Ringing in higher growth

We all agree that there is a huge discrepancy between India and China's absolute per capita income. For instance, in 2002, China's per capita GDP at $942, in constant 1995 dollar terms, was nearly double of India's $494. Recent International Monetary Fund (IMF) data, however, shows that India's per capita grew by 46 per cent between 1992 and 2002, while China's growth rate fell by 7 per cent over the same period.

The data also confirms that India's per capita income growth in five years, from 1997 to 2002, has outperformed that of other major Asian economies, with only Korea's growth rate matching that of India.

Several factors explain this trend. The first is "convergence" and it implies that as long as appropriate policies are followed, poorer countries can be expected to grow more rapidly than their richer counterparts.

This occurs mainly for two reasons:

• Free flow of capital to the poorer countries. Note that because of capital shortage, the rate of return to capital in poorer countries is higher.
• Poorer countries can imitate technological changes adopted by the richer ones, and do not need to reinvent the wheel.

The key factor in convergence appears to be the pursuit of appropriate policies. While it is well-known that the opening up of the economy in the 1990s has resulted in rapid growth, the issue that remains controversial is whether or not the reforms have trickled down.

So far, we have only noted the co-existence of stark poverty along with isolated islands of technology innovation such as Bangalore and Hyderabad, without a perceptible increase in growth due to technology.

In fact, recent research shows that convergence could occur if low-income countries could add to their stock of telephones rapidly. Empirical evidence and theory suggest that rapid deregulation of telecommunications is the most important policy decision that has resulted in increasing growth.

This is because as the information and communication technology (ICT) infrastructure improves, transaction costs of doing business reduce, and output increases for firms in various sectors of the economy. Further, ICT enables physically dispersed business activities as a by-product of efficient and well-informed managers.

Interestingly, according to a research study, half of all telephone calls made are related to some economic purpose, for example, discussing employment opportunities, commodity prices, land transactions, remittances and other business concerns.

Another research paper shows how basic telecom infrastructure can create a "digital provide" by bringing efficiency in the market through information dissemination to isolated and information-deprived locals and improve the living standards of the world's poor, which in turn accelerates growth. Empirically, it is estimated that a 1 per cent growth in telecom services generates 3 per cent growth in the economy.

To corroborate the theory, note that while India's per capita GDP increased from $ 326 (1995 = 100) in 1990 to $ 483 in 2001, registering a compounded annual growth rate (CAGR) of 3 per cent, over the same period, the CAGR of telephone penetration in India was 17 per cent.

Between 1996 and 2001, when most of the world's developing economies rapidly deregulated the telecom sector, mobile phone penetration in India was 66 per cent, lower than the low-income country average of 78 per cent for cell phone penetration.

In the period between 1990 and 2001, the CAGR of real investment in telecom infrastructure in India increased by 8 per cent. It is easy to imagine that investment in ICT infrastructure and derived services provides significant benefits to the economy.

Similar to other infrastructure investments, investing in telecom will increase the demand for the goods and services used in their production. Research identifies telecom infrastructure as being different from others because of network externalities, which increase the value of a service with an increase in the number of users.

The rapid increase in cell phone penetration in India and other developing economies, when compared to that of landlines, is easy to understand.

For developing countries, where penetration rates of telephones are extremely low, catching up with developed countries in terms of telecom infrastructure has meant investment in wireless and mobile systems local loops, bypassing investment in fixed lines.

This is especially so because mobile links are a quick and inexpensive way of developing new telecom infrastructure from scratch. From this point of view, India has not imitated the developed countries, as convergence implies, but has leapfrogged, like many other developing economies.

It could be that the intensity of ICT adoption is significantly dependent on the level of economic development and competitiveness of nations.

However, taking this simultaneity into account, we find, based on the sample of all low-income economies of the world, that an increase in total teledensity by 1 per cent increases national output by 0.14 per cent.

We find an increase in main telephone line penetration to increase GDP by 0.12 per cent, whereas a 1 per cent increase in cell phone penetration increases GDP by 7 per cent. So far, research has shown output increases of up to 3 per cent as being normal with telephone penetration increases.

If rapid infrastructure penetration is the panacea for most of our problems, then what can we do to improve infrastructure? Our research shows that increases in telecom investment have a powerful and positive influence on growth in telephone penetration. Specifically, a 10 per cent increase in investment increases telecom penetration by 2 per cent. Note that a regulatory structure that is conducive to competition promotes investment in telecom infrastructure.

Everything said and done, how can we come out of the Hindu rate of growth? First, we need to deregulate all public infrastructure in the same way as we have done in telecom. The most important of other public infrastructure is roads.

Currently, for instance, it takes longer for goods to reach from Delhi to a remote place in Karnataka than it takes from Bangkok to Delhi. Given the large country India is, we have the imperative to use it as a resource and develop the road network more extensively.

For this, infrastructure-financing institutions such as IDFC and ILFS have to be motivated to make investments, and they can do this only if the service charge-use relationship is enforced on consumers, as with telecom.

Second, we need to invest in social infrastructure "" particularly, primary education "" immediately and rapidly. This is to harness our most important assets for the future, which will ensure rapid growth. This becomes clear if we understand that reform is a double-edged sword "" reducing wasteful government expenditure and increasing investment where it is needed since there is still not enough incentive for the private sector to ensure equity in participation.

(The author is a fellow at the National Institute of Public Finance and Policy. Her email id is kala@nipfp.org.in)