The growth of e-commerce increases the size of the market, especially in rural areas.
The good thing about being a late developing economy is that we have such a lot of international experiences to learn from. The extraordinary growth of the Chinese e-commerce market, for example, has lessons for India, not just from the point of view of the companies operating in the sector or for their investors, but also in its effects on the economy.
That’s where a new World Bank research paper, titled ‘E-Commerce Development and Household Consumption Growth in China’, by Xubei Luo, Yue Wang and Xiabo Zhang, comes in handy. China is the largest e-commerce market in the world -- of its 772 million internet users in 2017, 533 million made purchases online. In comparison, a recent McKinsey Global Institute report on Digital India says that the number of online shoppers in India was 176.8 million in 2017, four times more than in 2013. This report also said digital retail’s share of trade is 5 percent in India, compared to 15 percent for China. It forecasts that e-commerce retail sales would rise to 15 percent in India by 2025, underlining its immense potential.
Will the growth of online channels cannibalise offline transactions? The World Bank research paper finds that the growth of e-commerce has led to higher consumption growth in China. In other words, e-commerce increases the size of the market. The researchers attribute the rise in household consumption to lower search costs and lower transaction costs, as consumers spend less on transport. This lowers the cost of living and therefore increases spending power. Indeed, a 2013 McKinsey report (China’s e-tail revolution: Online as a catalyst for growth) said e-tailing may have lowered China’s average retail price by 0.2 to 0.4 percent in 2011 and 0.3 to 0.6 percent in 2012, leaving more money in the hands of consumers.
That’s not all. The World Bank paper also finds that the consumers most likely to benefit from e-commerce are in rural and remote areas, where some products are not easily available. The authors cite an earlier study that found that ‘62 percent of goods bought through Alibaba’s Rural Taobao online terminal were not available in the village, which rises to 84 percent for durable goods.’ This pent-up demand for goods not available in rural stores is thus satisfied, resulting in increased consumption. The paper says, ‘the impact on consumption is conspicuously larger for the rural residents, inland regions, and the poor households, suggesting that e-commerce development helps reduce spatial inequality in consumption.’ In similar vein, McKinsey’s Digital India study points out that ‘consumers in smaller cities, who do not have retail choices comparable to those of large metro areas, account for more than half of new e-commerce purchases in India.’
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