Impact of Reliance's Entry

Impact of Reliance’s Entry A Socio-Economic Analysis of Jio-fication and India’s GDP story

AUTHORS Dr. Amit Kapoor Honorary Chairman Institute for Competitiveness, India Chirag Yadav Senior Researcher Institute for Competitiveness, India Editorial Neera Vohra Principal Associate Institute for Competitiveness, India

Publisher Institute for Competitiveness U 24/8. DLF Phase 3, Gurgaon 122 002, Haryana, India Website: www.competitiveness.in Š 2018 The Institute for Competitiveness. All rights reserved.

For more information about obtaining additional copies of this or other Institute for Competitiveness publications, please visit IFC’s website, www.competitiveness.in

About INSTITUTE FOR COMPETITIVENESS Institute for Competitiveness, India is the Indian knot in the global network of the Institute for Strategy and Competitiveness at Harvard Business School. Institute for Competitiveness, India is an international initiative centered in India, dedicated to enlarging and purposeful disseminating of the body of research and knowledge on competition and strategy, as pioneered over the last 25 years by Professor Michael Porter of the Institute for Strategy and Competitiveness at Harvard Business School. Institute for Competitiveness, India conducts & supports indigenous research; offers academic & executive courses; provides advisory services to the Corporate & the Governments and organizes events. The institute studies competition and its implications for company strategy; the competitiveness of nations, regions & cities and thus generate guidelines for businesses and those in governance; and suggests & provides solutions for socio-economic problems.

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The Institute for Competitiveness U 24 / 8 DLF Phase 3 Gurgaon 122 002 Haryana, India Phone: +91 124 437 6676 Email: info@competitiveness.in

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Reliance Industries...an entrant to India’s mobile market has attracted more than 150 million subscribers in less than 18 months. The company has fundamentally transformed the Indian telecoms market, turbocharging mobile data consumption with its cut-rate tariffs and triggering a wave of industry consolidation.

Simon Mundy, Financial Times, March 16, 2018

In the year since it launched, Jio has acquired over 100 million users — many connecting to the mobile internet for the first time in their lives. To give some context, this effectively makes Jio that fastest adopted technology in human history.

Trushar Barot, NiemanLab, December 18, 2017

Think of the hundreds of millions of Chinese internet users and how they changed the very nature of e-commerce, creating behemoths like Alibaba and Tencent, and have revolutionised finance by creating cheap digital payments far faster than any in the United States. Indians might well initiate the next series of transformations because of how this vast user base will use the internet.

Fareed Zakaria, CNN, April 1, 2018

[Reliance Jio] has succeeded in using the India Stack to enrol 108 million consumers in 170 days with a totally paperless, mobile-centric manner — in the process achieving customer acquisition costs of less than $1 (USD) per customer, compared with the prior industry standard of $25.

The process of digital disruption — whether led by government or not — creates numerous significant social challenges. Rather than seeking to slow that process to reduce those challenges, India has taken the opposite approach: to not only embrace but accelerate digital disruption, to ensure its full potential for economic and social inclusion is realized.

Arvind Gupta, Harvard Business Review, November 8, 2017

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Contents Executive Summary ................................................................................................................................ 5 1. Introduction ........................................................................................................................................ 6 2. Impact of Reliance Jio: Creating Shared Value ................................................................................ 14 Reconceiving Products and Markets ............................................................................................... 15 Redefining Productivity Across Value Chain ................................................................................... 17 3. Impact of Reliance Jio: Enabling Social Progress ............................................................................. 20 4. Measuring the Economic Impact of Reliance Jio’s Entry ................................................................ 23 Econometric Model .......................................................................................................................... 27 Impact of Reliance Jio’s Entry .......................................................................................................... 28 Appendix............................................................................................................................................... 32 Bibliography.......................................................................................................................................... 34

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Executive Summary Since Jio’s entry into the Indian telecom markets on September 2016, the face of the industry has not remained the same. It changed the basis of competition by offering free lifetime calling to its consumers in an industry that derived 75 percent of its revenue from voice. Instead, data became the new focal point of competition. Within six months of Jio’s launch, India became the highest mobile data user in the world consuming over 1 billion GB of data every month as compared to 200 million GB earlier. By the end of 2017, its users on an average consume almost 10 GB of data, 700 minutes of voice and 134 hours of video every month. Data usage in the country has soared. India is now only second to China in terms of app downloads. Such levels of digital consumption were unprecedented a year and a half ago.

Impact of Jio’s entry on Indian economy: •

Increased accessibility and affordability of data: The first and the most obvious one has been that it has made data accessible and affordable for every user in the country. Average prices per GB of data have dropped from Rs 152 to Rs 10. Such a drastic reduction in data prices has not only brought the internet within the reach of larger proportion of the Indian population but has also allowed newer segments of society to use and experience it for the first time. As per our calculations, even the most conservative estimate shows that due to Jio’s entry the annual financial savings to the consumers would be to the tune of $10 billion.

•

Digital Services: Before Jio’s entry there were hardly many avenues where such high levels of data could be expended by a consumer. On the other hand, Jio offers its consumers a wide bouquet of digital applications that address a variety of consumer needs ranging from education, health, entertainment and banking. All of these services form a part of the digital platform through which Jio aims to address multiple socio-economic needs of its customers. This study aims to delve deeper into the company’s unique business model and highlight its societal impact. We do this at three levels: through the shared value perspective, the social progress angle and an econometric analysis.

•

Economy-wide impact on growth: In order to quantify the economic impact of Jio’s entry into the Indian telecom market, an econometric analysis was conducted to measure the impact of internet penetration on economic growth. Using the findings, the study found that through network effects, Jio’s entry into the telecom industry will expand India’s per capita GDP by about 5.65 percent, if all else is kept constant in the economy. The effect on GDP growth due to higher internet penetration will not just be a contribution of the telecom sector but also the various externalities that arise out of the internet economy.

