The Influence of mobile
communication on the economic
development of India.
Bachelor thesis Name: Monique Rood Student number: 10182594 University: University of Amsterdam
Faculty: Economics and Business Field: General Economics Supervisor: Ron van Maurik
Date: March 10th 2014 Abstract:
Mobile phones are nowadays seen as one of the main factors that caused economic growth in India in the last ten to fifteen years. Mobile communication gives people easy access to information and knowledge that makes markets more transparent and efficient. In this research 5 mechanisms are outlined where mobile communication enhanced economic growth in India. These are: reduced search costs due to better access to information, a better-‐managed supply chain, job creation, reduced risks and uncertainties in markets, and the use of mobile phones as tools in markets with applications like ‘m-‐banking’ and ‘mobile searching’. An empirical research is done where the influence of mobile phones on India’s GDP is tested and whether simultaneous causality has occurred in the economic development. According to this research the influence of mobile phones on GDP is significant and no simultaneous causality has occurred.
Table of content
1. Introduction 3
2. Literature 5
2.1 The impact of telephones in India 5
2.2 The mobile phone era: the difference it made 6
2.3 Mobile communication mechanisms for economic growth 11
2.4 The Prospects of mobile phones on economic development 16 3. Methodology 18 3.1 Data 18 3.2 Method 21 4. Results 25 5. Conclusion 31 6. Discussion 32 7. References 35 8. Appendix 37
1. Introduction
‘The ubiquitous sight of a shop offering to re-‐charge your mobile phone is symbolic of the telecom revolution that has changed the face of India in the first decade of the twenty-‐first century with significant social and economic impact’ stated the rapport of the Telecom Regularity of India in 2012. The use of mobile phones has increased fast around the world, even in developing countries. This increase in mobile telephone activity is often cited as one of the fundamental causes of recent boosts to development in the developing world (Franses & Blauw, 2011). With new developments like mobile communication, new
opportunities were born.
The usage of mobile phones gives people the opportunity to access information and knowledge everywhere in a fast and easy manner. Information is a powerful tool that influences the decisions people make in every day life. With the information that can be shared through ICT devices nowadays, the economic activities will be more efficient. As a consequence there will be a reduction in information asymmetries and better access to knowledge. It would prevent one party from monopolizing opportunities for profit (gain) and at the same time allow participation of previously excluded groups (Röller &
Waverman, 2001).
Developing countries live usually in rural circumstances, which create huge information asymmetries in the market, as a consecuence there is a lot of uncertainty and risk. Mobile phones make these markets more transparent, which will reduce these risks and uncertainties (Abraham, 2007). To take a look at the influence of mobile communication in a developing country like India, this paper will address the research question: What is the impact of mobile communication on the economic development of India and through which mechanisms did the mobile phone enhance economic growth? To give an answer on the research question, there will be a combination between a literature analysis and empirical research. The mechanisms for economic growth will be outlined through literature and the impact of mobile phones on India’s economic development will be tested with regression analysis where GDP is the dependent variable, and the monthly mobile cellular
subscribers per million is the independent variable, which will be used as a
measure for the use of mobile phones.
The remainder of this paper is as follows: section 2 contains the literature part where an overview will be given of the influence of mobile phones in India, section 3 contains the methodology where the data and method of the regression analysis will be discussed, section 4 contains the results from the empirical research, section 5 contains the conclusion, and section contains 6 the discussion. Finally, in section 7 and 8 the appendix and reference list can be found.
2. Literature
2.1 The impact of telephones in India
In the past two decades, India has moved away from a ‘command and control’ economy to a market-‐based economy that started in the mid-‐1980s and became efficient in the 1990s. This transition to a market-‐based economy has been one of the events that started the development of the country India. With this transition, the economy started to respond to demand and supply in markets, and price changes of products and services, which created increased competition
in the Indian markets.
