Data and Descriptive Statistics

since the introduction of the goods and services tax in India in 2017, all large online retailers require vendors to list their tax identification number to transact on the platform. Although the vast majority of online retail payments in India is processed through cash-on-delivery channels, the use of mobile payments is increasing and will add to the formalization of business revenues in the longer term.

DATA SOURCES AND MAIN VARIABLES

To study which types of business are using online sales channels most successfully to expand their market reach and grow their sales, the analysis combines administrative data on the universe of transactions on the partner firm’s e-commerce website with survey data on the characteristics of business and entrepreneurs that use the platform. In addition, the analysis uses data from the CPHS database to study how the firms in the data compare with the wider population.2

The administrative data contain the universe of transactions made on the e-commerce platform between June 2016 and June 2020. The dataset contains a total of 29 million completed sales transactions made by 20,145 unique firms. The data have one observation per transaction and include the following variables: date of the transaction, company postal code (merchant location), customer postal code (customer location), transaction status (complete, canceled, return to origin), price, quantity, product category, and identifiers for the product and company. From these, the following variables were generated: experience on the platform (number of months the firm remains active on the platform, that is, has at least one completed transaction), monthly sales (number of completed transactions by month), monthly revenue (revenue from completed transactions by month in rupees), monthly number of products (number of different products offered through the platform by month), monthly number of pin codes with sales (number of different customer postal codes with completed transactions by month), and monthly number of states with sales (number of different customer states with completed transactions by month). Each of these variables is calculated at the company level for each month that a given firm is observed in the data.

The analysis additionally uses data from a survey with merchants who are active on the platform. This provides additional information on entrepreneur and firm characteristics for a sample of 2,316 active businesses that use the partner firm’s platform. The survey was conducted between June 2019 and April 2020. In principle, the survey questions could be answered by any member of the business; however, the respondent was the owner or manager in 87.2 percent of cases. The survey records the age, gender, education, and business experience of respondents, as well as the number of employees of the business, the share of the firm’s total sales managed through the online platform, the business age, and the type of business. Using the number of employees, two

additional outcome variables were generated for the study: monthly sales per employee and monthly revenue per employee.

Because there is no universally accepted definition of business formality and measuring business formality objectively is difficult through administrative records, the analysis follows related work and proxies informality by business size (see, for instance, Nataraj 2011). Specifically, for the analysis, a business is defined as formal if it has five or more employees, and as informal if it has fewer than five employees. This definition is similar to that applied in official surveys in India, which classify a business in the manufacturing sector as formal if it has 10 employees or more if the establishment uses electricity and 20 workers or more if the establishment does not use electricity. Based on this information and considering that businesses in e-commerce can be assumed to have access to electricity, the analysis relies on thresholds of five employees and 15 employees (which are the thresholds recorded in the survey). The results do not materially change if firms are defined as informal if they have fewer than five or fewer than 15 employees, but the analysis uses the more conservative definition of five employees throughout. Using this definition, 34 percent of businesses in the sample are categorized as formal and 66 percent are categorized as informal.

To evaluate how the sample compares with the wider population of small businesses in India, the analysis uses data from the most recent round of the CPHS micro, small, and medium enterprises module and compares the characteristics of the sample with the characteristics of businesses nationwide. Individuals in the CPHS are considered a business if the main occupations of respondents were recorded as businessman, selfemployed entrepreneur, qualified self-employed professional, or small trader or businessman without fixed premises.

FIRM CHARACTERISTICS AND TRANSACTIONS ON THE PLATFORM

Table 5.1 presents descriptive statistics on entrepreneur demographics and firm characteristics. The summary statistics show that entrepreneurs in the sample are young (the average entrepreneur is 32 years old), highly educated (77 percent have a college degree), and overwhelmingly male (80 percent). For firm size, the number of employees of firms in the sample ranges from zero to more than 250. The average number of employees is about 13, while the median firm in the sample has 3 employees, which is fairly representative of small informal businesses in India. Most of the businesses in the sample match the definition of micro or small enterprises. Figure 5.1, panel a, shows that 95 percent of firms in the sample have fewer than 50 employees. Table 5.1 also indicates that 66 percent of the firms in the sample are informal, according to the size-based definition. Only 12 percent of the firms are woman-owned, and the average age of these businesses is about 6 years. Of these businesses, 50 percent are merchants, 27 percent are producers, and 23 percent are distributors.

Figure 5.1, panel b, shows the percentage of total sales that firms manage through the online platform. Approximately one-half of the firms in the sample manage 10 percent