India had the third largest (243.2mn) number of internet users in the world in 2014. The pace accelerated over 2015 with 375mn user base in October 2015, according to a joint report by internet and Mobile Association of India (IAMAI), an industry body and IMRB, a market research agency. It is projected to reach 402mn, ahead of the US though behind China, by December 2015.
While the base and growth in internet users has been impressive, the penetration rate performance has been tepid relative to that in the US and China. We believe India is now in the phase of a continual acceleration in the penetration rate. Our analysis of similar trends in China and the US indicates post the double digit threshold, penetration rate typically starts increasing by 5%+ per annum. We believe this can be attributed to a) the network effect (the more people use internet, the more they draw in others in their network to also use it); b) emergence of an ecosystem (post the threshold, the growing economic viability starts bringing in service providers that deepens and expands the usage portfolio); and c) likely decline in access-costs (we believe access infrastructure providers typically focus on volume growth than realization in the early growth phase that inter-alia leads to reduced unit access costs).
Like China, we expect internet adoption in India to be also mobile-centric with the declining smartphone prices and concurrent roll-outs of 3G/4G networks (such as Reliance Jio). During the initial phase, the use of Internet which was only restricted to access information and exchange e-mails has now adopted Transactions like Ticketing, e-commerce, Bill payments, Online Banking, etc as penetration grows and Internet simplifies the ease of doing business.