The telegraph and trans-‐Atlantic cable were innovative developments, before the telephone, that had led to significant and rapid narrowing of price differentials between markets in historic events (Du Boff, 1980). Du Boff (1980) has found that the telegraph lowered costs of products and services, made resources available for alternative uses, and that the instant communication improved the efficiency of price information. With the introduction of telephones these already productive transitions were even getting better. The introduction of the telephone can be seen as an innovative development since its inception in the economic world, especially in developing countries. According to the research of the Telecom Regulatory Authority of India (2012), the development of the telephone sector in India can be divided in three different stages. In the first period, before 1990, the telecom sector was mainly state owned where the development was only through government spending. In the second period, 1991-‐2000, the wireless phones were yet absent, but the telecom sector started to reform. However, the real growth era of the telecommunication sector started in 1992 when the government decided to reform the telecom sector mainly in the form of increased competition. This was a consequence of opening up the sector for private players. After the reforming, the market started to develop itself and started to generate economic growth. In the third period, post-‐2001, the mobile phone came to life and the mobile telecom sector started to grow, which boosted the development of the economy. The total number of telephone subscribers in India stood at 943.49 million in
February 2012 as against 28.53 million in April 2000 (Telecom Regulatory
Authority of India, 2012).
Although India has one of the highest growth rates of GDP in the world, it is still counted as a developing country with a per capita income of US $950, measured in 2007 (Kathuria, Mamta & Uppal, 2009). Developing countries are assumed to have lower living standards then developed countries, usually because they are less developed in medical, economical and technological areas. Despite that India is a developing country; it has one of the largest growing telecom networks and software markets in the world, thanks to its high population density and development potentials. As a consequence, the telecommunication sector has played a major role in the economic development of India thanks to the large concentration of scientists and engineers, whom all speak English, and because of the low wages (Arora & Athreye, 2002). As mentioned above, the telecom sector has helped the economic development of India; it generates government revenue and income, and it provides job opportunities. Both these aspects will in turn increase India’s GDP. The share of telecommunication services, as percent of total GDP, has increased from 0.96 in 2000-‐01 to 3.78 in 2009-‐10 (Telecom Regulatory Authority of India, 2012), an overview of the growth rate of India’s GDP of the telecom sector can be seen in appendix 1.
2.2 The mobile phone era: the difference it made
India did not participate in the landline phone revolution as much as it did in the mobile phone revolution; it has seen an unpredicted growth in mobile phones with over 919 million subscribers by the end of March 2012 (Mehta, 2013). With landline telephones it was only possible to carry voice communication, but with the introduction of mobile phones, not only person-‐to-‐person voice communications were possible, but also text and data communications. Thanks to the personal, portable and digital nature, the mobile phone has been a popular item that enables people to always be connected with each other. The demand for mobile phones has increased significantly thanks to a couple of aspects. First, the low cost of handsets and the low budget financing
systems for contracts made it even for India’s poorest possible to afford a mobile phone. The telecom companies have made the prepaid telephone deals relatively cheap, which will help the economic development due to better access to information and knowledge for all. This in turn has led to lower barriers to entry for consumers in the markets of India. A second aspect is that the mobile phone contracts on the supply side were usually cheaper for mobile phones than for fixed line telephony, so companies did not install fixed lines but started working with mobile phones on a regular basis (Telecom Regularity Authority of India, 2012). Due to the increased demand for mobile phones, the telecom market increased fast to satisfy the demand for mobile phones of the population. The mobile phone subscribers accounted for nearly 96.6% of the total telecom subscriptions in February 2012, which makes the mobile segment the key contributor to growth in telephone subscriptions with its wide range of offers and services (Telecom Regularity Authority of India, 2012). An overview of the market value of mobile phones can be found in appendix 2, where it becomes clear that the mobile telephone market contributes a lot to the economy of India, even though the market growth has stagnated after 2009 that occurred due to the economic recession that was going on internationally. On this moment, India has one of the largest mobile phone markets in the Asia-‐Pacific part of the world. India accounts for 8.1% of the Asia-‐Pacific mobile phone market value, where China accounts for 49.1% of the market value (Market Line, 2013), see appendix 3.
