It is transaction costs all the way – Part 1

It is worth pondering this question: What exactly is the role of ICT in any economy?

This week, I would like to address myself to that question in detail. The answer can be succinctly stated as: It reduces transaction costs. It will take a pretty long time to explore that answer. But first a few personal experiences to set the stage would be appropriate.

Today I called up a local store which sells “white goods” (major appliances such as washing machines, etc.) I wanted to order an air-conditioner. Could I order the AC over the phone, I asked when the phone was finally answered by someone. I was told that I had to come down personally and bring cash. Will they accept a debit card? No. Will they deliver today? They can’t tell me that until I had paid and only then will they check to see if the department that does the delivery has the capacity to deliver today.

I drove to the bank to withdraw the cash. At the bank, the line for withdrawing cash was immensely long. I could not use the ATM because the amount I needed was above the ATM cash withdrawal limit. It took me a half hour before I had the cash in hand.

Next step: drive to the store. The closest branch was in Shivaji Nagar. I told the driver the address and we proceeded to drive the four or five kilometers to the store. It was on ‘L.J.’ road. The traffic was bad, as usual. The driver did not know where L.J. road was. We asked for directions from various taxi drivers. We traveled with hope thinking that this time the directions were right. In about 45 minutes, we had reached the store. It was closed because that branch of the store is normally closed on Mondays. I could not have found this out without going to the store. This was in Mumbai, the commercial capital of India.

I had spent about 2 hours in trying to buy something that in a different setting (for instance in California) it would have taken me all of 5 minutes and that too from the comfort of my home: I would have checked the prices of ACs on the web and ordered it online and paid for it with my credit card. Instead, after about 2 hours of frustration, I was still without what I wanted.

This little episode is indicative of a depressingly large set of similar experiences. The features of this set almost always include having to spend an inordinate amount of time searching. The search cost of locating a place is non-trivial. Street addresses don’t exist. You could be looking for a place with an address with reads “122/1/B Lajpat Nagar II”. You reach 121/1/B. And then you discover that 122 is not adjacent to 121 but is somewhere else altogether. Sequential numbers are not physically close. The house numbers are in the order in which the plots were registered, for instance. Once I spent about an hour hunting around for a place in Lajpat Nagar in Delhi. I am sure that I was not the first — nor I was the last person — to waste time and energy (gasoline) trying to locate an address there.

Another feature common to all the episodes includes transportation. On Saturday last, I was invited for dinner at a house that was about 5 kilometers (3 miles) from the Andheri local train station. I took a bus from the station. It took about 50 minutes for the bus to cover the 5 kilometers. Traffic moves about 8 kms an hour in the city of Mumbai, and at the breakneck speed of 18 kms an hour average on the nation’s highways.

Traffic is not the only thing that is slow. The movement of payments is an important function in any economy. I had to pay my brother Rs 25,000. I mailed him a check to Nasik without asking him first. He called to say that it will take about 3 weeks for that check to clear and so it would be good if I could send him cash or do a wire-transfer.

Cash is inconvenient to handle and carrying large sums is stressful. For furniture shopping, the only acceptable form of payment appears to be cash. Part of the reason is of course tax avoidance. But the slowness with which checks clear could have something to do with it as well.

There are a few things that one can do at a macroeconomic level to push the economy towards its potential such as fixing the monetary and fiscal policy. But they are limited instruments. Fundamentally, what really puts the brakes on the machinery of the economy is a very large number of very small grains of sand which are individually ignored but together form a very potent force. These grains of sand arise from what can only be said to be the overall culture of the economy.

It is an unfortunate fact that the Indian economic culture is dismal and unless that changes, India’s economy cannot reach its potential. Becoming aware of the problem is fundamental to the solution, of course.

In the next piece, we will explore what ICT can do to remove the sand from the Indian machinery.

[Continue reading part 2 of “It is transaction costs all the way“.]

10 thoughts on “It is transaction costs all the way – Part 1

  1. Samir Friday July 23, 2004 / 5:44 pm

    I agree completely, however the problem is not just related to large cash purchases but also to small purchases.

    Example of this is the many times during my visits to India I have wanted to make an impulse purchase of a small item of anywhere from 10 Rs to 80 Rs. And the problem is that there is no possibility of change being given because no one has any change. Therefore instead of buying a bottle of water from the fellow in the street (who needs the sale more than a store owner) I have to go into an established store for the purchase (more wasted time..) or the time I was on the train which stopped at one of the station en-route, I wanted to buy some bannanas a young boy was selling. Again I did not have the “tuta paisa” (small change) to make the transaction.

    I also asked my relatives about this and they also hold back on such impulse purchases unless they have exact change.

    One wishes for a service in each market that provides change to people wishing to buy something. This can be thought of as the same service that was provided in Europe (before the Euro) everywhere that took whatever (major)currency one had and exchanged it for the local currency (the buy and sell rate was such that you got slightly less money than indicated by the exchange rate) But everyone was willing to pay the premium because they wanted to buy the goods and needed the “proper” currency.

    Of course debit and credit cards can solve some problems but for small purchases, having the proper change available is also crucial to helping with quick transactions turnover

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  2. Aditya Friday July 23, 2004 / 11:50 pm

    Your A/C scene reminds me.. In June I was in India, thought of buying a cooler I called up a store, I thought to call 2-3 stores get the price which ever is the best deal I’ll go and get that one. To my surprise that person was not even willing to say ‘Hello’, I was expecting (This is abc from xyz store how can I help you). I asked is someone there to confirm that someone picked up really. Than he refused to tell the price over phone and asked me to come to the store. I don’t know what is the problem in even telling the price over phone? Where is the customer service attitude???

    Well Atanu you would be exploring how ICT can help the Indian machinery.. but again there is the second world (the poor people of India who do not need all this) for whom this machinery doesn’t exist.. can they also be benifited with this???

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  3. Elango Saturday July 24, 2004 / 1:08 am

    Hello Atanu,

    Very interested to know about the status of RISC pilot implemenation…

    Elango.

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  4. Elango Sunday July 25, 2004 / 1:34 am

    The reason they refuse to give price over the phone is rational. The pricing decision is done realtime based on what he thinks that you can pay. Also, he wants to make it harderfor you to shop around. I wonder …if NRIs who are used to western way of doing things find it diffcult to deal with these samll shop owners, how come a complicated project such as RISC can ever be implmented?

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  5. Elango Sunday July 25, 2004 / 1:34 am

    The reason they refuse to give price over the phone is rational. The pricing decision is done realtime based on what he thinks that you can pay. Also, he wants to make it harder for you to shop around. I wonder …if NRIs who are used to western way of doing things find it diffcult to deal with these samll shop owners, how come a complicated project such as RISC can ever be implmented?

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  6. Elango Sunday July 25, 2004 / 1:35 am

    The reason they refuse to give price over the phone is rational. The pricing decision is done realtime based on what he thinks that you can pay. Also, he wants to make it harder for you to shop around. I wonder …if NRIs who are used to western way of doing things find it diffcult to deal with these samll shop owners, how come a complicated project such as RISC can ever be implmented?

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  7. Elango Sunday July 25, 2004 / 1:38 am

    Sorry for the multiple posts. I got too impatient with the very slow response from the server.

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  8. Aditya Sunday July 25, 2004 / 12:18 pm

    Elango I don’t know about the complicated project RISC, but let me tell you one thing about those NRI’s who have lived their initial 20 – 25 years of life in India, because being used to western way of doing things it is not difficult to deal but it feels like little bit inconvinent way. And secondly you are not an Indian probably thats why you said all that, because you don’t know when we really get down to work we are the best in world.

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