An econometric analysis of the impact of mobile
Dr. Mahesh Uppal is the Director of Com First (India) Private Ltd, a consultancy specializing in policy, regulation, and strategy. Mamta is a researcher at the Indian Council for Research on International Economic Relations (ICRIER).
1. Summary
During the past two decades, India has moved away from its former ‘command and control’ policies to become a marketbased economy. This process started in the mid-1980s and gathered substantial momentum at the beginning of the 1990s. The process of reform has continued in this decade with a further opening of the economy and the creation of regulatory institutions to oversee the march towards fully competitive markets. As a result of the liberalisation, GDP per capita has been rising by 7% annually, a rate that leads to its doubling in a decade. This contrasts with annual growth of GDP per capita of just 1% in the three decades from 1950 to 1980. Rapid growth turned India into the third largest economy in the world in 2006 (after the United States and China and just ahead of Japan when measured at purchasing power parities), accounting for nearly 7% of world GDP.
1 Although India’s growth rate has been among the highest in the world, it remains a low income country. With a per capita income of US$950 in 2007, India ranks 122nd.
2 As well as a low average income, there are substantial disparities in economic performance between states. The average per capita Gross State Domestic Product (GSDP) of Delhi, the richest state, is five times that of Bihar, the poorest. There is a broad consensus amongst policy makers that growth needs to become more inclusive by increasing the prosperity of poorer states, whose economies have expanded at a slower pace than those of the richer states in the past decade. 6 India: The Impact of Mobile Phones Moving the debate forward • The Policy Paper Series • Number 9 • January 2009
Previous research suggests that the differences in economic performance across states are associated with the extent to which they have introduced market-oriented reforms, alongside measures to improve infrastructure, education and basic services.
3 The physical infrastructure (or lack thereof) is widely acknowledged to be one of the crucial impediments to achieving higher and more inclusive economic growth in India. The lack of adequate infrastructure is particularly acute in rural areas, home to 70% of India’s population and the 52% of the work force that is primarily engaged in agriculture and related activities.
4 Agriculture in India accounts for 18% of national income, implying extremely low agricultural productivity. The resulting migration of excess farm labour to urban areas in search of jobs is straining urban infrastructure and increasing the population living in city slums. India’s urban population is expected to double over the next two decades, to 575 million.Any strategy that seeks to address the problem of inclusive growth will therefore have to contend with these harsh realities of low productivity in the countryside, a massive movement of people to the cities, and extensive poverty in both rural and urban areas. Past policies have not had much success, often being defeated by the magnitude of the problem as well as weaknesses in implementation.But the message is clear. Rural productivity needs to increase both as part of the development process and to raise incomes for millions of Indians who live below the poverty line, in the countryside and the cities.A sustainably faster rate of growth can only be achieved by improving productivity, but underinvestment in infrastructure is an important barrier. India plans roughly to double investment in infrastructure, to $500 billion over the next five years, or about 8% of GDP each year. The Planning Commission maintains that the growth target of the Eleventh Plan (2007–12) is achievable only if the ‘infrastructure deficit can be overcome and adequate investment takes place to support higher growth’.
5 The government expects private investors to contribute two-fifths of the total investment in infrastructure, not only to expand capacity but also to improve the quality of service.The telecommunications sector has had the most success in attracting private investment and is often held up as an example for other infrastructure sectors.
6 Two familiar reasons for this status are worth repeating. First, India’s teledensity has shown extraordinary growth since private participation in the sector was introduced, rising from less than 1% in 1998 to over 30% today. Secondly, several research studies have found that the telecommunications infrastructure is one of the significant factors in economic growth, alongside others such as overall investment, education, energy and transportation networks.
7 The change in India’s telecoms landscape has been dramatic. In 1994, the year the National Telecom Policy was drafted, fewer than 1 in 100 Indians owned a phone. Public sector executives working for the incumbent monopoly were highly popular, given their ability to short circuit the endless waiting time for the privilege of owning a telephone. Less than 15 years on, teledensity has increased to more than 32% and subscriber numbers are growing at a rate of about 10 million per month. Ownership of a phone is no longer a function of who you know, but rather conforms to the conventional forces of demand and supply. Waiting lists are down and voice calls in India are amongst the cheapest in the world. The Government’s target of 250 million phones by the end of 2007 was reached, quite unexpectedly, ahead of schedule.
8 One of our research aims was to extend earlier studies by analysing the growth impact of telecoms in India. While the telecoms-growth link has been explored across different countries and within a particular country over time, few studies have assessed the relationship at the sub-national level. India’s Federal structure, with some states such as Uttar Pradesh, Maharashtra, and Madhya Pradesh larger in geographical area and population than most European countries, readily lends itself to such analysis.
9 Moreover, balanced regional development has always been an objective in India’s plans and therefore studying the impact of telecoms liberalisation across states will provide valuable insights for this policy aim.
The rapid spread of mobile telephony in India is the most obvious manifestation of the benefits of telecom sector liberalisation. Fixed line penetration is in fact showing signs of decline, and future growth will come from mobile. Given that about 10 million wireless subscribers are being added every month, the impact of telecoms on state-level growth rates can be explored through the impact of mobile telephony. This chapter accordingly attempts to answer three questions:
• What is the impact of mobile penetration on state growth rates;

* Do less-developed states show a greater impact of mobile penetration; and
• What are the links through which mobile telephony affects growth and what are the constraints, if any, which limit its impact?
The first two questions are addressed by employing ‘topdown’ econometric analysis using state level economic indicators, while the third question is addressed using ‘bottom-up’ evidence from surveys and other information.The next section briefly reviews the existing literature on the impact of telecoms on growth. Section 3 assesses India’s regulatory and competitive landscape for telecoms and compares Indian mobile telephony indicators with those of some other countries. The descriptive statistics presented in this section underscore the phenomenal progress made by mobile in India, both when judged against past performance and when compared with other countries, but also show that India still lags other countries in important ways. Disparitiesin mobile penetration across states and between urban and rural areas are also examined. Section 4 presents and analyses the results of the econometric model and also draws upon survey based evidence to demonstrate the positive impact of mobiles on growth, the first such estimates to confirm the growth dividend of mobile for Indian states. A final section offers some conclusions.
7 Moving the debate forward • The Policy Paper Series • Number 9 • January 2009 India: The Impact of Mobile Phones
Our key conclusions are:
• Indian states with higher mobile penetration can be expected to grow faster, with a growth rate 1.2% points higher for every 10% increase in the mobile penetration rate. If Bihar were to enjoy the same mobile penetration rate as Punjab then, according to our results, it would enjoy a growth rate that is about 4% higher.
• There is evidence of a critical mass, around a penetration rate of 25%, beyond which the impact of mobile on growth is amplified by network effects. This means there is an important threshold for policy makers.
• As is borne out in many other studies, including this one, it is the level of telecoms penetration (not the growth) which contributes to economic growth.Past policy reforms have achieved rapid growth in mobile but India lags well behind most other countries at similar stages of development. There is enormous variation between states, between urban and rural areas, and between poor and rich households in the cities. Further reforms are needed to bridge these gaps. Effective competition, efficient spectrum management, and a market-based policy framework are the key regulatory levers.