India plans an e-commerce revolution with ONDC

It is amazing how fast the sweeping digitisation has been happening in India over the past decade. First came the Aadhaar cards, giving over 90 percent of its citizens a digital identity. Then came UPI, which enabled seamless money transactions over the phone.

The next revolution that the Indian government aims for is the Open Network for Digital Commerce (ONDC), which is now in its beta stage. A project under the central government's Department for Promotion of Industry and Internal Trade, the platform has set an ambitious goal to democratise e-commerce activities.

The establishment of India’s digital payments also faced some initial challenges, but they skyrocketed after the introduction of the digital money transaction platform UPI (Unified Payments Interface). Multiple mobile digital payment services like Google Pay, PhonePe, and BharatPe now use UPI for transferring money from bank to bank.

The interoperability of the UPI application was the reason for its huge success and provided unprecedented convenience to the public. From purchasing a heavy-duty item to paying for a single tea at a wayside stall, using your phone has become the norm for millions in India.

Creating a similar system is the next challenge for the digital public good, as these initiatives are generally called, for Indian creators. The process is spearheaded by Nandan Nilekani, the non-executive chairman of software behemoth Infosys and the man behind Aadhaar cards.

“ONDC is another tech-based initiative to transform the way e-commerce functions in the country by enabling e-commerce through an open protocol based on open-source specifications,” explains ONDC’s site.

If and when ONDC becomes popular, the majority of India's online trade could shift to multiple e-commerce platforms instead of being dominated by a few, as is currently the case. This open protocol system will make the adoption of e-commerce easy and rapid.

“ONDC will truly reflect the physical market in a couple of years," said Thampy Koshy, the CEO of ONDC, who graduated from the College of Engineering, Trivandrum, in a recent interview with Forbes India.

Currently, private entities like Amazon and Flipkart command almost 70 percent of the total e-commerce activity in India. Many small and medium-sized businesses shy away from these platforms due to the high charges and commissions they impose. By popularising ONDC, the tight grip of these major players can be loosened, and e-commerce can be democratised, providing even the local corner shop with access to internet trade.

Alpha testing of the government-supported interoperable e-commerce platform commenced in April 2022, and it is presently active across more than 273 cities. ONDC started beta testing in Bengaluru in September 2022 and in Meerut in December 2022. The network is scheduled to go live in Mumbai, Delhi, Chennai, Hyderabad, and Kolkata this month.

In Bangalore, ONDC has made a remarkable impact, particularly with the mobility app Namma Yatri. Since its launch ten months ago, Namma Yatri has recorded a sharp increase in usage, and auto drivers are earning more as there are no hefty cuts like those imposed by established players such as Uber and Ola.

Inspired by the success of Namma Yatri, the Autorickshaw Drivers Union is set to launch MetroMitra by the end of August 2023. This app will provide last-mile connectivity from metro stations.

How It Works

To put it simply, ONDC serves as a platform that connects buyers and sellers. When a buyer uses an ONDC-linked app to shop for groceries, for example, they will be provided with a detailed list of ONDC-affiliated sellers who offer the same product. Even a small-scale local shop can participate in this action through ONDC’s technology without spending a significant amount of money or getting overwhelmed by the technical aspects.

In popular e-commerce apps today, customers can only choose products available within the app they are using. The selling platform controls the product catalogue, payment processing, and order delivery – the three crucial stages of a transaction. However, with the implementation of ONDC, these three stages become independent.

Customers will have the freedom to choose products from any seller, select their preferred delivery partner, and make payments using their usual payment app. As for the sellers, all they need to do is join an app that is integrated with ONDC, which will open up the online market for them.

When a customer searches for a product on an ONDC-integrated app, they will receive results from all sellers of that product listed across all apps on the platform. Once the customer selects the desired product, they have the flexibility to choose their preferred delivery agency and make payments using their own UPI payment system. If a retailer does not have a delivery system in place, ONDC will step in to address the issue.

This marks a radical shift from the current e-commerce practice, where consumers are limited to merchants listed on a single platform like Amazon, Myntra, or Flipkart, and all aspects of the transaction, from order placement to payment and delivery, occur within the same system.

With ONDC, the focus is on putting the buyers at the centre, providing them with a wider choice even if the sellers are listed on different apps. This approach aims to reduce monopoly in the digital marketplace and foster increased market competition, as envisioned by the government.

Local merchants and delivery partners will gain from ONDC by receiving improved digital visibility while the local corner shops have the opportunity to tap into the e-commerce world.

Hurdles ahead

Like any other e-commerce sector, ONDC has faced questions and concerns regarding data privacy, and the national debate about enacting a law to address these issues is ongoing.

Tax collection has also been a point of contention. The increased popularity of rides on the Namma Yatri platform has drawn attention, with other ride-hailing apps such as Ola, Uber, and Rapido expressing dissatisfaction. They argue that Namma Yatri's refusal to charge Goods and Services Tax (GST) on rides gives it an unfair advantage. Competitors are seeking to pressure tax authorities to impose GST on Namma Yatri rides as well.

However, the biggest challenge lies in encouraging buyers and sellers to migrate to platforms integrated with ONDC. According to a report by Business Today, ONDC still lags behind with a relatively low number of orders compared to industry giants like Flipkart and Amazon, which collectively handle millions of orders daily.

According to Dilip Vamanan, Co-founder of SellerApp, such marketplaces typically take over a decade to fully shape up. Partner for Government and Public Sector Consulting at EY India, Amar Shankar, also noted that consumer awareness and familiarity with the advantages of the ONDC platform are crucial.

The top management of ONDC aims to bring 120 million kiranas (like Kerala’s own “murukkan kadas”) online, along with larger players in the e-commerce space. It is an ambitious goal, and there are significant challenges to overcome.

However, ONDC boss T Koshy remains undeterred. He draws a parallel to the initial scepticism surrounding the launch of UPI and how it is now widely accepted as one of the best in the world. 

Despite the challenges, ONDC has already found a major client in Kerala. Women’s self-help groups under Kudumbashree have established an online presence to sell their products, showcasing the platform’s potential impact.

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