The Indian population growth in 2007-‐2001 was on average 1.32% per year, with an annual growth rate of the mobile phone market in that same period of 14.1% (Market Line, 2013). So the increase of mobile telephone activity was significantly larger than the population growth. This increase in mobile communication activity is seen as one of the recent causes of positive economic prospects in India. The mobile phone activity can be divided in two broad areas – capabilities and networking, according to Mehta (2013). Capabilities may occur in the direct production or via health and education, where mobile phones create increased access to information and knowledge in a fast and cheap manner. Knowledge, due to education that can be provided via mobile phones, can help by making the production process more efficient or by improving production
methods. Mobile phones can facilitate need-‐based and user-‐centric information and services at a cost that is affordable to India’s rural population, which was first unreachable (Mehta, 2013). In India a great part of the country is still rural, where the population is still poor and lives in bad circumstances. In these parts the accommodations like: lights, Electra and roads are still poor so it is hard for the population in these parts to get a constant flow of information. The mobile phone makes it possible for these people to get a permanent flow of information on job availabilities, economic or natural shocks, and social aspects. This will bring the rural and urban part of India closer to each other. Developing countries like India usually live in rural circumstances as mentioned above, where the markets are not absent but function badly (McMillan, 2002). This is caused by a bad transition of information and according to McMillan (2002) is information the lifeblood of efficient working markets. Without the right information, these markets will not work optimal. With the use of mobile phones, these not efficient working markets can be made efficient because mobile phones will make markets more transparent. Mobile telephony will widen the markets, create better information flows, lower transaction costs and can function as substitutes for costly physical transport (Kathuria, Mamta &
Uppal, 2009).
In developing countries there are usually poor forms of communication like postal systems, roads and fixed line networks so the benefits of mobile phones will be high. This is confirmed with the empirical evidence of Jensen (2007) his research. He presents that a ‘’near-‐perfect adherence of the Law of One Price’’ in the South Indian fisheries sector is due to mobile phone use. This Law of One Price is important in countries like India, because buyers and sellers often lack the means to evaluate prices that could cause market inefficiency (Eggleston, Jensen & Zeckhauser, 2002).
Waverman, Meschi & Fuss (2005) have researched the impact of mobile phones on developing countries where they used data on 92 high and low income countries from 1980 to 2003. They have found a positive effect of mobile telephony on economic growth, and that this effect was twice as large in developing countries compared to developed countries. The Telecom Regularity Authority of India (2012) has reached comparable conclusions on the positive
effect of mobile telephones on economic development. In their research they tested the impact of telecommunication on economic growth for developing countries and found that a 10 per cent higher telephone penetration would
increase GDP by 0.59% in developing countries.
The telecom industry has boosted the economic development of India in different sectors of the market. According to Jensen (2007) the mobile services have helped the development in fishery. He describes in his paper; ‘’the price of two goods should not differ between any two markets by more than the transportation cost between them, this is what is called: the Law of One Price’’. Abraham (2007) has found similar results in the fishing industry in India. He states that mobile phones make prices more visible, so there is less price dispersion between different markets. The Law of One Price did not apply in the Indian markets that much before the mobile phone was used due to the
incomplete information between markets.
The mobile phone also contributes to the coordination of demand and supply in markets, so there is less time wasted and it makes markets less risky and uncertain. ‘’The ability to make informed decisions based on continuous supply of information has greatly lowered the risk of any losses of doing business in highly volatile commodities’’ (Abraham, 2007). However, Abraham (2007) did find that the mobile phone usages are the most profitable on the
marketing end, rather than the production end.
The study on mobile phones in the agricultural sector from Mittal, Gandhi, and Tripathi, (2010) has found that the farmers in general use the phone more for social purposes, but that they benefit from the ability to contact other farmers and to talk to experts, or to coordinate with their employees.
The rapport of the Telecom Regularity Authority of India (2012) has found that Small and Medium Enterprises (SMEs) also benefit from the usage of mobile services. They use mobile communication in two different ways – they build business models around mobile services or they use the mobile phones to increase productivity, income, employment creation or efficiency, and sometimes they even use mobile phones for education and teledensity. ‘Mobile communication offers major opportunities to advance human and economic development – from providing basic access to health information to making cash
payments, spurring job creation, and simulating citizen involvement in democratic process’ said the World Bank Vice President for Sustainable Development of India (Telecom Regularity Authority of India, 2012). The telecom sector has also provided beneficial consequences socially. The mobile phone has made it easier to get knowledge of the job opportunities available, which has lowered the unemployment rate among the Indian population. Also the development of the software industry has created a lot of jobs and opportunities for the population where a lot of unskilled labour is used for the production. However, the mobile phone is also used as a status symbol; the possession of mobile phones among women also increased their productivity and status in the household (Telecom Regularity Authority of India, 2012). In India women usually stay at home and take care of the family, but with the mobile phone the opportunities for them to participate in the economy has increased and gives them the ability to participate more in social contexts. It makes them more independent and more mobile. Citizens with access to telecommunications can tap into the benefits of broad economic and social growth much more easily than those who are unconnected (Kathuria, Mamta & Uppal, 2009). This is especially important nowadays, because India is in a stage of development at this moment where there is a large movement from the rural areas to the urban areas, which will poses new challenges for both the rural and
urban economies.
