Background: Online Retail in India

business growth. Evidence from a World Bank survey among small businesses that are active on the Chaldal online platform in Bangladesh, for instance, suggests that signing up for an online platform increases the incentives for business formalization and helps entrepreneurs gain access to bank financing (Bussolo et al. 2021).

India is home to one of the most rapidly growing e-commerce markets in the world. With 697 million internet users (approximately 40 percent of the population), India has the world’s second largest internet user base, behind only China (Times of India 2014). However, the penetration of online sales—while difficult to measure in a way that is comparable across countries—is still less extensive in India than in more developed markets such as the United States, where more than 80 percent of households use online retail channels and online sales account for about 12 percent of total retail sales (Smith and Anderson 2016; US Census Bureau 2021). Today, 5 percent of all retail sales in India (US$46 billion) are e-commerce sales, and the number of e-commerce transactions is expected to grow by 20 percent annually in coming years (IBEF 2021).

Significant consolidation has occurred recently in the number of online retail platforms serving the Indian market. In a first wave of consolidation, mergers and acquisitions among local e-commerce platforms created a number of local providers with national reach. In a second wave of consolidation, international retailers—such as Alibaba, Amazon, and Walmart—entered the Indian market and acquired local online retailers. This process has made online retail channels more attractive for small businesses that can now reach a larger market by selling their products through one online retail platform. It has also given rise, however, to some concerns about the market power wielded by large online retailers. In an effort to address these concerns, the government of India introduced new regulations in February 2019 that were intended to curb the market power of international retailers. These new regulations prohibit, for example, international retailers from holding inventory in their own warehouses and limit their role to that of a marketplace that intermediates between vendors and customers. In addition, the new regulations place limits on vertical integration. International retailers are, for instance, prohibited from selling products of companies in which they hold an equity stake; they are also prohibited from entering into exclusive sales agreements with vendors, which are common in many online marketplaces.

The use of online sales channels in India has been growing rapidly among small businesses. Data from the Consumer Pyramids Household Survey (CPHS), a survey of a representative sample of small businesses, indicate that, among family businesses, 11 percent of those with five or more employees and 7 percent of those with fewer than five employees use e-commerce.1 According to most definitions, these businesses would be considered informal, and it has been argued that the increasing use of online retail is a development that may facilitate business formalization in the longer run. For example,