India online

EVERY second three more Indians experience the internet for the first time. By 2030 more than 1 billion of them will be online. In June last year one in four mobiles used in India was a smartphone, up from one in five just six months earlier. Add in two more facts—India boasts the world’s fastest-growing large economy, and the planet’s biggest population of millennials—and you can see why the likes of Facebook, Uber and Google are falling over themselves to establish footholds there.

No battle for the online future of India is more intense than the one now being waged in e-commerce (see article). Sales are still tiny, at $16 billion last year, but the country is the world’s fastest-growing e-commerce market and is prized by America’s and China’s internet titans. India has become the biggest test of Amazon’s international ambitions. Jeff Bezos, Amazon’s founder, wants it to be his second-largest market, after America, and has backed his plans with billions of dollars of investment. His opponents are platforms like Flipkart and Snapdeal, founded by locals and funded by some of the biggest names in tech, among them Alibaba, China’s e-commerce champion.

As these companies jostle for market share, they are spending feverishly on logistics and discounts to lure consumers online. Capital may dry up for some; in February a Morgan Stanley mutual fund sharply lowered the valuation of its stake in Flipkart. But whoever wins or loses in this frenzied contest, the importance of e-commerce stretches beyond individual firms and into the wider economy. In the West e-commerce companies piggybacked on an existing infrastructure of shops, banks and logistics firms. In India the game being played by the e-commerce pioneers is leapfrog. It could become a model for emerging markets around the world.

Pay as you grow

Indian e-commerce has such potential because it can bring three changes more profound than convenience and keen prices. The first is faster financial development. China already provides one example. Alipay, an arm of Alibaba, overcomes mistrust between buyers and sellers by holding on to customers’ money until they have safely received their goods. Now run by an affiliate called Ant Financial, Alipay has more than 400m accounts that let consumers buy products, pay bills and transfer money. The torrent of information that Alibaba gathered on merchants and consumers was the basis for a lending business.

Something similar is under way in India. Paytm, which provides digital wallets and is itself backed by Ant Financial, has 120m accounts, nearly six times the number of credit cards in India. E-commerce companies are also helping small businesses obtain loans that they would otherwise have struggled to raise. Amazon India rolled out such a programme for its sellers last month. In January Snapdeal announced a partnership to streamline loans from the State Bank of India.

Second, e-commerce firms could help overcome India’s ropy infrastructure and vast geography. Where roads are clogged and infrastructure is decrepit, the rival firms are melding warehouses and local outposts into idiosyncratic distribution networks. About half of Flipkart’s and Snapdeal’s customers are outside India’s biggest cities. Some are still farther afield: Amazon claims to be helping more than 6,000 Indian businesses sell abroad. China again shows what can be done. Alibaba is connecting remote rural areas to the online economy; there are now 780 “Taobao villages”, rural communities in which at least 10% of households are shopping or selling over the internet.

The third big impact of e-commerce in India is on retailing itself. Shopping malls and chain stores account for only about one-tenth of total retail sales. Already, the combined sales of India’s top three e-commerce sites, Flipkart, Snapdeal and Amazon, surpass those of the ten largest offline retailers.

Two-thirds of Indians are below the age of 35. For these young people, armed with smartphones, shopping is likely to be very different from what it was for their parents. Malls and chains will not disappear, but they may never be as prevalent as they are in the West.

That in turn will stimulate the rise of other digital firms. India’s tech scene is thriving. Tiger Global, a Flipkart investor, also backs an Indian online classified business and a messenger app that helps users avoid data costs. SoftBank, which backs Snapdeal, funds a mobile-advertising platform. In 2014 only America, Britain and Israel saw more new tech startups.

Platform boost

Simply to assume that e-commerce will conjure up growth—particularly of the labour-intensive sort that India needs—would be a mistake. The market in China had a very different starting-point, for instance. When the likes of Alibaba got going, it helped that China was already home to many manufacturers looking for new ways to sell excess inventory. India’s manufacturing base is much smaller, especially for electronics, e-commerce’s best-selling category. India is also poorer. A smaller share of its population is online—32% last year, compared with 52% in China. Indians speak more than 20 languages, which complicates marketing. The budget unveiled by Narendra Modi’s government this week includes plans to upgrade 50,000km (30,000 miles) of roads, but India is not about to possess a gleaming motorway network to rival China’s. Mr Modi’s continued failure to install a harmonised goods and services tax blunts the benefits of e-commerce.

Yet in its heft, governance and manufacturing clout, China is also an outlier. India is a better template for the e-commerce battle in other emerging markets. Its logistical woes provide a test of firms’ ingenuity. If they find a way to deliver goods profitably there, they may succeed elsewhere. If they falter, their stumbles will provide lessons. That is all the more likely because India’s e-commerce is so international. Naspers, a Flipkart investor, backs ventures in Nigeria, South Africa and Egypt, among other places. E-commerce in India is a local battle for customers, but it is also a battle for the future.