The Mobile phone is also a great help in the rural parts of India. It helps to improve the economic status of the rural population by providing timely information on agriculture, the labour market, and trading and credit, because usually in the rural parts it is hard to get access to the basic knowledge of these aspects due to the bad supply of connections. Mobile communication helps to improve life skills and social capital by providing timely information on healthcare, education, government schemes, family and friends (Mehta, 2013). However, for mobile phones to be the most efficient for the population of India, it should be associated with investment in other infrastructural elements like education on agricultural techniques and tools, and better roads and storages. Because only giving someone a mobile phone does not improve a person’s
India has chosen a policy for the telecom market to be highly concentrated, which has led to declined prices of mobile telephone usage. It has delivered low prices and high minutes per subscriber for mobile phones due to the high competition. For example, for outgoings calls the effective price has dropped from Rs. 15.30 to Rs. 0.68 (Kathuria, Mamta & Uppal, 2009). Due to the relatively low prices the poorest of India are also able to afford a mobile phone. This can reduce the gap between the population of rural and urban parts of the country. There are also consumer-‐financing programs available that facilitate the consumer to finance a handset with declining interest rates; this allows the population to spread the cost over manageable monthly installments. However, despite the increased mobile teledensity in India, the use of mobile phones is still skewed toward the urban areas where much of the industrial base is located. The urban teledensity is seven times larger than in the rural parts (that consist 70% of the country). Although the gap is still large between the rural and urban parts, the strong growth in mobile phone use in 2007-‐2008 has occurred despite some signs of stagnation in the urban areas (Kathuria, Mamta & Uppal, 2009). This can be a sign that mobile telephone use in the rural parts is increasing. According to Kathuria, Mamta & Uppal (2009), the growing penetration in states with the lowest income levels does show a trend towards convergence. An Overview of the economic and social impact of mobile phones in a framework can be seen in appendix 4.
2.3 Mobile communication mechanisms for economic growth
A couple of mechanisms have been named through which mobile communication enhanced economic growth; the five most important mechanisms will be discussed here. First, mobile phones make it easier to share information among markets; which will lead to better access to information. This will reduce searching costs, improve coordination among agents and increase market efficiency (Aker & Mbiti, 2010). This gives the ability to reallocate resources in a more efficient way. Second, communication among markets will increase so firms should be able to better manage their supply chain (Abraham, 2007). Third, the mobile phone has created a new software and telecom industry in
India, which has led to new possibilities, job opportunities, income generation and an increased export (Arora & Athreye, 2002). Fourth, mobile phones can facilitate communication among social networks in response to shocks, thereby reducing households’ and firms’ exposure to risk (Aker & Mbiti, 2010). Finally, mobile phones can be used as tools to enhance economic improvements in the form of mobile applications like ‘m-‐banking’ and ‘mobile search’ (Aker & Mbiti, 2010).
First o all, the markets in India have had a lot of market asymmetries before mobile communication was increasingly used. Information had to be obtained from a lot of different resources and areas like input and output prices, jobs, potential buyers and sellers, natural disasters, and new technologies and politics (Aker & Mbiti, 2010). The traditional mechanisms through which information was gathered were personal traveling, radio programms, newspapers, telegrams, television programs and letters. However a great part of India is rural and in these areas people face several developmental constraints, such as low literacy, poor healthcare facilities, low per capita income, a high degree of poverty and problems related to poor infrastructure (Mehta, 2013). Due to these development constraints, a great part of information was gathered through personal traveling. The personal costs of obtaining the information was high, it required transport and opportunity costs, which in rural India can be relatively high due to long distances and poor roads (Aker & Mbiti, 2010). With the use of mobile phones, these transport and opportunity costs are no longer relevant since people can share information through mobile communication. This translates itself in reduced search costs; it allows people to obtain information immediately and on a regular basis. The sequential search model of Aker (2008) predicted that a reduction in search costs will decrease the variance of equilibrium prices, thereby improving market efficiency, and it will also make sure that prices are the same in different markets with products that are substitutes.