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1. Introduction The Indian telecom industry has witnessed a spectacular growth story since the Atal Bihari Vajpayee government formulated the National Telecom Policy in 1999 almost two decades ago. From a mere million subscribers when the policy was enforced, the industry has grown to encompass more than a billion subscribers, which makes it the second-largest telecommunications market in the world.

This evolution of the Indian telecom industry beginning from 20021 is visually depicted in Figure 1.1. The kink around 2012 is due to a change in the definition by TRAI for wireless subscribers. Availability of comparable data would have shown a continued upward trend.

Over the years, the sector has become a significant contributor of the country’s GDP and job growth. In fact, in 2015, the mobile industry contributed to 6.5 percent of India’s GDP while providing direct and indirect employment to a total of 4 million people in 20152.

The industry has also been one of the fastest-growing sectors in the country with a compound annual growth rate (CAGR) of 7.3 percent over the last decade3. It is, therefore, not a stretch to claim that the telecom industry, especially mobile telephony, has occupied centre-stage in the Indian growth story4.

There are a number of factors that have contributed to this growth trend of the telecom industry in India. The first, and the most important, element is the level of price competition

Figure 1.1. Evolution of the Indian Telecom Industry 1400

100 90 80

1000

70 60

800

50 600

40

Teledensity

Subscriber Base (in millions)

1200

30

400

20 200

10

0

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Wireless Wireline Teledensity Source: TRAI Performance Reports

1

TRAI began compiling its performance reports from 2002 onwards.

The Mobile Economy – India 2016, GSMA Intelligence. Link: https://www.gsmaintelligence.com/research/?file=134a1688cdaf49cfc73432e2f52b2dbe&download 3 IBEF Industry Report. Link: https://www.ibef.org/download/Telecommunications-November-2017.pdf 4 Telecommunication has also been the only sector that is an outlier in productivity gains achieved in the postreform period. A supporting visualisation can be found in the Appendix.

2

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Box 1.1. Overview of the Indian Telecom Industry One of the fastest-growing sectors of the country with a growth rate of 7.3% between 2006-16

Second-largest subscriber base in the world of over 1200 million as of August 2017 Second-highest number of internet users in the world of over 430 million Hyper-competitive market with one of the lowest tariff rates in the world PPORTER’S FIVE FORCES FRAMEWORK ANAYLSIS

Threat of New Entry (Low) • High fixed costs • Strict government regulations • Limited spectrum availability

Bargaining Power of Customers (High) • Low switching costs • High price sensitivity

Competitive Rivalry (High)

Threat of substitutes (Low)

• • • •

• No effective substitute for databased services

4-5 industry giants Low switching costs Minimal customer loyalty High exit barriers

Bargaining Power of Suppliers (High) • High switching costs • Limited number of suppliers

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among the telecom players. Indian consumers are extremely price sensitive and value conscious than most of their global peers5. Therefore, the Indian telecom industry throughout its history has seen intense price competition among players offering its consumers one of the lowest tariff points across the world6. The continual rise in affordability of telecom products led to an ever-expanding adoption of the technology across the country. The second factor that has led to the exceptional growth of the telecom industry over the years is the rise in affordability of handsets. Reliance is a case in point. Box 1 describes the story of how Reliance revolutionised telecom services back in 2002.

However, the pace of transformation of the industry over the course of last year has been astonishing even by its own standards. It all began in September 2016 with the entry of Reliance Jio into the telecom fray that was already saturated by giants such as Bharti Airtel, Vodafone India, Idea Cellular and BSNL along with other smaller players. Until then, the industry had derived 75 percent of its revenue from voice, and as each operator tried to gain market share by offering competitive prices, it seemed to have bottomed out reaching as low as $0.01 per minute (compared to a regional average of $0.02).

Jio changed the basis of competition by offering lifetime free calling for its consumers to any network from anywhere across India while also providing a compelling value proposition for data. It was all leveraged on an all-IP data strong future-proof network with latest 4G LTE technology that also supported voice. Therefore, Jio could offer voice services to its customers at virtually no cost. Unsurprisingly, it added 100 million subscribers within 170

Box 1.2. How Reliance Revolutionised the Telecom Industry It is now taken for granted, but before 2002 the Indian consumer had to pay for incoming calls by the minute. Reliance revolutionised the industry with its entry in late 2002. It offered free incoming along with revolutionary data, video and value-added services at affordable prices. These offerings made telecom services accessible to the common man, which was the privilege of a select few until then.

Apart from making calling affordable, Reliance Infocomm also offered free digital mobile phone, which provided outgoing calls at incomparable prices to any other Reliance phone across the country along with free incoming. Outgoing rates to other phones was also at prices that the industry had never conceived before.

Within a year of its operation, the company set up its CDMA network across more than a 1000 cities and towns covering over 20 telecom circles and set up 60,000 kms of nationwide optic fiber cable across the country. It had also gained 22 percent market share within that time. The industry was never the same again.

5

A BCG-CII research carried out in 10 countries showed that on an average, for a similar product, prices in India are 10-30% lower than other markets, adjusting for purchasing power parity. Link: https://mediapublications.bcg.com/india/Retail-Transformation.pdf 6 ITU Yearbook of Statistics 2016.

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days of operations, which is the fastest by any technology company around the world. The disruption was complete.

Within six months of Jio’s launch, India became the highest mobile data user in the world with a monthly consumption of over 1 billion GB as compared to 200 million GB earlier.

India also surpassed the United States in terms of app downloads, making it second only to China. When Jio services became paid, an astounding 72 plus million people subscribed within a month making it the largest and the fastest migration from free to paid services in the digital services domain. By September, India had moved from a lowly 155th in mobile broadband penetration to become the world’s largest mobile data consuming nation within a year.

By the end of December 2017, the company’s subscriber base stood at 160 million and data consumption on the Jio network amounted to 10 GB per month per user7, the highest in the world. These levels of data consumption are higher than the total mobile data consumption in the US and twice of that in China. The pace at which the company is gaining market share is sending out understandable jitters across the industry.

