E-Commerce Reaches India's Small Towns

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For most of its first decade, Indian online retail was a metropolitan business. The customers were in Bengaluru, Delhi, Mumbai, Hyderabad, Pune and Chennai, they paid with credit cards, and the warehouses and courier networks were built to serve them. Today the growth is somewhere else. The majority of new orders on the large platforms come from what Indian business language calls tier two and tier three towns: places such as Guntur, Jalandhar, Siliguri, Kota, Warangal, Bareilly and several thousand smaller settlements with populations in the tens or low hundreds of thousands. The shift is not a marketing story. It happened because four separate pieces of infrastructure, none of them built primarily for retail, fell into place within a few years of each other.

The first was mobile data. India's internet was thin, expensive and mostly urban until Reliance Jio launched a nationwide fourth generation network in September 2016, offering free service for an extended introductory period and then tariffs that collapsed the market price of data. Competitors were forced to match, consolidation followed, and within about two years India had moved from among the more expensive markets for mobile data to among the cheapest in the world, with per user consumption rising accordingly. The device side moved with it: inexpensive Android handsets, many assembled in India, put a browser and a camera in the hands of people who had never owned a computer. Crucially, this was a first screen rather than a second screen, which is why Indian shopping applications are designed for a phone held in one hand on an unreliable connection rather than for a desktop.

Payments, taxes and the plumbing

The second piece was payments. The Unified Payments Interface, built by the National Payments Corporation of India and launched in 2016, allowed any bank account to send money to any other instantly, at no charge to the customer, through a simple identifier rather than an account number. It became one of the highest volume real time payment systems anywhere, and it removed the requirement for a credit card, which most Indian shoppers have never held. Cash on delivery, long the dominant method and a heavy cost for sellers because of failed deliveries and cash handling, has fallen substantially as a share of orders, though it has not disappeared. Alongside UPI, the biometric identity system and the expansion of no frills bank accounts under the Jan Dhan programme brought hundreds of millions of people into the formal banking system for the first time.

The third was tax. Before the Goods and Services Tax took effect on 1 July 2017, moving goods between states meant navigating a patchwork of state sales taxes, entry taxes and octroi levies, with lorries queuing for hours at state border check posts. Warehousing networks were designed around tax boundaries rather than around demand. The unified tax dismantled the check posts, replaced them with an electronic waybill, and made it rational to hold stock in a few large regional warehouses and ship anywhere. Logistics companies built for that world: Delhivery, Ecom Express, Xpressbees and the in house arms of the big platforms, layered on top of India Post, which reaches more than a hundred and fifty thousand post offices and remains the only network that serves the remotest pin codes at all.

The fourth was language and interface design. Only a minority of Indians read English comfortably. Platforms that grew beyond the metros did so by adding Hindi, Tamil, Telugu, Kannada, Bengali, Marathi and other interfaces, by using images and video in place of text, and by allowing voice search. Meesho took the logic furthest, building a model in which individual resellers, often women working from home, share product images through messaging applications with their own social circles, add a margin and place the order. That approach reached customers who would not download a shopping application at all, and it made social trust rather than brand advertising the mechanism of the sale.

Who is winning and what is disputed

The market is dominated by a small number of players. Flipkart, founded in Bengaluru in 2007 by Sachin and Binny Bansal as an online bookseller, became the largest home grown platform and was majority acquired by Walmart in 2018. Amazon entered India in 2013 and has invested heavily. Reliance, with JioMart, and the Tata group, with Tata Neu and BigBasket, have built competing ecosystems anchored in existing retail and telecom assets. Meesho, Nykaa in beauty and Myntra in fashion occupy strong niches. A separate quick commerce segment, promising delivery of groceries in minutes from small neighbourhood dark stores, grew explosively but remains concentrated in larger cities where population density makes the economics work.

Government policy has tried to shape this. Foreign investment rules permit full foreign ownership of a marketplace that connects independent sellers to buyers, but not of an inventory led retailer that owns the goods it sells. A policy note issued in December 2018 and effective from February 2019 tightened the distinction, barring platforms from selling goods through companies in which they hold equity and from entering exclusive sale arrangements. Traders' associations argue the large platforms still structure their operations to evade the spirit of the rule, and the Competition Commission of India opened an investigation into the practices of the two largest platforms in 2020, which the Supreme Court allowed to proceed. More recently the government has promoted the Open Network for Digital Commerce, an attempt to build a shared protocol so that any buyer application can transact with any seller application, breaking the closed platform model. Whether it can achieve meaningful scale is not yet settled.

The genuinely open question is what all this means for the roughly twelve million small neighbourhood shops that still handle the bulk of Indian retail. The alarmist version, that online platforms will eliminate the kirana store, has not happened; many such shops have instead become delivery points, digital payment acceptors and stockists for platform supply chains. The more measured concern is about pricing power: deep discounts funded by investor capital, preferential treatment of favoured sellers, and the eventual squeeze on margins once competition thins. Small town growth is also partly a discount artefact, and the industry's own reported order volumes rise sharply around the festival sales held near Diwali each year and fall afterwards. What is not in doubt is that a household in a district town now has access to a range of goods, at prices set nationally rather than locally, that was simply unavailable a decade ago.

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