Impact of digitization on Indian E-tail market

Published on 02 Nov, 2018

Digitization, aided by remarkable growth in internet and smartphone users as well as reduction in smartphone prices, has triggered a major transformation in the Indian retail market. The rapid development of the digital market, coupled with favorable government reforms, higher capital outlays, and investment by foreign majors, is driving a gradual shift from retail to online retail. The uptrend in online retail is only expected to strengthen, unleashing immense growth opportunities.

Growth of Digital Market in India 

The internet has significantly impacted exchange of data/information over the last decade. In the process, within a span of few years, it has transformed from being a mere medium of communication to becoming a necessity in our daily lives. Internet users rose at a CAGR of 64.6% from 22mn in 2011 to 446mn in 2017. The figure is expected to increase to 821mn by 2021, implying a CAGR of 16.5% from 2017. India has ~10mn daily active internet users on a monthly basis, which is the highest rate of internet user addition globally. Also, the country has an online population of close to 500mn, the second largest in the world, after China. The growth in online population can be attributed mainly to ease of access to smartphones, lower cost of data, changing consumer mindset, and rise in disposable income.

We believe the digital market in India would grow significantly in the years ahead, as more and more Indian consumers embrace the modern way of transacting.

Link between Digital Market and E-tail (online retail)

Amid its increasing online population, India is witnessing the emergence of the e-tail sector. Rising internet penetration and increasing affordability of smartphones bode well for significant growth in the domestic retail e-commerce sector. The online retail market clocked a CAGR of 74% over 2012–17, touching USD16bn, led by market leaders Flipkart, Amazon India and Paytm Mall. It is anticipated to record a CAGR of 30% by 2022, surpassing USD60bn, with major players making huge investments in enhancing logistics and payment gateways, besides offering attractive discounts. The share of e-tail in the retail market is expected to more than double from 3% in 2017 to 7% by 2021. India is expected to witness the highest e-retail growth compared to its Asian peers in the next five years.

The digital market is one of the main catalysts driving the emergence of the e-tail sector in India, reflected by the growing share of e-tail in overall retail.

Government Reforms Support Growth in E-commerce

Growth in digital market is well supported by various government initiatives. In November 2016, the Prime Minister of India, Mr. Narendra Modi, announced the demonetization drive. India being a cash-intensive economy (cash-to-GDP ratio at 12%) primarily, the initiative created a cash crunch, albeit for a short duration. Since the cash-on-delivery (COD) option contributed over 50–80% to total online transactions, e-commerce companies braced for a slump in business in the immediate near term following the announcement by either discontinuing the COD option or limiting such orders to a certain maximum value. However, demonetization is considered beneficial for the e-commerce industry in the long term, as it promotes digital payments, thereby reducing the additional cost and risk of returns in COD.

The government has launched several schemes such as Lucky Grahak Yojana and DigiDhan Vyapar Yojana to incentivize digital transactions. It also arranged the DigiDhan Mela in 2017, showcasing the digital growth in India.

Digitization has been complemented by the FDI policy, which permits 100% FDI in retail e-commerce for companies operating under the “marketplace model”.

Various reforms undertaken by the Indian government have provided the much-needed push to digitization. Going forward, the government is expected to take more initiatives to promote digitization in its bid to bring the economy at par with other major nations; this would further strengthen the e-tail industry.

Growth in Smartphone Users Contributing to E-tail 

The Indian e-commerce industry witnessed a shift to mobile commerce (m-commerce), led by a surge in smartphone sales with the rapid adoption of digital technology. The number of smartphones in India is expected to soar to 490.9mn by 2022 from 291.6mn in 2017, supported by higher participation of non-metro cities. This, coupled with the availability of inexpensive mobile data plans (as low as under INR4 per GB cost per day) following the launch of Reliance Jio in September 2016, is likely to push the internet subscriber base to 821mn by 2021. The entry of Reliance Jio heralded a revolution in the Indian telecom industry, with the average revenue per user (ARPU) declining at a CAGR of 22.0% to INR76 per month by FY 2018 from INR125 per month in FY 2016. In line with the uptrend in internet subscribers, digital transactions are expected to reach USD1tn by FY 2023E, led by growth in mobile payments.

With the payments landscape evolving, we believe digitization of payments is going to drive consumption in the Indian e-commerce market, along with progressive changes in regulatory framework.

Rise in PE Deals and Investment by Foreign Majors

Attracted by the growth potential of the Indian e-tail industry, foreign investors have increased investments significantly in this sector over the past few years. The Indian e-commerce market witnessed M&A deals to the tune of USD2.1bn in 2017. A summary of the major deals is given below:

The industry witnessed the entry of global behemoth Walmart in 2018, as it acquired 77% stake in Flipkart for USD16bn, locking horns with Amazon India. The battle of these two majors is expected to boost growth in online retail and increase its share in the overall retail market.

The growing interest of foreign investors, reflected in the investment of billions of dollars, is a testimony to the immense growth potential of the Indian online retail industry, which could attract even more foreign participation in the years to come.


We believe the transition from retail to online retail is well underway, and represents an attractive opportunity for investors to capitalize on. The Indian economy is growing rapidly and consumers are welcoming the modern mode of transacting, which not only saves time but also provides a wide variety of choices with low prices. Given the current trend, India could feature among the top five countries in the world in terms of size of online retail market within the next decade.

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