The Impact of Internet in India

 

By A Correspondent

 

Access to Internet and broadband are widely regarded as catalysts for economic and social development of a country. A number of research studies have demonstrated the positive impact that Internet and broadband penetration have on national income (GDP) as well as its transformative impact on businesses and livelihoods. Internet (among other means of access such a fixed line or mobile) is increasingly viewed as an efficient mechanism for accessing information.

 

Several case studies have highlighted the role that information can play in inspiring economic activity and good governance. In this sense, information can be viewed as a public good, access to which yields positive externalities. Internet allows better access to information and hence the existence of ubiquitous information infrastructure becomes a key input to the efficient functioning of markets and government.

 

One of the chief tasks of this report is to provide a compelling basis for government intervention in the internet market in general and broadband in particular.

 

Scope of study:

To the best of our knowledge this is the first study that systematically investigates the growth impact of Internet and broadband at a sub-national level. India is ideally placed for such an analysis because it has more diversity within its borders than any other country. Over 1.2 billion people live and work in India in very different circumstances and geographies. Yet critical telecommunications policy is formulated at the national level and applicable across the country. The study would be incomplete if it failed to demonstrate the manner in which Internet and broadband create growth impacts.

 

Assessment of internet and broadband impacts – international experiences

Two broad approaches have been used to measure the economic impacts of broadband and Internet; these are the input-output method and the multivariate regression analysis.

 

The former technique relies on input-output matrices to estimate the impact of broadband infrastructure deployment on output and employment generation in a country.

 

The latter are largely international cross sectional studies that attempt to gauge the impact of broadband infrastructure on economic activity by establishing a causal link between broadband deployment and economic growth.

 

An influential and widely cited study in this genre is the World Bank inquiry into the economic impacts of Information and communication technologies (ICTs) including broadband (Qiang et al 2009). It draws its intellectual inspiration from Roller and Waverman [rW] (1996, 2001), who were the first to quantify the positive impact of investment in telecoms on the economic growth of a country. The research suggests that the contribution of broadband to economic growth is indeed substantial, and may be more profound than comparable narrowband or voice-based ICTs. The study finds that 10 per cent increase in broadband penetration boosts GDP growth by 1.38 per cent in developing countries.

 

Many other studies support the growth-dividend hypothesis for broadband. McKinsey & Company found that 10 per cent increase in broadband household penetration delivers a boost to a country’s GDP that ranges from 0.1 – 1.4 per cent. Booz & Company found that 10 per cent higher broadband penetration in a specific year is correlated to 1.5 per cent greater labour productivity growth in the next five years.

 

The point of departure for this report is to measure the Internet-growth linkage within the national boundaries using the multivariate regression model.

 

Analyzing the growth impact of Internet in India

India’s teledensity has shown extraordinary growth since private participation was allowed in the sector, rising from less than 1 per cent in 1998 to 61 per cent on September 3, 2010. Several 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. Despite the rapid growth in mobile penetration rate – an acknowledged driver of growth – India lags behind other countries in Internet and broadband penetration. Based on TRAI data, while there were 687.71 million mobile subscribers as of June 2010, the corresponding numbers for Internet and broadband were 17.9 million and 10.31 million respectively. Net additions in broadband subscribers are merely 0.2 to 0.3 million per month compared to around 15-18 million mobile connections.

 

The benefits and externalities associated with greater Internet and broadband penetration are far too significant to wait for the market to deliver these outcomes. India’s federal structure, with some states such as Uttar Pradesh, Maharashtra, and Madhya Pradesh having significantly higher population and geographical area than most European countries, readily lends itself to such analysis.

 

Moreover, balanced regional development has always been an objective and therefore studying the impact of telecom’s liberalization across states will provide valuable insights for this policy aim.

 

While the rapid spread of mobile telephony has been the most visible demonstration of the benefits of telecom sector liberalization, attention needs to shift to data and Internet. Accordingly, we attempt to answer three questions:

 

  • What is the impact of Internet penetration on state growth rates?
  • Do less-developed states show a greater impact of Internet penetration?
  • What is the mechanism by which Internet affects growth; and what are the constraints, if any, which limit its impact.