After Jio’s entry, the competitive intensity in the markets has become so intense (see box 1.3) that scale has become a crucial prerequisite. It has made industry consolidation the next eventual step in the industry’s evolutionary ladder. Subsequently, Bharti Airtel has acquired the telecommunication services of Tata and Telenor while Vodafone is in its final stages of merger talks with Idea. After the merger, Airtel will lose its two-decade-long held position as the industry leader since the Vodafone-Idea combine will command a subscriber base of 400 million as compared to Airtel’s 320 million. More recently, Jio has signed pacts to buy assets of Reliance Communications. Jio is well ahead of its incumbents both in terms of quantity of subscribers and quality of services.

7

Reliance 3Q FY 2017-18 Financial Results. Link: http://www.ril.com/getattachment/c3c88daa-31ff-4f21-ad778a5ea062011b/Financial%20Presentation%20-%20Q3%20Results.aspx

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Box 1.4. Changing Face of Indian Telecom India's Internet Users NUMBER OF USERS (IN MILLIONS)

500 450 400 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Internet and Mobile Association of India, Statistica

Jio Subscriptions

SUBSCRIPTIONS (IN MILLIONS)

180 160 140 120 100 80 60 40 20 0

Source: Telecom Regulatory Authority of India

Wireless Data Usage GB PER MONTH (BILLION)

1.4 1.2 1 0.8 0.6 0.4 0.2 0

Source: Mary Meeker/Kleiner Perkins

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Apart from the change in industry dynamics, a less frequently mentioned effect of Jio’s entry is the social impact of its unique business model. The business model of the company is visualised in Box 1.5. Jio does not position itself as a telecom company, but as an allencompassing digital platform. Affordable calling and data services is only a part of what Jio is about.

Jio aims to provide an end-to-end digital service to its consumers based on its unique LTE technology beginning from an affordable LTE-enabled phone to the content consumed within it. The societal benefits that are generated through its services as a digital platform have the potential to address innumerable challenges that various communities face at the bottom of the pyramid.

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Some of the product offerings of Jio as a digital platform are as follows:

LTE technology • Incomparable quality in calling or data usage over LTE network • Allows functional capabilities like seamlessly shifting from voice to video calling • Low call latency

Jio Phone • Since most consumers at BoP did not have LTE-enabled phones, Jio Phone was introduced as an affordable smartphone with VoLTE technology • The phone is virtually free to the consumer as it comes with a buyback guarantee

Jio Apps • Jio carries a multitude of apps that allow the user to access services depending on his needs • These apps cater to daily needs like entertainment, education, health and banking

Public Wi-Fi • As a part of its plan to provide internet in corner of the country, Jio has launched public hotspots where users can access high-speed internet • The company has already set up more than a million hotspots

IoT Devices • The company has plans to launch IoT devices that will be based on the Jio network • Device for smart cars that allows the user to diagnose vital statistics of the car • Jio Fiber for smart connected homes

Livelihood Apps • Jio Kisan provides farmers with information relating to farm products like market prices at mandis • Retailers can use Jio Merchant, which is a device to scan and bill products that sends automatic updates to suppliers

Content • Reliance is also focussing on creating new content across various platforms like Alt Balaji, Network18, Eros and Saavn.

The societal impact of Jio is not limited to its products themselves. It can be shown that every activity across the value chain carries benefits to society. This has been diagrammatically detailed below.

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Box 1.6. Inside-Out Links with Society

Source: Adapted from Michael E. Porter

Each activity across the value chain creates a positive societal and economic impact from either making efficient use of resources to creating innovative product offerings that generate measurable benefits to society. These can be either looked at from the shared value or social progress perspective. Each of these are further detailed in the following sections.

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2. Impact of Reliance Jio: Creating Shared Value The telecom industry in India has had significant contribution in building the country’s competitiveness. Porter’s Diamond shows that India offers a competitive advantage to firms operating within the country (see Box 2.1.).

All of the four factors weave into each other to bring out the highest levels of productivity within the telecom sector. High demand begets high competition between service providers and handset manufacturers while high competition results in provision of the most affordable services possible. Alongside, enabling government policies and availability of skilled labour helped gain the required levels of competitiveness.

Therefore, the economic impact of the telecom sector has always been exceptional in nature. However, with Jio functioning at levels that lie beyond the domain of mere telephony, the impact of its operations has been more than economic. Through its activities, Jio is aligning economic goals with social ones, creating shared value8 in the process.

With its digital ecosystem, Jio is creating shared value at multiple levels. The idea behind shared value is to build business models around social good. It focuses on identifying and expanding the connections between societal and economic progress. An enterprise can create shared value through three key means: reconceiving products and markets, redefining productivity along the value chain and by enabling local cluster development. The shared value dynamics are illustrated in detail in Box 2.2.

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Porter M. E., Kramer M. (2011) Creating Shared Value. Link: https://hbr.org/2011/01/the-big-idea-creatingshared-value

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Reconceiving Products and Markets Reliance has had a proud history of reimagining products within the telecom market. In December 2002 when Reliance Infocomm was launched, it became a defining moment for the industry. The company was the first to offer free incoming and cheap outgoing services.

Subscribers were also offered handsets at throwaway prices, whose cost were recovered over time in monthly billings. Neither consumers nor the telecom companies had considered such an eventuality.

Fourteen years later, Reliance heralded a new age in telecom by virtually making outgoing calling free as well. It could so se because it had reimagined the telecom market in a variety of different ways.

Data-centricity: The Indian telecom industry was very much voice-centric. Even though voice calling in India was one of the cheapest in the world, it was responsible for about 75 percent of the industry’s revenue. Jio brought about a transformative shift in the telecom landscape by entirely reconceiving the product and shifting its centricity to data instead of voice.

LTE services: Jio was the first company to roll out the LTE technology on a national scale, which has significantly evolved over the last few years in terms of efficiency of the network equipment and compatibility across bands. The network allows high internet speeds and low call latency. In layman terms, the latter implies that the call connects in quick time intervals, averaging around 32 milliseconds. These calls are made over Voice over LTE, which allows the company to offer calls at virtually no overhead costs since the technology has to be set up for data services.

