Unlocking the potential of Indian e-commerce

Walmart has now announced an investment in Flipkart, India’s most promising e-commerce startup. The market has been waiting a while for some investment activity to validate the longstanding potential India’s middle-class market promised. It has been estimated by Brookings and others that India’s consumption class is set to become the world’s largest. The demographics pointed in the same direction. With 65% of the population below 35 years of age and with average wages rising about 10% a year, this did not seem unlikely.

However, it took its time showing up. The lull since 2012 and the recent sluggishness after demonetisation and the implementation of a complicated goods and services tax (GST) system introduced an element of uncertainty. But now, with a giant investment of $16 billion by Walmart for a 77% stake in Flipkart, the Indian market has received a much awaited fillip. The startup space that had been looking weary will now get a massive endorsement.

Criticism of this will come from the swadeshi quarter that will sense a sell-out of an Indian entity in the core retail sector. However, Flipkart is already invested in by New York-based Tiger Global Management and now by Tencent Holdings and Microsoft Corp. And with the Union government opening up just about every sector for 100% equity, there is no reason why the retail sector should be left out. It is the largest employer of unskilled and semi-skilled labour and employs a large number of people in logistics, project management, delivery, warehousing and back office operations. This should offset the fear, largely unfounded, that small neighbourhood stores and mom-and-pop establishments will close down.

Sensing the need to shape up for intense competition, Amazon India has already declared it will hire 8,000 people in its logistics division. Given the unemployment situation and the inability of the manufacturing sector to hire during the slump, it is retail and e-commerce that will fill the gap, if allowed to. We may also see new regulations, which would enable a large segment in the online retail business, if India brings in simple and clear rules on e-pharmacies. Once that takes off, we will see a new market segment evolve.

For long, we have spoken of the last mile problem in delivery of goods and services in the country. A large number of case studies show how firms and customers suffer because the delivery mechanism cannot tackle infrastructure and warehousing problems across small towns and in rural India. With large-scale investment in e-commerce, this has already seen a major change, with tier II and tier III cities being served by the likes of Amazon. Multinational fashion brands and accessories now easily reach tier II cities where subdued demand, helped by large consumer surpluses, results in big potential.

Supply chains for grocery, fruits and vegetables have also resulted in gigantic wastage. The supply chain bottlenecks resulted in huge inventories for Indian firms, with nearly a quarter of goods stuck in the process. Nearly 50% of fruits and vegetables perish owing to the creaky logistics network. All this will now start getting sorted out as supply chains get modern technology, state-of-the-art information technology, back end systems, and real time inventory management.

Indian companies and multinationals operating in the country were faced with complex tax structures and various interstate barriers that will hopefully get sorted out as the GST system refines and takes shape. With this, inefficiencies would reduce and a world-class online and offline retail infrastructure would replace the archaic and unorganized process that existed to tackle uncertainties of law, regulation, and transportation. India’s e-commerce potential is immense.

As internet access improves, the number of users will go up exponentially from the 400 million today. This will also push up the meagre sum of just about one million e-commerce transactions per day. Today, online sales are at a fraction of the $17 billion market.

The Flipkart-Walmart deal is a great step forward for the development of the retail sector in India. It will certainly generate employment, especially for the semi-skilled labour force. Also, as it infuses competition in the organized retail sector, it will give a fillip to e-commerce in the country. We should now see some dynamism in this market, that is, at the moment, in its infancy and has been struggling to get out of its big city, cash-on-delivery shackles. As large retail moves to cashless transactions and smaller towns, consumer spending will go up, and so will the need to develop skills in logistics, procurement, quality control and distribution. For a country threatened with rising unemployment, this would come across as a big move forward.

What will be required is large-scale real financial inclusion and trust in the banking system and payment gateways. Then we would see an improvement in a situation where even though 70% of the population has bank accounts, 75% of e-commerce deals are inefficient cash-on-delivery transactions. This is owing to faulty point of sale (POS) machines, poor connectivity and lack of trust. This new deal, which brings Walmart to the country, will help change the situation dramatically.

Amir Ullah Khan is a development economist and a visiting faculty at the Indian School of Business and NALSAR in Hyderabad.

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