Photo: Jayachandran/Mint
Photo: Jayachandran/Mint

What e-commerce could mean for inflation in India

It is an area rich in data waiting to be minedand the results could bring more clarity to India's perennial inflation debates

Jeff Bezos is an exceedingly ambitious man. But even he is unlikely to have imagined the full range of economic consequences of the spread of e-commerce when he founded Amazon back in 1995. A recent National Bureau of Economic Research (NBER) paper, Internet Rising, Prices Falling: Measuring Inflation In A World Of E-Commerce, by Austan D. Goolsbee and Peter J. Klenow, studies those consequences. There are lessons here for Indian policymakers.

Two decades ago, economists had already agreed in principle that e-commerce could have a disinflationary effect. In principle, though, is the operative bit here. The volume of data and the means to track it required to test that idea were missing. That is changing now. In 2016, Adobe launched the Digital Price Index, a measure of inflation based on data from online purchases in the US. The Billion Prices Project, started in 2007 by the Massachusetts Institute of Technology’s Roberto Rigobon and Alberto Cavallo, is more ambitious. It collects data from dozens of countries in order to study high-frequency price dynamics and inflation measurement. There are other such projects as well.

The NBER paper is based on the former. It studied millions of data points for e-commerce transactions across categories. Adjusting for new goods—they tend to distort the picture—online inflation turned out to be more than 3 percentage points lower for the 2014-17 period than the consumer price index (CPI) inflation rate. The implications for monetary policy are obvious as the e-commerce share of the US retail market—currently at just over 8%—grows.

What, then, about India? The e-commerce sector currently forms a minuscule percentage of the retail market—1.5% as of FY17. But it is one of the fastest growing in the world, expected to account for 5.7% of retail sales by 2022. Policymakers have shown signs of turning their attention to it. The edited minutes of the October 2015 meeting of the technical advisory committee that advised the central bank on monetary policy at the time noted the possible effect of low e-commerce prices on retail inflation. And, in 2016, there were reports that the Union ministry of statistics and programme implementation bureaucrats who calculate the CPI were keen to introduce online prices into the mix.

Ritwik Banerjee, Chetan Subramanian and Nished Singhal have beaten them to it with their Economic & Political Weekly article last month, Predicting Food Price Inflation Through Online Inflation In India. They have focused on food and beverages since “a large share (45.86%) of food in India’s inflation means food prices affect inflation directly" and there is “a very high correlation of 0.978 between the food and beverage inflation index and the overall CPI inflation (data from January 2013 to January 2016)". They found that their online index closely tracked the level and dynamics of the CPI. That’s a valuable finding. The quantity, quality, frequency and ease of collection of online data is significantly better than comparable offline data. If it can be used to plug the holes in India’s leaky statistical framework, so much the better.

And the possibility of online retail exerting downward pressure on inflation, as it does in the US, for instance, should not be discounted. Take the sector Banerjee, Subramanian and Singhal have focused on. E-retail growth over the next few years is going to be driven by the online grocery business. There is currently something of a feeding frenzy here, from incumbents like Big Basket to challengers such as Amazon and Flipkart. Much like foreign direct investment-fuelled multi-brand retail—if it ever fought its way clear of the populist underbrush—this brings improved logistics, supply chains and economies of scale to the sector. That bodes well for damping inflation.

There are caveats, of course. For one, e-retail is new enough that it’s difficult to predict the long-term impact. Better transparency, price discovery and efficiency might exert downward pressure on prices in the short term. However, the long-term equilibrium may well look different. Secondly, the e-retail business model is built around low product prices and high sales volumes, given the high fixed costs and low marginal costs involved. That makes for fragile businesses. Little wonder that turning a profit is about as easy as squeezing blood out of a stone for so many e-commerce companies. Cheap capital won’t keep coming forever.

Regardless, e-commerce will become increasingly difficult for policymakers to overlook. They would do well to get a head start, as it had seemed they might back in 2016; the setting up of a Big Data analytics unit by the Reserve Bank of India is a step in the right direction here. The same goes for independent empirical research. This is an area rich in data waiting to be mined. The results could bring more clarity to India’s perennial inflation debates.

Should government statisticians start looking at online retail? Tell us at views@livemint.com

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