Digital Platform: Jio did not end its offerings at calling and data services but took it a step ahead to build an ecosystem of mobile applications that can cater to specific needs of consumers. These services delve into the domain of health, education, entertainment,

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Figure 2.1. Average Users of Reliance Jio Apps 16000000

Number of Users

14000000 12000000 10000000 8000000 6000000 4000000 2000000 0

Monthly Active Users

Daily Active Users Source: Google Diagnostics

digital inclusion, farming services, etc. Jio has redefined the consumption of data in India.

Such services make huge leaps in bridging the information asymmetry that exists in society and increasing competitiveness.

For instance, services like JioChat and JioMoney eliminate the need for workers who migrate to cities to make frequent visits back home. They can make seamless video calls using the former and transfer their earning back to their families through a secure gateway. The socio-economic multiplier of Jio’s operations are aplenty. We try measure the same in a later section.

This approach has made Jio the largest network globally in terms of data carried and has contributed to India becoming the leading country in the world with regards to data usage.

It is a significant feat for a country that was ranked 155 in terms of mobile broadband penetration in 20159 to become the highest mobile broadband data consumer globally in 2017.

The escalation in data demand has mainly occurred because of an increase in its affordability. The price of 1 GB of data, which was INR 375 in 2012 had merely halved to INR 152 in 2016. However, due to Jio’s entry and enhanced levels of competition, prices have fallen by 15 times to INR 10 in 201710. The data implosion has been to the extent that India now uses 100 crore GB of data each month as compared to 20 crores GB earlier.

It can, thus, be said that Jio has reinvented and reimagined the entire telecom market with its innovative product offering.

9

The State of broadband 2015. Link: http://www.broadbandcommission.org/Documents/reports/bbannualreport2015.pdf 10 Institute for Competitiveness Analysis

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Redefining Productivity Across Value Chain One of the most effective means of creating shared value arises from mitigating the harm arising out of a firm’s value chain activities. As a company finds means to enhance efficiency across the value chain, it saves on operational costs while the society saves on environmental costs or enjoys the benefits of improved working conditions.

Jio has strategized at different levels across its value chain by building synergies through partnerships and leveraging on existing infrastructure. It has also followed an innovation-led developmental model to build an efficient technology network that is future-ready.

Partnerships It is no secret that telecom is an investment-heavy industry and the process of laying down infrastructure for a new entrant can be a tough ask. In fact, it is one of the industry’s foremost barrier to entry. A very basic requirement is to set up a network of telecom towers across the nation and each unit typically requires permission from up to 40 authorities. On top of it, an LTE network requires laying down of cross-country fibres, which is extremely expensive and time consuming. Even that comes with a requirement for permission from multiple local agencies.

Jio managed to have a direct physical presence in all 29 Indian states11 covering more than 18,000 urban and rural towns and over 2,00,000 villages with the most sophisticated, efficient and largest LTE network in the country.

Partnerships played a key role in this process. Jio entered into partnership agreements with some of the leading telecom infrastructure companies in India such as Reliance Infratel Ltd, Indus Towers Ltd, Viom Networks Ltd, ATC India Tower Corporation Pvt Ltd, GTL Infrastructure Ltd, Ascend Telecom Infrastructure Pvt Ltd, Tower Vision India Pvt Ltd, RailTel Corporation of India Ltd, BSNL and MTNL to have access to the passive infrastructure set-up by these companies. It also managed to economise on the overall use of fiber and other passive infrastructure by getting into partnership agreements with Reliance Communications. To supplement these partnered assets, Jio also built its own network of towers and optical fibres.

Such an approach allowed Jio to create synergy effects and helped it prevent unnecessary expenditure of resources at the altar of competition. Both the company and society gain from such efficiency-enhancing partnerships.

Distribution In the telecom industry within a country like India, setting up distribution channels is another challenging task after setting up the infrastructure. Fortunately for Jio, Reliance already had a vast expanse of Reliance Digital stores spread across the country. So, it accessed the reach of these stores to build its distribution network. At the time of the launch, Jio had about half a million activation outlets and close to a million recharge outlets.

Moreover, for areas where Reliance Digital was not present, it built an online store that offered the entire product assortment with an assisted sales model. It was supplemented with store pickup and home delivery facilities so that customers in remote locations can also 11

State-wise distribution of Jio consumers can be accessed in the Appendix

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avail the ‘connected store’ experience. Thus, Jio made clear efficiency gains by leveraging on existing infrastructure and digital facilities to strengthen the distributional aspect of its value chain.

Innovation In a dynamic industry like telecom, continuous research and innovation is the only means of remaining competent. Jio understood this aspect of the industry and extensively developed innovative means to build its network.

The company’s LTE network has advanced features such as Software Defined Networking (SDN) and Network Functions Virtualisation (NFV) and uses both Time Division Duplex (LTETDD) and Frequency Division Duplex (LTEFDD) technology for its wireless broadband services. It is built to make the transition to 5G with minimal additional capital expenditure in the network.

The company has undertaken extensive research to build the network and, in fact, over the course of its development, it ended up filing a total of 54 global patents. Using the network, Jio aims to usher in an era of “visuality”, where video will replace voice as the new communication medium.

Therefore, Jio has successfully boosted the productivity all across its value chain beginning with infrastructure development to product delivery to consumer usage itself. All of these measures were quite efficiency-enhancing for the company itself and the consumers as a whole.

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Box 2.3. Shared Value Benefits Across Society

Micro and Medium Scale Enterprises: Accessing new markets via digital platforms Easy and secure payment mechanisms Real-time access to consumers and suppliers

Women Empowerment: Access to various sources of information Enables development of women entrepreneurs Reduction in information asymmetry

Skill Development: Skill-based learning platforms Access to experts for career-related information Video and text-based courseware

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3. Impact of Reliance Jio: Enabling Social Progress With a net worth of ₹2.9 lakh crore, Reliance Industries contributes to about 1.87 percent of India’s GDP. To put things in perspective, the expenditure of the Indian government on healthcare is merely 1.4 percent of its GDP. Unsurprisingly, it is also one of the largest employers in the country with an overall direct employment of over 1.4 lakh people.

