Rural Connectivity and the Economic Impact of Mobile Phones

Now that we’ve looked at the history of Internet and mobile services in India as well as people’s general attitudes towards their adoption, let’s look at how the rapid distribution of  mobile phones have changed the face of the economy, with special focus on rural penetration.

As part of the Vodafone Public Policy series, a study led by Professor Rajat Kathuria of the Indian Council for Research on International Economic Relations (ICRIER) was conducted in January 2009 to analyze the impact of telecommunications on economic development in India and compare its progress to that of other developing nations. State-level data was collected to investigate the impact of mobile phones across states, economic sectors and population segments. The results of the econometric analysis that was performed suggest that there is a causal relationship between higher mobile penetration (mobile subscriptions/population) in a region and higher economic growth, by 1.2% points a year more on average for every 10% increase in the penetration rate. The study also measures to what extent the benefits of the 8-10% growth rate are trickling down to the poorer socio-economic groups. The study indicates that in the agriculture and small and medium enterprise sector and even amongst the urban slum dwellers, access to telecommunications is an important to realizing productivity. Citizens who have mobile phones can tap more easily into the benefits of information and opportunity, and thereby economic growth.

While 2008 saw the growth in telecommunication connections reach 10 million per month, certain harsh realities have been overlooked: (a) Teledensity lags behind other developing nations at similar stages of development (b) Many less developed states in India, such as Bihar, Uttar Pradesh, Orissa and Madhya Pradesh and Assam have penetration rates of less than 20%.

The growth of mobile in India can be seen as an outcome of a compelling technology and an increasingly liberal policy environment. While the growth of mobile is accelerating, the growth of fixed lines is trending down. In March 2008, mobiles accounted for 86% of all telephones in India, and by October 2008 this number had increased to 90%. Contrast this with the situation in 1999 when mobile constituted just 5% of all telephones. The study slightly underestimated the number of subscribers there would be in 2010 (540 million) as the figure has currently gone beyond 600 million.

Mobile density across states and between urban and rural areas to a large degree reflects the differences in per capita income across states. The simple correlation coefficient between per capita income and mobile density for 2008 is 0.87 (where 1 would indicate perfect correlation). Yet another determinant of penetration is how early the state or region started liberalizing telecommunications. Despite the massive increase in mobile density, access is still skewed towards urban areas where much of the industrial base is located. However, the study does cite some reasons to be optimistic:

(1)   Urban teledensity (all attributable to mobile growth) increased by 34% while rural teledensity increased by 62% from March 2007 to March 2008, the disparity reflecting the low rural base (These figures have changed tremendously since 2008. The more recent ones are available on one of the previous blog posts).

(2)   Until around 2008, the focus of mobile operators’ attention had been on the more lucrative urban markets. High cost of infrastructure rollout in less dense rural areas and affordability for the rural population were big hurdles. But now infrastructure rollout in rural areas is now eligible for subsidy and all major providers have reported future plans for expansion in rural India.

Today’s mobile technology has the potential of reducing the digital divide. The authors of the report believe that at the policy level, there is a need to recognize the significance of wireless, both for delivering voice and for data services, and to stimulate the installation of backhaul infrastructure in rural area through the use of incentives.