Small producers in India usually experienced income losses due to information asymmetries in the markets. Wholesaled traders knew prices in various markets and could enter into price arbitrage operations, whereas small producers had to limit themselves to possibly lower price realization in
neighbourhood markets (Mehta, 2013). According to Egglestone, et all (2002) prices and market signals are the key instruments that facilitate the coordination issue involved in the allocation of resources to their best possible use. Prices transmit all the information that participants require to make effective decisions in both the production and consumption. So when the prices are not coordinated well, this can lead to income losses and inefficiencies. The rise of speedy arbitrage operations and new information institutions, because of the mobile telephone, ensured that the price differentials among markets would narrow to the cost of transportation and transaction between places (Du Boff, 1980), which resulted in a more efficient way of the allocation of resources in the market. Second, the increased usage of mobile phones makes it easier to communicate with one another. This is especially important in the supply chain of a market. Good communication between firms and their supplier can lead to a more efficient streamline of the production process and a better work environment for the employees. This will reduce costs and makes the supply chain work more efficient. One example of this feature is the mobile phone use in the fishing industry in India. ‘’The wholesale merchant who buys fish at the harbour is constantly in touch with retail merchants who know local consumer demand well. He buys if and only if he knows with certainty that the retail merchant will buy the fish from him, while the retailer bases his buying decisions on his intimate knowledge of local consumers and the selling price of fish in the landing centre’’ (Abraham, 2007). So with the coordination of mobile phones, there will be less wastage of products and time in the supply chain. Third, job creation is one of the most visible impacts on the economy that mobile communication has enhanced in India. Due the increased demand of mobile phones, the number of mobile operators has increased significantly, so labour demand increased in this sector. India also managed to develop a major software industry that has made India a major exporter of the telecom products in the international economy. The Indian Software Industry has grown more than 30% annually for the last 20 years, in 2008 exports projected at close to $60 billion (Telecom Regularity Authority of India, 2012). The development of software is relatively labour intensive and uses a relatively low amount of capital, which gives the opportunity to outsource a
great part of software products to less developed countries. This outsourcing demand has formed the basis of the initial growth of the software industry in India (Arora & Athreye, 2002). In table 1 the Growth of the software industry in
its early days can be seen.
Table 1: Growth of software revenues in software industry India
Source: Lakha (1994) for figures up to 1989/90, Kumar (2000) for all other years.
India is a country with relatively low wages where the population speaks English, which makes it a better candidate than other developing countries with low wages for investors to outsource the production of software products. Also India has a great availability of scientists and engineers whom all speak English, which gives India a great comparative advantage in the labour productivity for the software production. That is one of the main reason why the software industry is far more productive than other sectors. The wage advantage for software professionals for India compared to other countries can be seen in table 2.
Table 2: International differences in wages software professionals, 1995
Source: www. man.ac.uk/idpm/isicost.htm
due to better communication among members of a social network. The constant flow of information gives the possibility to make informed decisions easy and fast which has lowered the risks and losses of doing business in highly volatile commodities (Abraham, 2007). Mobile phones make it possible to communicate for less communication costs than normal, due to reduced search costs (see above), this will increase the spead of information, which will allow people to better respond to natural or economic shocks. For natural disasters, this is especially important in the agricultural sector. It can help farmers to make planting and harvesting decisions with more information than before. Mobile phones can also have the ability to change the way social networks function. It can strengthen some by allowing individuals to communicate more frequently and widely, and broaden other networks as trades and firms start businesses in
new markets (Aker & Mbiti, 2008).
Finally, the public sector and government recently started to use the mobile phone as a tool for economic development. They made applications for mobile phones with services that go beyond the person-‐to-‐person communication by texts and voice calls, but focus on the possibility to provide agricultural price information, monitoring health care and transferring money (Aker & Mbiti, 2010). A recent financial application that is possible with the mobile phone is ‘m-‐banking’ (mobile banking). The system usually involves a set of applications that facilitates a variety of financial transactions via mobile phones, including transmitting airtime, paying bills and transferring money between individuals (Aker & Mbiti, 2010). It gives costumers the possibility to transfer and to withdraw money using their mobile phone whenever and wherever they are (Franses & blauw, 2011). M-‐banking systems let people store value in accessible accounts, convert cash from an account, and transfer between users with a single text message, a menu command or a personal identification number. Transactions can be done in seconds, which makes it easier to do business in markets. Usually financial transactions in developing countries can take days or even weeks to get finalized. With ‘m-‐banking’, even the people living in rural circumstances, can make transactions more easily and faster. M-‐banking transfer systems could change the duration, frequency and magnitude of these transactions, thereby affecting households’ business opportunities, educational
investments and income (Yang, 2008).