Therefore, Reliance’s operations are deeply integrated into the well-being of the Indian society. Any move by the company is bound to have a widespread social impact.

The single biggest impact of Jio’s entry into the Indian telecom market has been the increasing data and voice accessibility and affordability for people at different strata of income levels. It has opened up windows of opportunities for people across various sections of society to leverage the power of the internet and expand their capabilities in different walks of life (see Box 3.1).

Apart from increasing access to communication, there are three specific areas towards which Jio is making concerted efforts. These include agriculture, education and health. India has had a problem of access in addressing all of these issues of social concern. Improving digital connectivity is one of the most viable and efficient mechanisms of improving access and enabling social progress.

The agricultural sector in India presents various opportunities for application of digital tools to reduce information asymmetry and improve productivity. The average farm yields in India are around 20-30 percent of the best global yields. Apart from infrastructure issues, there is a huge knowledge gap among farmers about the best farming practices. Jio’s initiative with e-plant clinics, which connects farmers with experts on a real-time basis to provide farming solutions has made great strides to bridge this gap. Jio has shown that digital solutions like these can provide substantial returns when scaled on a national level. The company aims to bring about a ‘digital green revolution’ across the entire agricultural value chain so as to boost farm productivity.

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Box 3.1. Correlation between Digital Access and Social Progress It is quite intuitive that higher digital access leads to more efficient provision of social services and hence results in higher social progress. However, findings from the Social Progress Index 2017 formalise the idea. Exhibit 1 and 2 shows how access to information and communication is highly positively correlated with the per capita GDP of Indian states while per capita GDP, in turn, is highly positively correlated with the Social Progress Index scores.

Exhibit 3 and 4 show the direct correlation between access to information and communication and health and education indicators. The health and education scores of Indian states are positively correlated with their access to information and communication scores.

250050

Goa

250040

Delhi Sikkim

Delhi

Sikkim 200050 Maharashtra Gujarat Haryana Uttarakhand Andhra Punjab Tamil Pradesh Nadu Chhattisgarh Madhya Odisha Assam Pradesh

150040

100040

50040

Bihar

Per Capita SDP

Per Capita SDP

200040

Haryana Himachal Pradesh Maharashtra Arunachal Punjab Pradesh Kerala Gujarat Jharkhand

150050

100050

Assam 50050

Jharkhand

40

50 10

30

50

70

90

40

50

60

70

SPI Scores

Access to Information and Communication

Exhibit 1

Exhibit 2 80

Goa

90

Kerala Chhattisgarh

Himachal Pradesh Manipur Karnataka Sikkim Maharashtra Assam Punjab

80 70

Delhi

Gujarat

60

Bihar

50

Uttar Pradesh

Jammu & Kashmir Rajasthan

40

Nutrition and Basic Medical Care

100

Access to Basic Knowledge

Jammu & Kashmir

Bihar

Manipur Mizoram Nagaland Goa

70 60

30

50

70

Access to Information and Communication

Exhibit 3

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90

Tamil Nadu

Punjab Himachal Pradesh Delhi Karnataka Assam Odisha Gujarat Haryana Rajasthan Bihar Madhya Uttar Pradesh Pradesh Tripura

50 40 30 20

10

Kerala

10

30

50

70

90

Access to Information and Communication

Exhibit 4

Second, Jio has made significant advancements in digitally-enabling health services.

JioHealthHub, an IT-enabled platform, allows users to digitalise their health records and connect with partner hospitals and labs on a real-time basis. Jio is also using it to keep a robust health record of its employees and spouses so that it can conduct periodic medical examinations for them and ensure their well-being. Considering the fact that India faces huge gaps in access to healthcare, such digitals solutions can go a long way in bridging them.

Third, Jio is also exploring the digital opportunities available in the field of education. Access to quality teachers is a serious challenge in India’s vast landscape due to geographical and economic barriers and enabling students with digital access can break them effectively.

Smart classrooms aided by AI-based smart assistants can ensure quality learning for students. Jio’s Smart Classrooms are doing the same with a cloud-based courseware where students can learn from video-based and text-based lessons. Skill-based learning is also being made accessible with JioChat that hosts a channel where users can gain essential skills online in order to secure jobs and stay up-to-date with market trends.

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4. Measuring the Economic Impact of Reliance Jio’s Entry The impact of information and technology (ICT) on economic growth has been extensively studied since the advent of technology became evident in our lives. The subject has been a matter of considerable interest since growth in ICT has multiple synergy effects. Apart from the most obvious gains from an increase in demand for the goods and services within the sector, ICT also generates efficiency gains by reducing transaction costs of economic activities undertaken across the economy.

It provides businesses and consumers with efficient ways to interact with each other. For instance, the prevalence of e-commerce, which is an offshoot of the ICT revolution, has drastically eliminated the geographical barriers between buyers and sellers in ways that were inconceivable merely two decades ago. In a similar fashion, the cost of business-tobusiness interactions also become down with growth in ICT. Thus, the growth of the telecommunication industry within an economy provides significant derived benefits as their presence allows productive units to produce better.

Several studies were undertaken to gauge the extent of the benefits from these spill-over effects of ICT. The first one to find a significant impact of telecom on growth was by Hardy (1980)12, who based it on data from 45 countries. Interestingly, he found that the returns from investment on telecommunication to GDP growth were the highest in developing countries and the lowest in advanced economies. Further, Leff (1984)13 found that increased telecom services allow firms to have physically dispersed activities.

In a more detailed study, Roller and Waverman (2001)14 showed a two-way causality between investments in telecommunication and economic growth. They pointed out that testing for effects of telecom investments on economic growth could result in exaggerated outcomes as the latter also impacts the former. However, even after controlling for this simultaneity bias, the results showed significant non-linear benefits from growth of the telecom industry. Since the study by Roller and Waverman, several studies have used their methodology for various cross-country and sub-national studies only to find similar results.

These have been detailed in Table 4.1.

