Ecommerce is developing rapidly in India. The increasing penetration of smartphones and mobile data, along with the rise in digital literacy, has led to an influx of investment in ecommerce startups.
India Brand Equity Foundation, a federal agency, projects Indian ecommerce sales to reach $64 billion by 2020 and $200 billion by 2026 from $38.5 billion in 2017. IBEF projects India to surpass the U.S. to become the second largest ecommerce market in the world by 2034.
India is an enticing opportunity, in other words. For merchants interested in entering that market, here are three tips.
1. Choose a Business Model
- Ecommerce site. Setting up a proprietary ecommerce store is a good way to enter the market if you have a unique product that only you can source. However, it is expensive and time-consuming, requiring the setting up of an online store, integrating a secure payment gateway, and building a logistics chain, among other tasks. However, this option allows you to create a brand name.
- Marketplaces. The marketplace model is the easiest and fastest way to sell products online in India. Flipkart, along with its fashion arm Myntra, is the leading marketplace in India with a 38.5 percent market share. Amazon India is second with a 29 percent market share. Other marketplaces include Snapdeal, ShopClues, and Paytm.
Non-Indian merchants can join any of these marketplaces. It typically requires registering your company, obtaining a tax number, and opening a bank account. The marketplace will take care of logistics and payments.
2. Register Your Business
You have three primary options for registering your business: a sole proprietorship, a private or public company, and a limited liability partnership. Starting a private company is the best option in most cases, especially for smaller companies.
LLPs established by foreigners face roadblocks in India owing to stringent foreign direct investment regulations. A sole proprietorship cannot exceed two crore rupees in annual revenue — less than $300,000. Plus, it can’t allocate or transfer shares to others.
The registration process for a private company, on the other hand, is relatively easy, less expensive, and requires fewer documents. It stipulates at least two (and no more than 200) shareholders of non-transferable shares with a minimum share capital of INR100,000 (approximately $1,500). It also requires at least one director who is a resident of India or has lived in India for more than 182 days in the previous financial year.
Keep your identification and proof of address ready before the process begins. You will need to obtain a Digital Signature Certificate, Director Identification Number, certificate of incorporation or company registration certificate, and approval of the company name.
Once registered, the company must obtain a valid Permanent Account Number, a Goods and Services Tax Identification Number, open a bank account, and set up a payment gateway. A company may also need additional documents on a case-to-case basis if the authorities so demand. The process is a bit complicated; hiring a lawyer is often a good idea.
3. Understand Logistics, Payments
Indian ecommerce is still grappling with logistics and payments. Be prepared to face difficulties surrounding these two issues.
- Logistics will likely be your biggest obstacle if you launch your own ecommerce store. Building a robust supply chain can be an arduous process in India, as the infrastructure in most regions is still underdeveloped. A marketplace, however, will take care of logistics for you.
International logistics players such as FedEx and UPS operate in India. DTDC Express is a leading, nationwide domestic provider. But all have limited warehousing and infrastructure facilities. As a result, they have to rely on smaller and cheaper third-party companies for delivery.
The problem worsens in rural areas and small cities. But, overall, delivery options are getting better (gradually). For example, DHL recently launched its ecommerce logistics division in India and will soon commence its operations. This includes DHL SmarTrucking, a road-based transportation system.
- Payments. Setting up a payment gateway is easy. But avoiding the cash-on-delivery model is nearly impossible. Most Indian consumers prefer to pay in cash. Unfortunately, the COD-based payment method is expensive. Merchants have to pay multiple fees — in addition to the courier charges — and also pay for the return if the customer refuses to accept the package.
COD also delays receiving the money. Merchants have to restock inventory before the cash from the last sales reaches your bank account. Furthermore, carrying cash is risky. Theft can lead to irretrievable financial losses for you and your courier partner.
Thankfully, digital payments are slowly gaining acceptance. Two actions by the Indian government have helped. First, the government reduced the amount of currency in circulation, which hampered the ability of consumers to withdraw cash from ATMs to pay for COD purchases. Second, the government will pay the merchant account fees of smaller businesses for two years starting Jan. 1, 2018, encouraging those businesses to accept debit cards and other digital payments.
Moreover, the entry of global players into India’s digital payment space is expected to grow the segment by about five-fold by 2023, according to Credit Suisse, the international banking firm.