What Does the Launch of Amazon Prime in India Mean for the Company and the Country?

On Tuesday, Amazon announced the launch of its globally popular Amazon Prime membership program in India. With Prime, Indian customers in over 100 cities will be able to enjoy unlimited free one-day and two-day delivery on lakhs of eligible products from India’s largest online shopping selection.

Amazon Prime membership in India is offered at an introductory annual subscription fee of INR. 499, a discount of INR. 500 over the list price of INR. 999. As a special promotion, customers who sign up early can enjoy Prime free for 60 days, which is twice the normal trial period globally.

In addition, Prime members in 20 cities can also choose same-day, morning or scheduled delivery at a discounted fee of INR 50 per order on over 10,000 products. For deliveries to cities not yet eligible for one-day or two-day delivery, members will receive free delivery with no minimum purchase.

Why is Amazon so interested in India?

While Amazon Prime in India promises to be a great deal, it is a piece of a larger picture and a strategy Jeff Bezos has in mind for Amazon with regard to the Indian consumer market. Earlier in June, Amazon announced a $3-billion-dollar investment in its Indian business (with Prime Minister Narendra Modi, for whom canvassing foreign investment from American companies has been an important agenda, present). In addition to substantial investment, Amazon says it has created 45,000 jobs in India.

Here is the reason for this investment: Amazon expects India to become the second largest e-commerce market in the world (after China) within a decade and the company can't afford to not capture a portion of that share. As Diego Piacentini, Amazon’s SVP for international retail, who oversees operations in Asia and Europe, commented, The size of (the) opportunity is so large it will be measured in trillions, not billions—trillions of dollars, that is, not rupees.

However, as Piacentini shared with Fortune, any big return from investments in the country will come at a price. We know that in order to win in India, we need to do things we have never done in any other country. We need great people, a great platform, and honestly, a lot of money.

Let’s look at some stats dug up by curious minds that could explain Amazon’s readiness to make a dent in a pocket for leadership in India:

  • Data from 2015 suggests that India’s retail market of $503.7 billion is to be ahead of Brazil ($480 billion), Russia ($398 billion) and Mexico ($354 billion). However, compared to the US ($3.2 trillion) and China ($4.5 trillion), it is still considered to be a small market.
  • About 38% of India’s population has access to the Internet, which means that entering Internet companies have an outstanding room for growth with the remaining 62%. With Google and Facebook heavily investing in expanding online access among the Indian population, e-commerce giants with cutthroat prices will have leverage in accessing potential shoppers.

But does India really have as much potential as investors believe?

While India does have a number of demographic factors in its favor, the truth is that there are a number of hefty obstacles that also need to be overcome:

  • English literacy in India isn’t as high as expected. While India’s overall literacy rate is over 70%, China’s is over 90%. Much of that literacy in India is in a language other than English. In fact, less than 20% of Indian students are even learning English in school and the vast majority of the adult population doesn’t speak English either. Without a significant investment in multiple language websites and product content that is user-friendly to all shoppers, the addressable market for e-commerce may only be 200 million consumers, which is comparable (population-wise) to the US.
  • Income is still low. While Indian incomes are expected to rise in the decades to come, the average monthly income of Indian consumers is around $300 compared to more than $650 in China. Betting on e-commerce in India is to be wildly bullish that Indian incomes will more than double in the coming years. This is completely plausible given that China tripled the income of its citizens in the last decade (though some of that was due to inflation) but it is also highly dependent on a government that makes this a key priority.
  • Connectivity still is a work in progress. The good news is that India’s Internet population is nearly 500M, growing at 30% annually. A bit less than half of those consumers are smartphone users. Smartphones are of course critical to the growth of e-commerce. China however now has twice as many smartphone users as India does.

All this said, the behavior of India’s Web-shopping population—active, affluent, English-speaking consumers—is on par with Chinese consumers. The challenge for India will be how rapidly the country can grow that percent of its population. Without more shoppers that have more money, the investments in Indian e-commerce may never have a positive ROI.