The two-way causality is depicted diagrammatically in Box 4.1 below. The figure outlines the factors that affect telecom penetration and GDP of an economy using all the major cause and effect links along with the direction of the relationship (cause –> effect). The relationship is indicated as positive (or negative) if the change in the causal factor has a similar (or opposite) effect on economic growth. Such a closed sequence of causal links is termed as a causal loop. The causal loop is said to be positive if it has all positive links or an

12

Hardy, A (1980): 'The Role of the Telephone in Economic Development', Telecommunications Policy, 4(4): 278-86 13 Leff, N H (1984): 'Externalities, Information Costs, and Social Benefit-Cost Analysis for Economic Development: An Example from Telecommunication', Economic Development and Cultural Change, 32(2): 255 14 Roller, L H and L Waverman (2001): 'Telecommunications Infrastructure and Economic Development: A Simultaneous Approach', American Economic Review, 91 (4): 909-23

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Study

Regions Covered

Years

Qiang et al. 2009 (High income countries) Qiang et al. 2009 (Low income countries) Czernich et al. 2009 Zaballos et al. 2012 Kathuria et al. 2016

120 countries

1980-2006

1.2

1980-2006

1.4

1996-2007 2003-2009 2001-2014

0.9-1.5 3.2 2.4

25 OECD 26 Latin American 18 Indian states

Increase in GDP per capita per 10 percent point increase in fixed broadband penetration

Table 4.1. Cross section panel models of broadband on economic growth15 even number of negative ones.

The figure explains growth using traditional inputs of labour and capital along with telecom.

All of these inputs are expected to have a positive impact on the total national output (GDP). It has at least one positive loop, which indicates increasing growth of both the telecom industry and the economy.

India, like most economies, has made extensive gains from ICT diffusion. In fact, the extent of internet penetration over the last few years has escalated exponentially. In the six years between 2010 and 2016, the average year-on-year growth of internet users for India has been 31.2 percent annually against 9.2 percent globally. The growth in internet penetration since 2000 for India and the world has been depicted in Figure 4.1. The sudden spurt in percentage of internet users within India is evident from the figure.

15

Adapted from various studies. More detailed insights of these studies can be found in Minges (2015), Exploring the Relationship between Broadband and Economic Growth: Background Paper prepared for the World Development Report 2016: Digital Dividends.

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Figure 4.1. Internet Penetration (India vs the World) 50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 India World

Source: Internet Live Stats

It must be noted that Figure 4.1 has been plotted till July 1, 2016. With the advent of Jio, the internet penetration across the country must have escalated exponentially as data became more accessible to the masses. Jio’s entry in September 2016 would have further accelerated the pace of internet accessibility and usage.

India has displayed a curious trend where the increase in internet penetration has not been matched by a commensurate increase in internet usage. While global internet traffic in peta bytes per month increased at an annual average growth rate of 30 percent, India’s internet consumption increased merely by 21.7 percent16. In a price sensitive market like India, the high cost of data plans and smartphones must have discouraged consumers from using the internet to its fullest potential. Therefore, Jio’s contribution in making both of these aspects affordable will have an indelible impact in the market.

Figure 4.2. Relationship of Internet Density with Growth of Indian States 450000

GDP per Capita (in rupees)

400000 350000 300000 250000 200000 150000 100000 50000 0 0

20

40

60 Internet Density

16

CISCO Virtual Networking Index Forecasts

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80

100

120

140

Source: TRAI Performance Indicators Report

Box 4.2. Financial Gains to the Economy The most basic impact of Jio’s entry into the Indian telecom market has been a drastic reduction in data prices. IFC analysis showed that the price of per GB of data fell from a high of ₹152 to ₹10. The gains to the consumer from such a substantial drop in prices were not only limited to Jio. In order to match 375 the price offerings of Jio, every telecom company in the country followed through with commensurate drops.

The nation’s gain due to a rise in affordability of data prices can be calculated with these numbers. It can be seen that average price of per GB of data fell by ₹142 after Jio’s entry.

Taking a conservative estimate that every consumer uses 1 GB of data every month (an average Jio consumer is using 30 GB of data each month), we can calculate the financial gains to the economy by estimating the benefit to all 350 million internet subscribers of the country.

250

227.5

152

10 2013

2014

2015

2016

2017

Cost of per GB of data (in INR)

As per our calculations, the yearly savings of the entire economy due to a rise in affordability of data prices comes out to be ₹600 billion (or $10 billion). To put things in perspective this figure is more than four times the entire GDP of Bhutan.

142 ₹/GB 350 m $10 billion

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Monthly savings by an average internet user since Jio’s entry

Number of internet users in the country

Yearly Financial Savings of the Economy

This study aims at quantifying the effects of Jio’s entry into the Indian telecom market. To do so, we first delve into the impact of the growth in telecom industry on a national scale.

For a preliminary understanding, Figure 4.2 shows the relationship between the internet density among Indian states and their level of economic development shown by GDP per capita. The data is for the 19 telecom circles that largely intersect with the boundaries for 29 Indian states. GDP per capita has been adjusted according to the telecom circles.

The figure shows that there exists a positive correlation between the two variables. To be precise, the correlation coefficient comes out to be 0.8. It is also noteworthy that the relation for less developed states is evidently stronger than the more advanced ones in line with the findings of Hardy (1980). The correlation between the two, however, does not imply causation. Therefore, we need to delve into a more rigorous regression analysis of the impact of telecom penetration on India’s GDP.

Econometric Model Internet has transformed economies all over the world in unimaginable ways at an unprecedented pace. Multiple studies have attempted to quantify the contribution that internet penetration has on economic growth. The literature on the impact of internet penetration or internet user elasticity globally shows that 10 percent increase in broadband penetration increases the GDP growth of economic regions by 0.9 to 1.5 percent on an average17. Other studies on internet speeds also show that increasing broadband speeds helps boost GDP growth by 0.03 percent to 0.98 percent18.

We use the fixed effects regression on a panel data for 18 states across the country for the decade 2004-2014. The impact of internet penetration – controlled by basic input variables

Box 4.3. Model Specification of the Regression Analysis In order to test the impact of internet penetration on GDP per capita levels of regions, a fixed effects panel data regression was estimated. The data pertains to 18 Indian states for the period 2004-2014.

