Dynamics of Price Transmission: Evidence from India’s Import Basket

Published date01 May 2024
DOIhttp://doi.org/10.1177/00157325231158848
AuthorSonam Choudhry,Abhinav Narayanan, Anshul
Date01 May 2024
Subject MatterOriginal Articles
Dynamics of Price
Transmission:
Evidence from India’s
Import Basket*
Sonam Choudhry1, Abhinav Narayanan1 and Anshul2
Abstract
This article uses granular information on trade flows between India and its
trading-partners to estimate the impact of price changes on the import basket in
general. We first investigate whether a change in world prices at the commod-
ity level triggers a reorganisation of trading partners. Second, we examine the
degree of transmission of world prices to Indian import prices. Lastly, we look
at whether India imports less from countries that charge a higher markup on a
product. Our results indicate that a change in world prices does not significantly
change the set of importing countries. Using the country–product level price
changes, we find a higher degree of transmission as compared to the world
prices. This provides an important policy implication. In order to determine how
the transmission of world prices to import prices works, we need to pay atten-
tion to the product price changes in the partner countries rather than focusing
on the world prices. Lastly, we find that India imports less of a particular product
on average from a country that charges a higher markup for that product relative
to the average export prices charged by that country.
JEL Codes: F14, F60, F02, Q27
Keywords
Price transmission, price differential, trade partners, India
Original Article
Foreign Trade Review
59(2) 252–278, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231158848
journals.sagepub.com/home/ftr
*
The views and opinions expressed in this article are those of the authors and do not necessarily
represent the views of the Reserve Bank of India.
1
Department of Economic Policy and Research, Reserve Bank of India, Mumbai, India
2
Financial Markets Operations Department, Reserve Bank of India, Mumbai, India
Corresponding author:
Anshul, Financial Markets Operations Department, Reserve Bank of India, Mumbai, Maharashtra
400001, India.
E-mail: anshul@rbi.org.in
Choudhry et al. 253
Introduction
Over the years, growing market integration, trade competitiveness and the develop-
ment of transport infrastructure have increased the number of trading partners. For
instance, India alone imports approximately 4,585 products from 229 trading part-
ners and has 21 partners on average for a product.1 There has also been a significant
increase in the number of producers of a certain commodity. This increase is a result
of globalisation and technology transfer between countries (Behar & Venables,
2011; Vemuri & Siddiqi, 2009). Although a large number of countries now produce
and export a particular product, the importing country may have a strong preference
for a particular quality that is manufactured by a particular producer country (Tung,
2008). Controlling for such preference factors, it is likely that an importing country
may move to a different producer/exporter located in a different country if this
country offers a competitive price and, ceteris paribus, the quality of the product
(Forbes, 2019). This move to a different country, however, is not straightforward
because of the established trade and diplomatic relationship between the country
and the associated increase in the cost of moving to a different partner (Amelung,
1991). Nonetheless, whenever there is a change in global prices, an importing coun-
try may benefit by moving to a partner that offers a competitive price. This reorgani-
sation of the set of importing countries within a product has important implications
for the transmission of the international prices to the import prices.
In this article, we first investigate whether a change in world prices at the com-
modity level triggers a reorganisation of trading partners. As the world price
changes for a certain product, an importing partner may see an opportunity to
move to a different set of trading partners (Forbes, 2019). This shift in trading
partners may, however, depend on several factors that may include the importing
country’s preference for partners, type of product, proximity with trading part-
ners, trade agreements, tariffs, quality of the product and volume of imports,
among others. For instance, if a product is heterogeneous in nature, then it is
unlikely that any movement in world prices would change the set of trading part-
ners, as the importing country may have a strong preference for the quality of the
product imported from a particular country. On the other hand, if the product is
homogeneous in nature, that is, the product does not differ much across the sell-
ers, then a change in world prices may change the set of importing partners.2 This
is because for a homogeneous product, it is easier to find an importing partner that
supplies the same product at a competitive price (Erkel-Rousse and Mirza, 2002;
Yeats, 1990). Second, we examine the degree of transmission of world prices to
Indian import prices. To this end, we first look at how product-level world prices
get transmitted to Indian import prices. However, looking at world prices may not
reveal the entire transmission process, as India does not import from all the
exporting countries. So, we extend the analysis by looking at country–product-
level prices and checking if the transmission occurs with a higher degree when we
consider only the partners that export the product to India. Lastly, we look at
whether India imports less from countries that charge a higher markup on a prod-
uct vis-a-vis their exports to other countries. We start with the hypothesis that
gains from trade may induce an importer country to import less of a product from
a country that charges a higher price.

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