In these festive weeks, the sight of a cubicle slave hunched over his computer could mean one of two things: immense work pressure as the year draws to an end or eager participation in one of the growing number of online sales. Few could have missed the advertising blitz over the past few days to announce the attractive discounts being offered by online companies that are chasing market share by using cheap capital from venture capital firms.
The work done by the technical advisory committee of the Reserve Bank of India is usually a world apart from the online discounting wars that have gripped at least the more affluent parts of urban India. However, the two worlds have improbably intersected in the latest minutes of the committee released by the Indian central bank on Wednesday. The news reports about what was discussed have habitually focused on what the various members of the committee recommended in terms of interest rate action a few days before Raghuram Rajan cut the repo rate by an unexpected 50 basis points.
But here is one sentence in the edited minutes that deserves more attention: “Moreover, there has been comfort on the inflation front—wholesale prices are contracting, GDP consumption deflator has been low at around 3%, and with vendors engaged in e-commerce offering low prices, retail inflation may be lower than what the headline number suggests.” (Italics added.) It would seem from these comments that the discount wars in the online world are actually feeding into the monetary policy outlook. One reason why Raghuram Rajan went in for a deep rate cut could be that the official consumer price inflation numbers have not yet begun to capture the sharp fall in prices online. The inflation numbers that are widely accepted could be understating the extent to which price pressures have actually eased.
Few will now remember the heated debates about a decade ago on whether India should allow big-box retailers to open outlets in the country. There was an understandable fear that these organized retailers would throw millions of neighbourhood stores out of business. One argument made then in favour of the introduction of big-box retailers was that their superior supply chain capabilities would allow them to offer lower prices to harried consumers. A few US economists had already noted the positive Wal-Mart effect on food prices in that country.
Those debates are behind us, but the underlying possibility remains. Digital commerce companies have not only the sourcing skills of the big-box retailers but also algorithms that lead to efficient price discovery. There is no doubt that some of the recent online discount wars are being funded by cheap capital rather than better operating efficiency alone, but the structural advantages of e-commerce cannot be denied either.
Indian inflation is a complex animal—and deeply dependent on disparate factors such as money supply, the food price policy of the government and international energy prices. So, we would not want to overstate the importance of e-commerce as a factor. But it is also true that the new digital commerce platforms are offering prices that are lower than what the official consumer prices captured by government statisticians suggest. That is perhaps what the economists advising the Indian central bank meant when they noted this factor in these latest discussions.
There is one immediate suggestion. Private sector economists should begin to construct price indexes that take into account the prices being offered online, as another reference point beyond the official inflation statistics. The availability of adequate computing power, big data analytics and algorithms can make the task easier than it sounds.
Good policy has to be built on the bedrock of good data. That is more easily available these days as far as prices are concerned. And that is why we found the discussion on e-commerce in the midst of a meeting on monetary policy so interesting.