The model used is as follows:

Log GDPit = α + β Lit + γ GCFit + δ Log IPenit + ε Log GDPit is the logarithmic value of state GDP per capita in ith state in year t; Lit is the labour population of the state in ith state in year t; GCFit is the gross capital formation of the state excluding investment in telecom; IPenit is the logarithmic value of internet penetration within the state in ith state in year t The data for the above variables has been extracted from TRAI and the state series data of the National Accounts (CSO). The data was adjusted to match the telecom circles data from TRAI with the state-level data points.

17

Koutrompis (2009) and McKinsey (2012) Deloitte (2016), “The Economic Impact of Disruptions to Internet Connectivity: A Report for Facebook”. Link: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Technology-MediaTelecommunications/economic-impact-disruptions-to-internet-connectivity-deloitte.pdf 18

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of labour and capital – was tested for its effect on per capita GDP growth. Data for telecom penetration has been taken from TRAI. It provides quarterly data for 22 telecom circles across the country that can be boiled down to 18 states19. Since internet penetration and GDP growth have a strong two-way causality, the problem of spurious correlation was tested and remedied. Any missing value in the variables was either extrapolated or interpolated. The impact of state-specific factors like geography has also been accounted for with the use of the fixed effects model.

The key results of the estimation are as follows: The coefficients of all explanatory variables are positive and significant as expected. These can be seen in more detail in the Appendix. The results imply that a 10 percent increase in internet penetration leads to an increase in GDP per capita by 3.9 percent, if everything else remains constant.

It is important to point out that even the most conservative estimate in terms of the lower bound of the 95 percent confidence interval stands at 3.7 percent GDP growth for every 10 percent rise in internet penetration. Indian estimates for the relationship are usually found to be higher than global ones20. A major reason for this finding can be that a major driver for India’s growth has been the service sector, which is highly interconnected with the development of communication and IT services. Therefore, the synergy effects of increase in telecom and internet penetration has a much higher multiplier effect for the economy.

Another major point that needs to be highlighted is that the regression is only meant to quantify the effects that internet penetration can have for the economy in the short run.

The effect will not be as robust in perpetuity and should settle around global levels in the long-run. So, the use of such regression results should be done with caution.

However, the findings of the regression are quite insightful for the purposes of this study. As we aim to calculate the impact of Jio’s entry into the Indian telecom market, the incremental change in internet penetration due to it can be quantified for its economic impact.

Impact of Reliance Jio’s Entry The entry of Reliance Jio into the Indian telecom industry in September 2016 had two immediate effects. One, internet services across the country became more ubiquitous and accessible to the masses. Second, since Jio offered competitive pricing that enabled market growth, affordability of data also increased for the consumers.

Now that we have established that the increased penetration of internet in the economy has a significant positive effect on economic growth, it can be said with conviction that higher provision of affordable internet after Jio’s entry would have had distinctive economic gains. We use the regression results to project this impact.

19

The states are Andhra Pradesh, Assam, Bihar, Delhi, Gujarat, Haryana, Himachal Pradesh, J&K, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh & West Bengal.

20 Kathuria et al (2016). The study estimates that a 10 percent increase in internet penetration increases GDP per capita by about 2.4 percent. However, the study was done for the period 2001-14. Since this study begins from 2004 after which India entered a high growth phase, the estimates attained are expectedly higher.

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Figure 4.3. Growth in Wireless Subscribers Across India 1400

14.0

12.8 1200

12.0

1000

10.0

800

8.0

7.1

6.9

600

6.0

5.3

400

4.0

Jio's Entry

200 0

2.0 0.0

Sep-13

Sep-14

Sep-15 Wireless Subscribers

Sep-16 Growth

Sep-17 Source: TRAI Performance Indicators Report

Before we get into measuring the impact of an increase in internet subscribers after Jio’s entry, it is first instructive to depict its effect on the increase in wireless subscribers. The change in absolute number of wireless subscribers along with their year-on-year growth rate is depicted in Figure 4.3. After Jio’s entry in September 2016, the growth of wireless subscribers shot up by twice the rate it was averaging in the last three yearly cycles (from an average of 6.4 percent to 12.8 percent). Therefore, if we discount the average growth from last year’s growth in telecom subscribers, Jio’s contribution to subscriber growth should be around 6.4 percent. Figure 4.4 depict the similar impact Jio has had on improving India’s mobile internet subscriber base using TRAI data for the years it was available.

Figure 4.4. Growth in Mobile Internet Subscribers Across India 350

85.5

90.0 85.0

300

80.0

250 73.3

75.0

200 70.0 150 65.0

66.3

100

60.0

Jio's Entry

50 0

50.0 Sep-14

Sep-15 Mobile Internet Subscribers

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55.0

Sep-16

Sep-17 Growth

Source: TRAI Press Releases

Figure 4.4 shows that the average growth rate over the last two years before Jio’s entry has been around 70 percent as compared to 85 percent since then. Therefore, the additional 15 percent can be attributed to Jio’s entry. This rise in mobile internet subscriber base by 15 percent would also include the addition in consumers of other telecom operators due to improved affordability of data. However, since a rise in data affordability is also an effect of Reliance’s entry, it would be appropriate to take the total 15 percent rise for regression purposes.

As per the regression results, a rise in internet penetration by 15 percent will result in an improvement in GDP per capita by 5.85 percent, if everything else in the economy remains constant.

The mechanism of the effects of a 15 percent rise in internet penetration need to be outlined here. An increase in affordability and accessibility of internet services does not merely affect the telecom industry but creates multiple synergy effects. Information becomes more accessible and communication a lot easier. Businesses find it easier to operate and access consumers. Labour working in cities has to make less frequent trips home and becomes more productive as a result. Education and health services becomes available in inaccessible locations. Multiple avenues open up for knowledge and skill enhancement. Therefore, the 5.85 percent boost in per capita GDP comes from a cumulation of these spill-over effects.

These spill-over effects also have the potential of transforming the very nature of internet.

