I think the valuation would be justified if they can leverage their IP and platform and are able to scale globally. Maybe the investors have seen how good and scalable their internal operations are.
You are right, India is a small market right now, but if they can build a low-cost model armed with a global supply chain, they can compete with Amazon in other markets too.
There is nothing unique about Flipkart's IP or business model that it will beat well established players worldwide. Is there any example of any Indian or other third world company expanding into US e-commerce or tech sector ?
Zoho is a great example i can think of an Indian startup (they were founded in India and primarily work out of Chennai even though they are headquartered in the US) which is making inroads into the CRM market worldwide; which is especially impressive considering that they are 100% bootstrapped and have rebuffed multiple attempts at acquistion including from Salesforce.com. They are also unconventional in that they don't look at degrees and even hire kids straight from high school. This despite the fact that the founder and CEO did his grad in IIT and got his PhD. from Princeton.
You are right, India is a small market right now, but if they can build a low-cost model armed with a global supply chain, they can compete with Amazon in other markets too.