Another innovative mobile application is the ‘mobile search’, encompassing a range of Short Message Service (SMS) that inform users on request about weather conditions, sports, news, agriculture, health and so on. Mobile search helps to efficient gather information, and it helps individuals to take more uniformed decisions (Franses & blauw, 2011).
2.4 The Prospects of mobile phones on economic development
There have been a lot of studies that conclude the positive impact of fixed and mobile telephones on the economic development, especially in developing countries as outlined above. At a macro-‐economic standpoint, Hardy (1980) has found a positive impact of fixed telephone lines as a contributor to economic development; it speeds up the growth. According to Eggleston et al. (2002) did both mobile and public phones seem to close the digital divide between the developed and developing world, in fact it facilitates a ”Digital Provide”, which
ultimately leads to economic growth.
Aker en Mbiti (2008) have found empirical evidence on the potential that mobile phones can serve as a tool for economic development with data on Africa, but this evidence remains limited. They argue that communication technologies cannot replace investments in public goods such as education, power, and better road access and water availability. Without these public goods, a trader might get better price information because of better access to information, but can still be unable to transport goods to other markets. So in order for mobile phones to be as effective as possible, a combination of investment between public goods and mobile communication should be made (Aker & Mbiti, 2008).
Arora and Athreye (2002) argue that the software industry in India has accounted for the economic development in the past 10 years due to the rapid advance of software exports as a consequence of the country’s comparative advantage in the production of these products and services. This comparative advantage results from the human capital, the large availability of English speaking engineers that are available in India, as well as from the disadvantage in manufacturing due to poor infrastructure investments from the past.
Röller and Waverman (2001) have researched the economic development in 21 OECD countries and found that a 10 percent increase in the telecommunications penetration rate increased economic growth by 1.5 percent. Kathuria, Mamta & Uppal (2009) have found similar results, they found that mobile penetration is both positive and significant and found a causal relationship within the same country. ‘Indian states with high mobile penetration can be expected to grow faster than those states with lower mobile penetration rates, by 1.2% points a year more on average for every 10% increase in the penetration rate’. They also found that fixed lines do not seem to have any impact on mobile demand, this is because of the much greater availability of mobile phones in the country. So there is a positive relationship between GDP
per capita and the mobile density.
However there has been found that there exists a two-‐way relationship between large growth of telecommunications and the income level of the population by a paper of Cronin, Colleran, Herbert and Lewitzky (1993). The large growths of the telecommunication market and the increased exports from the software industry have created jobs for the population, which has generated income for India. The increased income has stimulated the demand of mobile communication devices. But at the same time, the increased use of mobile phones, made possible by the low costs of contracts and phones, made markets more efficient and transparent that has boosted the economy as well.
According to the rapport of Market Line (2013) are the future prospects
of the mobile telecom market in India still increasingly good. They have estimated that in 2016 the Indian mobile phone market will have a volume of 241.9 million units, an increase of 71.3% since 2011. This will probably close the gap more between the rural and urban parts. The mobile telephone demand in the rural parts will increase, because in the industrialized parts of India most
people already have a mobile phone.
According to the literature review above, it becomes clear that mobile phones have had a positive impact on the economic development in India. But it is still not clear whether this positive impact is significant and whether simultaneous causality has occurred during this development. Did the growing software industry in India, which boosted GDP, caused the increased mobile
phone use, or did the increased use of mobile phones boosted the economic development? This relation will be tested in the next section of this paper.
3. Methodology 3.1 Data
For this empirical research, quarterly panel data is used for India over the time period 2002-‐2012. Quarterly data is used because mobile phones are a quite new phenomenon, so not much data is available for the use of them before 2002. The dataset includes 36 observations. In total 18 observations are not included in the dataset, because data on these macro-‐economic variables were not available. The variables of interest are LNGDP (the natural logarithm of Gross Domestic Product (GDP) of India) as the dependent variable, which will capture the percentage increase of GDP per capita, and MobSub (Mobile cellular subscribers in millions) as the independent variable, which will capture the mobile phone use in India.
