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Wealth effects of the phone begin to ring wide

Wealth effects of the phone begin to ring wide
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First Published: Wed, May 20 2009. 12 29 AM IST

Within reach: A mobile phone user in Faridabad, Haryana. It is estimated that telephone firms across the country would spend at least $15 billion this fiscal in setting up or expanding their networks.
Within reach: A mobile phone user in Faridabad, Haryana. It is estimated that telephone firms across the country would spend at least $15 billion this fiscal in setting up or expanding their networks.
Updated: Wed, May 20 2009. 12 29 AM IST
New Delhi: India’s base of 430 million telephone users, expanding at some 10 million a month, have made for headline numbers. But the real story, say industry insiders and economists, is the effect of the rapidly spreading use of cellular phones on the economy and the lives of people.
Strands of empirical and anecdotal evidence abound on the effects of the spread of the telecom network in Indian cities, towns and villages: from savings on local travel costs to healthcare spending, increasing access to customers to improving security, lowering communication costs to retrieving commodity prices and other information.
Within reach: A mobile phone user in Faridabad, Haryana. It is estimated that telephone firms across the country would spend at least $15 billion this fiscal in setting up or expanding their networks. Rajkumar / Mint
The aggregated effect of these benefits is being researched not just for the impact in the immediate future but also on how the use of mobile phones—especially if it helps spread access to banking and financial services in India’s so-called bottom-of-the-pyramid population—will bear out on the economy in the years ahead. Comparisons are being made to the railway network set up by the British and the virtuous feedback it gave into the local economy.
Some experts say, in fact, that one of the reasons the Indian economy may have weathered the effects of recession in other countries is productivity linkages from the wide use of phones in an economy that has not had the benefit of such communication access and resulting information flows.
“The telecom sector has managed to stem the downward impact in a lot of areas that would have been affected by the global economic downturn,” says Usha Rajeev, executive director with audit and consultancy firm PricewaterhouseCoopers, or PwC.
One obvious area is the multi-billion capital spending by phone firms. “While many firms have cut down their capital expenditure, the telecom sector is continuing to invest significant amounts in expansion including their IT (information technology) spending,” Rajeev says.
Also See Expanding Network (Graphics)
Phone firms such as Bharti Airtel Ltd, Reliance Communications Ltd, VodafoneEssar Ltd and a bunch of aspirant telcos such as Loop Telecom Pvt. Ltd, Unitech Wireless Pvt. Ltd and Datacom Solutions Pvt. Ltd would spend at least $15 billion (Rs71,250 crore) this fiscal year in expanding or setting up phone networks, according to announcements by the companies.
Other areas such as new business development and employment have got a huge boost. “There is also the huge growth of the telecom ancillary sectors like value-added services, including firms that are doing content creation, content aggregation, distribution and delivery to the customer,” says the PwC executive director.
Economist Rajat Kathuria, considered a specialist in the phone services business, says that as the adoption of mobile phones spreads in India, it is giving rise to an entirely new set of businesses whose operating models hinge on the use of phones. “There are firms like JustDial (a directory service), which started out on capital of $1,000 14 years ago, (now) has annual revenues of $17 million and is valued at $100 million,” says Kathuria, a professor at Indian Council for Research on International Economic Relations, or Icrier. “The firm’s founder attributes his company’s continuing success to the telecom revolution in India as otherwise his accessible market would be far smaller.”
The wealth effects of a spreading phone network show up in a 5.6% incremental growth of gross domestic product every time 10% of a country’s population acquires a mobile phone, Carl Henric Svanberg, president and chief executive officer of Telefon AB LM Ericsson said on a visit last week to India, quoting research at universities, without naming them.
In India, Bharti Airtel chief executive and joint managing director Manoj Kohli estimates around 2% of the country’s GDP growth has been contributed by the growing telecom sector. India is expected to report GDP growth of 6.6% in fiscal 2009, a steep drop from 9% in the previous fiscal year, according to the Reserve Bank of India.
The country’s GDP growth averaged 7.1% in nine years between 1999-2000 and 2007-08, a period the compound annual growth rate of mobile phone connections expanded 83%.
The increasing impact of phone use on the economy can also be seen at the state level.
“Indian states with higher mobile penetration can be expected to grow faster, with a growth rate 1.2 (percentage) 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,” according to a January report prepared by Icrier and Vodafone Group Plc., the world’s largest mobile phone services firm by revenues.
According to Kathuria, who co-authored the report, the so-called network effects that magnify the economic impact of mobile phones kick in when phone penetration exceeds one in four of a population.
“This underlines the urgency of increasing teledensity across all states and especially in those numerous areas of India that are yet to reach this threshold level,” the report adds.
Telecommunication in India has also helped in making up for gaps in other parts of the Indian economy.
“Mobile phones can perform in underserved areas and regions in the same as fixed lines did in many developed countries over two decades ago—widen markets, create better information flows, lower transactions costs and substitute for costly (in time and money) physical transport. The value of a mobile phone can be particularly high because other forms of communication such as postal systems, roads and fixed line networks are often poor in developing countries,” the Icrier report notes.
Still, there is a long road ahead for phone services and their virtuous spread of economic benefits as industry organization such as COAI (Cellular Operators Association of India) project the country will be home to some 761 million phones by 2011. Just one in three Indians has a phone today.
With a more ubiquitous spread of phones, businesses will be able to integrate its use better into its operations and even reach out better to customers, one industry insider said. At a recent technology event organized by Mint, D. Shivakumar, managing director of Nokia India Ltd, cited studies that have shown that empowering an employee with a mobile phone lets the employer get a lot of the employee’s secondary time.
“That is estimated to be anywhere between 10 days a year. Most organizations have about 12 days of holidays in a year. If you’re giving an employee a mobile phone, you’re virtually getting back all that you gave him in holidays,” said Shivakumar.
A proposed auction of spectrum for so-called third generation, or 3G, services, which has been delayed for some two years from when it was initially planned, later this year and phone networks starting on this data-rich technology will enable use of bandwidth-intensive applications on mobile phones.
Shivakumar said that access to 3G networks would allow organizations to save on training and travel costs. For example, all training can happen remotely, rather than in classrooms, and the cost of travel can get reduced significantly as video conferencing picks up. “Those kind of benefits far outweigh the kind of investments that people are making today,” he said.
The other benefit of 3G would be that a typical Indian, who understands the audio- visual medium much more than the literate medium, can find solutions to his problems in visual depictions.
Asit Ranjan Mishra contributed to this story.
Graphics by Ahmed Raza Khan / Mint
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First Published: Wed, May 20 2009. 12 29 AM IST