“Think of the hundreds of millions of Chinese internet users and how they changed the very nature of e-commerce, creating behemoths like Alibaba and Tencent, and have revolutionised finance by creating cheap digital payments far faster than any in the United States. Indians might well initiate the next series of transformations because of how this vast user base will use the internet”, pointed out CNN journalist, Fareed Zakaria, while talking about the impact of Jio’s entry on the Indian economy. He added that fields like healthcare and education could easily witness disruptions in the rest of the world with innovations arising out of India.21 Ravi Agarwal, the former CNN New Delhi bureau chief gives an interesting analogy about India’s potential gain from the ongoing internet revolution in his book “India Connected: How the Smartphone is Transforming the World’s Largest Democracy.” He explains that when the car was first introduced in the American economy, it led to the creation of roads and highways. When people could drive long distances, it led to the formation of suburbs, which in turn led to the creation of a whole other infrastructure in the form of local supermarkets and malls.

This was America in the mid-twentieth century that was created around the notion of the car. “In the same way the mobile phone is a device of their literal and figurative mobility for an entire generation of Indians.”22 The externalities that will emerge out of the internet economy are expected to benefit the country through such network effects.

21 22

Fareed Zakaria (2018), What in the World: India’s Mobile Revolution.

Ravi Agarwal (2018), India Connected: How the Smartphone is Transforming the World’s Largest Democracy

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Moreover, in India’s case, the efforts of the government to reach beneficiaries of social schemes directly through the Jan Dhan-Aadhar-Mobile (JAM) trinity will also generate an added push after greater mobile and internet penetration. This also implies that unlike the initial impact of the introduction of smartphones, which mostly benefited the upper strata of Indian society, the increasing affordability of mobile devices and data, the benefits of the telecom revolution will begin to percolate down to people at the bottom of the pyramid.

These network effects explain the economy-wide growth effects that our regression results show.

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Appendix 1. Telecom Productivity Gains in the Post-Reforms Period Figure A.1. Sectoral Change in Productivity Post-Reforms 12 Post and 10 Telecommunication 8 6 Agriculture, Forestry and Fishing 4 Manufacturing Hotels and 2 Rubber and PlasticRestaurants Basic Metals CAGR in Products Pre-Reform Period Mining and Quarrying 0 -8 -6 -4 -2 0 Construction Wood and Products of wood

-2 Textiles, Leather and Footwear -4

Petroleum Products and Nuclear fuel

Electrical and Optical Equipment Transport and Storage

Chemicals and Chemical Products

Financial ServicesFood,Beverages and Tobacco Electricity, Gas and Water Supply Business Service

Trade 2

Education

4 Paper,Printing and 6 Publishing Health and Social Work

8

-6 CAGR in Post-Reform Period -8

Source: RBI Productivity Data

The x-axis shows the change in productivity in the period before the 1991 reforms while the y-axis represents the change in productivity in the post-reform period (1991-2014). The 45degree line shows no change in sectoral productivity even after the reforms. All the red dots show a fall in productivity while the blue ones show a gain in productivity levels. The telecommunication sector stands out in its gain in productivity in the post-reform period.

2. State-wise Distribution of Jio Users Figure A.2. National Distribution of Jio Users 20000000 15000000 10000000 5000000 0

Source: TRAI Press Releases

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3. Regression Results The regression results for internet penetration on GDP per capita are as follows: Log GDP Coefficient Labour 3.27e-07 GCF 5.75e-09 Internet .3924126 Penetration Constant 5.372837 R-sq 0.91 Prob>F 0.000

Std. Error 5.24e-08 6.10e-09 .0114318

t 6.25 0.94 34.33

P>|t| 0.000 0.347 0.000

[95% Conf. Interval] 2.24e-07 4.31e-07 -6.26e-09 1.78e-08 .3698866 .4149385

.1350143

39.79

0.000

5.106795

5.638878

4. Reliance Impact: ‘ZeroG’ to 4G An interesting anecdotal evidence of Jio’s impact on the day-to-day lives of people comes from Moharli, a small village near the Tadoba National Park. Hans Dalal, a noted tiger conservationist, shares the story of how the villages around the national park suffered problems of connectivity with the rest of the world due to lack of internet connectivity.

Access to basic medical, banking and communication services were not easily accessible to the locals. To address the issue, the inhabitants of the seven villages around Tadoba wrote a letter to Reliance Foundation requesting them to energise a Jio tower outlining the benefits that would accrue from it. Within less than a month, a tower came up in Moharli digitally connecting all seven villages with the world outside. Hans’ story can be found here.

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Bibliography Agarwal, R. (2018), India Connected: How the Smartphone is Transforming the World’s Largest Democracy.

Barot, T. (2017), “The Jio-fication of India”, Nieman Lab, December 2017.

Boston Consulting Group (2012), “The Internet Economy in the G-20”, March 2012.

Deloitte (2016), “The economic impact of disruptions to Internet connectivity: A Report for Facebook”, October 2016.

Gupta, A. and Auerswald, P. (2017), “How India is Moving Towards a Digital-First Economy”, Harvard Business Review, November 2017.

Hardy, A (1980), 'The Role of the Telephone in Economic Development', Telecommunications Policy, 4(4): 278-86 Kathuria, R. and Jaju, M. (2012), “India: The Impact of Internet”, ICRIER. Kathuria et al. (2015), “An Enquiry into the Impact of India’s App Economy” ICRIER-IAMAI, July 2015.

Leff, N H (1984), “Externalities, Information Costs, and Social Benefit-Cost Analysis for Economic Development: An Example from Telecommunication”, Economic Development and Cultural Change, 32(2): 255 Mundy, S. (2018), “Reliance Industries’ Jio Reshapes India’s Telecom Market”, Financial Times, March 16, 2018.

Roller, L H and L Waverman (2001), 'Telecommunications Infrastructure and Economic Development: A Simultaneous Approach', American Economic Review, 91 (4): 909-23 Zakaria, F. (2018), What in the World: India’s Mobile Revolution, CNN, April 1, 2018.

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