The coronavirus (COVID) pandemic has introduced an outlet bias, as a large share of total spending moved online that is charging a mark-up over off-line prices. In fact, In fact, the price of e-commerce platforms and kirana stores has converged, says a research note from State Bank of India (SBI).
According to the report, during the pandemic, the use of online delivery platforms, such as Grofers, Nature's Basket and Licious has soared and most retailers on these platforms tend to have higher prices than in their physical stores.
During this crisis, consumers have spent a lot of time at home and online – and have become comfortable doing a set of activities online. So, people are also shopping essential items from e-commerce platforms.
Interestingly, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, says, "before COVID-19, the prices of e-commerce outlets were much lower than the maximum retail price (MRP). However, due to the rise in demand and less supply, now there is no or less bulk discounts in e-commerce."
The analysis carried out by SBI reveals two distinct trends. “Firstly, the trends between April to November 2020. In principle, the share of discretionary spending of consumers that had reached as much as 35% of total cards spending in February crashed to 16% in April.”
"Since April, the share of discretionary spends has, however, fluctuated wildly between 15% and 35% indicating consumers are still uncertain when to splurge on items of discretionary consumption, as uncertainty has prevailed in the minds of consumers with different phases of economy opening,” it added.
However, SBI points out that this change in online price is not accounted in the data collection methodology used by the National Statistics Office (NSO), the change in spending outlets could cause another downward bias in the headline consumer price index (CPI) as computed by NSO. If NSO considers online prices, there would be 10 to 15 basis points (bps) impact on CPI inflation, it added.
CPI inflation slowed to 4.29% in April 2021 from 5.52% in March this year, primarily due to easing food prices. However, SBI feels, even as the pandemic rages through India, it is worthwhile to look beyond the headline inflation. It says, rural core has now jumped to 6.4% in April 2021 and would rise further in May this year.
"Increasing health expenditure because of the pandemic is having a meaningful impact in rural areas. Item-wise inflation of health CPI shows persistent month-on-month increase in inflation of non-institutional medicine, and X-ray, electrocardiogram (ECG), and pathological tests. Even hospital and nursing home charges have increased in April 2021," SBI says.
In the current pandemic, the report says, headline inflation may not be incorrect to look at. It says, "A more important price concept is the relative prices, which are not a monetary phenomenon but their movements convey important information about the scarcity of particular goods and services as now like health."
For example, SBI says, overall CPI declined in April 2021 because of significant decline in food CPI, but when the relative prices of food items are compared to overall CPI, the deceleration was not sharp as it was seen in actual food CPI.
"Similarly, for certain items like fuel and health the increase in relative prices is maximum. Interestingly, the core CPI which was showing a decline of 57 bps increased in relative terms by 18 points. We believe such distortions in relative prices must be looked through now as it could have an important impact on ratcheting up future inflationary expectations," the report says.
Against this backdrop, SBI provides three conclusions.
First, it says, health expenditure currently at 5% of overall private final consumption expenditure (PFCE), could increase by at least 11% from the current level and this is likely to also result in squeeze in expenditure on other items of discretionary consumption, a recipe for a cutback in consumption spending.
Second, the increase in fuel prices since December 2020, as the government is facing a collapse in revenue receipts, is having a direct impact on squeeze in consumption spending on discretionary items, other than on health, which is currently unavoidable.
"But the most definitive conclusion when we re-estimated CPI headline by using SBI card spend data and through Paasche's Index, since December 2020, is that our CPI computed inflation for the five-month ended April 2021 is higher than Central Statistics Office (CSO) estimate on an average by 60 bps, while for April 2021, the computed inflation is at 5.35%," SBI says.
"This has happened as spend on oil in December has crowded out the spending on other discretionary items, like health, grocery and utility services that was the trend in earlier months which is worrisome. In fact, the share of non-discretionary spend has jumped to 59% in April 2021 from 52% in previous month. This demands a cut in oil prices through tax rationalization, otherwise consumers' non-discretionary spending will continue to get distorted and crowd out discretionary expenses.
"This will also impart a clear upward bias in inflation," the report says, adding, "There has been an increase in use of online delivery platforms, which is not considered by NSO and if NSO considers online prices, there would be 10 to 15 bps impact on CPI inflation."
Third, SBI says, the rise in commodity prices has fuelled market expectation of possible rate hike by US Federal Reserve. US job openings surged in March to a record high, underscoring a rapid increase in labour demand as vaccinations accelerate and states reopen their economies, but it appears companies are unable to find the workers they need hence vacancies were not filled.
"However, policy circles still maintain that current inflationary pressure in the US economy is transitory in nature and may not ultimately call for rake hike.
"We, however, will continue to watch this space for any future trends. All this will make it difficult for Reserve Bank of India (RBI) to manage the conflicting targets of inflation, exchange rate and adequate liquidity amidst weak growth," the report concludes.