in nearly all the research reports is that e-commerce will get a major boost from the rollout of 4G services by Reliance Jio Infocomm Ltd that had been expected to happen last year.

Even UBS, with the most conservative estimate among the five firms, assumed that Reliance Industries Ltd would launch its 4G services by June 2015. Jio’s launch is still a few months away, according to previous reports in Mint and other publications.

In the Goldman Sachs report published in October 2015, the securities house wrote that Amazon.com Inc. had announced an additional $5 billion investment in its India operations. That was purportedly based on a report in The Economic Times published on 20 July that said Amazon would pump in an additional $5 billion into India. In fact, Amazon announced an additional $3 billion investment last month.

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