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Get Ready for India's Internet Boom

Internet usage is set to double by 2020, with opportunities for both old and new industries to benefit from an eCommerce boom.

To witness India's accelerated transformation into one of the world's biggest eCommerce markets, drop in on Mumbai during lunchtime. Beginning in April, the century-old network of delivery men, called dabbawalas, who ferry lunch boxes from people's homes to their offices, also started delivering packages for the country's largest online retailer.

This marriage of old and new offers a glimpse into India's future and the opportunities for eCommerce growth in this country of 1.25 billion. The Indian Internet market, which was valued at only $11 billion in 2013, could rise to $137 billion by 2020, according to a recent Morgan Stanley Research report, "The Next India: Internet—Opening Up New Opportunities" (Feb 2, 2015), with the potential to drive economic growth, creating new markets and industries that have been maxed out in other regions.

"With strong entrepreneurial talent in India and significant opportunities thrown up by the Internet and the Internet of Things, we believe India, like the US, provides a wide assortment of companies that can transform the way more than one billion people live their daily lives," says Parag Gupta, Morgan Stanley Research's India Internet analyst.

One of the largest online stores sells a saree every two minutes, a pair of shoes every 30 seconds.

On the Heels of China

India's Internet and eCommerce evolution follows a path similar to that of its northern neighbor, though about seven years behind. China's online retail boom also began with increased Internet use, followed by the first wave of Internet companies, which had to jump market hurdles, such as immature electronic-payment systems. Then smartphones came along—and Chinese eCommerce exploded. With $314 billion in online sales in 2013 (vs. $255 billion for the US), China now accounts for 35% of all global eCommerce.

Could India travel the same path? Consider: The country's number of Internet users doubled from 50 million in 2007 to 100 million in 2010, then tripled to more than 300 million by 2014. This makes India the second largest Internet market in the world, after China, even though the user penetration rate is still only around 17%, compared with 46% in China and more than 80% in developed markets such as Japan and the US.

In other words, India's Internet journey is just beginning. Over the next five years, as smartphone adoption climbs, Internet users could double again to more than 600 million, nearly half its population. Increasingly, mobile access also means that many new users are coming from smaller towns and rural areas and bypassing the desktop/PC era altogether, a trend that eCommerce companies are already leveraging in China.

Capital and Cash

Investors have taken note. Venture capitalists and private equity funds had pumped $4.5 billion into the Indian market in 13 months through January. General merchandise companies have captured most of the capital.

ROBUST VENTURE CAPITAL/PRIVATE EQUITY FUNDING ACTIVITY

Source: Medianama, VC Circle, Company Data, Morgan stanley Research

As online retailers, both domestic and international, expand their presence in India, buying goods online is becoming more common practice for the Indian consumer. One of the largest online stores sells a saree every two minutes, a pair of shoes every 30 seconds. Recently, it added automobiles to its product line.

All this opportunity isn't without its challenges. For online retailers, one of the biggest is that 80% of the Indian population lacks a way to pay electronically for purchases. Cash is still king, accounting for $1.4 trillion in transactions annually. Early online retailers have found creative solutions, such as offering cash-on-delivery as a payment option. It's also creating a distinct opportunity for mobile wallets to serve the large, unbanked population.

Adapt to Disrupt

Getting products to customers can be another obstacle. Like their US counterparts, Indian online shoppers are fond of next-day delivery. It's a possibility in the larger cities, but in a country that stretches from the Himalayas to the Indian Ocean, many remote and more rural areas remain underserved by third-party logistics companies. Inefficient road and rail systems also mean that online retailers rely mostly on air transportation, which makes delivering packages to those smaller cities and towns even more expensive.

Still, for first movers and savvy investors who can adapt to disrupt—like the eCommerce giant that's hiring dabbawalas for local deliveries—these problems may be speed bumps rather than roadblocks.

Morgan Stanley Research has written a series of reports on “The Next India," including this recent installment on the rise of the Internet in India. Explore more Ideas and Research, or contact your Morgan Stanley representative for the full report. Find a Financial Advisor to discuss your investment goals and strategy.

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