 

Our first major finding is the existence of a positive and significant coefficient on Internet. The result shows every 10 per cent increase in Internet subscribers delivers, on average, 1.08 per cent increase in output. Accordingly, Indian states with higher Internet penetration can be expected to grow faster. What it means is, if Bihar had half as many Internet subscribers as Punjab, it would have resulted in an increased growth of 7.02 per cent in state per capita income.

 

We also estimate the impact of mobile telecommunication on growth in order to compare it with the growth impact of Internet; the model is the same as used in the 2009 study (ICRIER 2009).

 

The coefficient for mobile penetration that 10 per cent increase in mobile penetration delivers, on average 1.5 per cent increase in GDP, is a marginal increase from the earlier estimate of 1.2 per cent in 2009. Given the low Internet penetration levels in India, it is not surprising to find a lower growth dividend for Internet than for mobile (1.08 versus 1.5).

 

(Extracts from the report by the Indian Council for Research on International Economic Relations along with the IAMAI and the Government of India’s Department of IT)

 

Shruti Pushkarna’s interview with ICRIER’s Rajat Kathuria, who has co-authored the report with Mansi Kedia-Jaju.

 

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On the findings of ICRIER study on impact of internet

The finding of the study is that an increase in internet penetration by about 10 per cent leads to GDP effect of 1.08 per cent, which means that for every increase in internet, we are going to get GDP impact. And this is fairly a large impact but we hope that once internet reaches a critical mass we’ll have even larger impacts.

 

Right now internet penetration in India is fairly low, so we haven’t reached what’s called critical mass. But once critical mass is reached, this impact could go up to even 1.5- 1.8 per cent.

 

But even at 1.08 per cent, it’s a fairly large impact. So the manner in which internet is beginning to impact India is through small things such as overcoming the constraints of alternate infrastructure, lack of roads, lack of information, and internet is able to breach that gap fairly efficiently and quickly.

 

So what internet is doing in India today is allowing small businesses to access information, allowing students to get access to information they never had, allowing doctors to expand the scope of their geographical activities, and if you aggregate all these little impacts that internet is having at the level of entrepreneurs, at the level of individual experts and then at a much higher level, at what it’s doing to a huge retail outlet, to say a WalMart; it improves the supply chain of an entity like WalMart as it improves the efficiency of a farmer or a doctor.

 

So internet can have impact across the spectrum of activities, social and economic impacts. And those impacts are beginning to show up in India.

 

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On the recommendation of ICRIER study on impact of internet

The recommendations of the report are as follows: If you wait for the market to deliver these outcomes, internet will happen, it will eventually happen but it might take a bit too long because private sector is not interested in making such huge investments in the core infrastructure.

 

The secretary has recently announced a Rs20,000 crore fund just to lay optical fibre across the country to connect the 250,000 gram panchayats. The private sector is not going to do this because the gestation period is very high and the revenue stream is uncertain.

 

But once the government does it, and that’s what we are recommending, the government should shortcircuit this process, otherwise internet and broadband will grow in islands clusters in India. In Gurgaon, Delhi, Ahmedabad and other cities, they will get good internet connectivity and the rest of the country will be deprived.

 

In fact, it should be the other way round, we need internet connectivity more in areas where the other infrastructure is weak. So what we are recommending is, short circuit this process, overcome the market failure.

 

The government should become a protagonist in investing huge amounts of money upfront and then the private sector will deliver what it does best, create business models around infrastructure.

 

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On constraints faced in documenting ICRIER report on impact of internet

If we had access to more data…one of the constraints we faced in documenting the report is access to information, and if we had better quality information, we could have come up with probably more robust estimates. The estimates would not change maybe but we would have more confidence in the robustness of our estimates if we had improved quality of data access. But that’s something we have to live with in India.

 

Image courtesy: cover of ‘The Impact of Internet’.

Copyright 2011 ICRIER
All Rights Reserved
Cover Photograph by Digital Empowerment Foundation

 

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