The Gross Domestic Product (GDP) of a country measures the market value of the final goods and services that are produced within a year. This variable is a good approximation of India’s standard of living; it represents the health of the countries economy. In this research the natural logarithm of India’s GDP is taken (LNGDP); in this way the percentage change of the GDP is measured. The change in percentages of India’s GDP can be used as an approximation of the economic development of the country. When India’s GDP increases, the economic development of India will increase, which means that the gap between the developed and developing countries will decrease. The data on India’s GDP comes from OECD, Organization for Economic Co-‐operation and Development.
To indicate the amount of mobile phone usage in India, the measure of mobile subscribers per million is used here as an approximation. Mobile subscribers is used as a measure for mobile phone use because it is hard to exactly identify the amount of mobile phone usage in a country. Also with the use
of mobile subscribers as a measure, only the working accounts are counted for instead of the number of mobile phones itself. In a developing country like India, some people have more than one mobile phone while others share a mobile phone, so this does not provide a realistic summary of the mobile phone usage. The data for Mobile cellular subscribers in millions comes from the Telecom
Regulatory Authority of India.
The GDP of India is a measure for economic development that correlates and depends on a lot of factors, which need to be taken into account to get reliable estimates of the variable of interest (MobSub). To get a reliable result, control variables are used for GDP and will be included in the model; this will ensure that no omitted variable bias will occur. These control variables are ExRate (Exchange Rate USD in RUP), Int (Interest rate from The Central Bank of India), PopGro (Population Growth in %), NetImp (Net Import), and HumCap (Human Capital).
The Exchange rate of USD in Indian Rupees is used as a control variable because with an increase or decrease in the exchange rate, GDP will be affected. With an appreciation in the value of the Indian Rupee, the revenue generated from exports will decrease; this in time will decrease GDP. With a depreciation of the Indian Rupee, the opposite will happen and the revenue of exports will increase. To control for these fluctuations of GDP in this research, the exchange rate is taken as a control variable. The data on the exchange rate of USD in Indian Rupees comes from the International Monetary Fund (IMF).
The interest rate of the Central Bank of India is also used as a control variable. It is a measure of the discount rate that will influence GDP. When the interest rate increases, saving money on a bank account will be more beneficial due to the higher interest rate that can be earned, this will increase the saving rate. Meanwhile the cost of holding money will increase, it will be more beneficial to save money on a bank account than hold it on hand. An increase in the interest rate will make borrowing more expensive, which will result into less consumption and a decrease in India’s GDP. This in turn, will also affect the money supply, because less consumption and less borrowing will lead to less holding of money on hand by consumers, which will also cause India’s GDP to decrease. An increase of India’s GDP will happen when the interest rate will
decrease. To control for these fluctuations in this research, the interest rate is taken as a control variable. The data on the Interest rate of The Central Bank of India is also from the International Monetary Fund (IMF).
The population growth of developing countries is usually high, which in turn can have an influence on the economic development of a country, so on India’s GDP. When the population growth increases, there will be more people available that can and want to work, which in turn will decrease wages. So a high rate of population growth will increase the amount of cheap labour available in India. This in turn will increase the investment opportunities for firms from outside of India who would like to take advantage of the low wages available in the country. The increased investment possibilities will generate job opportunities and revenues that will increase India’s GDP, the opposite is true when the population growth will decrease. To control for these fluctuations in this research, the population growth is taken as a control variable. The data on the population growth is adjusted from yearly percentages to quarterly percentages and comes from the World Databank.
Net import is the subtraction from exports minus imports of a country’s trade. Net import shows if a country has a trade surplus or deficit. When exports are higher than imports, there will be a trade surplus. More goods and services are going out of the country that generates revenue, than is imported by India that costs money, this will cause India’s GDP to increase. The opposite case is true when the imports are larger than the exports, so when there is a trade deficit. Again to control for these fluctuations in GDP, net imports are taken as a control variable in this research. The data of net imports comes from the Reserve Bank of India.
Human capital is the collective term used to describe the set of skills that employees acquire on the job to produce value for themselves. This can be through training or experience, and will increase the value of the employees in the marketplace. Human capital itself is hard to measure, so secondary school enrollment as gross percentage is used as a proxy for human capital in this research. Secondary school enrollment measures the ratio of children, of official school age, who are enrolled in school to the total population of India. With secondary education, the basic education is completed that began at primary
