Amazon (AMZN -0.16%) has been facing a slew of challenges in India's fast-growing e-commerce market from the likes of Walmart and local rival JioMart, but the American giant has been taking smart steps to ensure that it remains a top player in that lucrative market.

After giving its grocery business a shot in the arm last month, Amazon has now made another big announcement that shows how it is working toward capturing a bigger share of India's multibillion-dollar e-commerce prize. Let's take a closer look.

"E-commerce" and the Indian flag printed on keyboard buttons.

Image source: Getty Images.

Amazon's fast-growing local store network in India is great news

It has been less than a year since Amazon launched its Local Shops on Amazon program in India. Deployed during India's strict lockdown to contain the novel coronavirus pandemic in April 2020, the program became an instant hit as it allowed customers to place orders from their neighborhood stores and get quick deliveries.

Over 5,000 local stores selling a wide range of items such as groceries, furniture, electronics, apparel, toys, and furnishings, among others, signed up for the Local Shops pilot program in April last year. Amazon now says that the program has grown to more than 50,000 sellers spread across 450 Indian cities.

The company also provided some interesting insights into the program. For instance, grocery items are the most popular on Local Shops, and the program has gained impressive traction in smaller Indian cities. These two developments bode well for Amazon, as the online grocery market in India is expected to grow eightfold over the next five years and hit $18 billion in revenue, according to a third-party report.

Meanwhile, smaller Indian cities are now accounting for a bigger volume of e-commerce sales. Management consulting firm Kearney points out that e-commerce growth in Tier 2 and Tier 3 cities in India is outpacing that of Tier 1 cities. More specifically, the volume share of these smaller cities in India's e-commerce market increased to 46% in the fourth quarter of 2020 from 32% a year earlier.

What's more, online spending per customer in Tier 2 and Tier 3 cities seems to have improved as well, as these cities held a 43% share of the e-commerce sales value last quarter, up from 26% a year ago. So the rapid growth of Amazon's Local Shops program can give it a huge boost in the long run by helping it tap into the growth hotspots of the Indian e-commerce market.

A look at the bigger picture

Amazon reportedly controlled 30% of India's e-commerce market at the end of 2018, according to RBC Capital Markets. In 2019, RBC said that Amazon could increase its share to 35% by 2023, with the e-commerce giant getting 4% of its total revenue and 13% of its international revenue from India by then. The good part is that the company seems to be making progress toward getting a bigger share of its revenue from India.

Amazon is taking away market share from key rivals in important areas, and the new steps it is taking to bolster its presence among neighborhood stores could help it maintain its strong momentum. In fact, Amazon could continue to rapidly scale up its Local Shops program, as there are reportedly more than 10 million neighborhood stores (known as kirana locally in India) spread across the country.

So don't be surprised to see Amazon sustain its impressive pace of growth in India. The company's e-commerce marketplace revenue in India was up 42% in fiscal 2020 (which ended in March last year) to 11,028 crore Indian rupees ($1.5 billion at the current exchange rate).

The Indian Brand Equity Foundation estimates that India's e-commerce revenue could jump to $200 billion by 2026. So Amazon could add billions of dollars to its revenue in the long run if it continues to hold a nice chunk of India's fast-growing e-commerce market and remain a top retail stock for years to come given the huge potential over there.