The muddled economics of Data Localisation in India

The sentiment behind the title draws from the contentions and arguments that have followed and shaped the discourse around the proposed data localisation norms in India. The Justice BN Srikrishna Committee report, in its chapter “Transfer of Personal Data” has, after undertaking a cursory cost-benefit analysis of the move, advocated for Data localisation regulations to augment and enhance the security of India’s data. This proposal, though still under the consideration of a parliamentary committee, has garnered contested responses from all camps of businesses, governments, industry, and trade bodies and consumers. This article aims to explore the economic consequences that can arise from the implementation of localisation and what must the Indian policymakers be proactive rather than reactive towards for designing an efficient and holistic data protection regime.

The conundrum of Data Localisation

We must first begin by exploring what is at the core of making data localisation such a hotly debated topic. The world today has been revolutionized by the development of IT and allied technology at breakneck speed. Since the early 70’s the pace of innovation has increased exponentially and has transformed economies and societies around the world. At the same time, a paradigm shift in which the idea of lesser state intervention and more role for the markets emerged and took prominence. The failing role of the state in effectively managing its resources, financial downturns, and the growing competitiveness of the market have led to the disappearance of borders in terms of trade in goods and services, more so virtually.

…strict data protection regimes are often seen as economically unfavourable since they can act as an impediment to the successful and seamless conduct of business for the concerned economies.

The rapid and large scale development of the internet spread around the world like wildfire, with internet penetration and accessibility to services having undergone an unprecedented jump in the last 2 decades. With this, as we grow more and more interconnected and interdependent, the data, the digital footprint that we generate, can be seen as nothing less than a valuable resource. A resource that is harnessed and processed into valuable business insights and strategies that drive the sales, profits and the overall growth of the multinational corporations and businesses dealing with and dependent on this data ecosystem.

Following from this thought, data today is experiencing a newfound role as an input in trade and commerce. Countries are becoming more sensitive and taking cognizance of the fact that their economies are significantly driven by services and IT, built on industries that thrive on the colossal amounts of data they gather and process across the world every second. Accordingly, business and industry bodies lobby for a more liberal data regime. As a consequence of this, strict data protection regimes are often seen as economically unfavourable, since they can act as an impediment to the successful and seamless conduct of business for the concerned economies.

Well, if the businesses are so vocal about their support for a free digital economy then what are the opposing views that add to the debate? Essentially, proponents of data localisation base their arguments on national and public security. Though the technological advancements have transformed our socio-economic conditions for the better, the same has been accompanied by inequitable distribution of wealth and resources, exploitative antitrust conduct along with surveillance, and manipulation of users’ data by private entities (ICRIER 2019). Hence, in light of this, it becomes imperative that the individual’s data must be safeguarded from the gold rush of businesses and excessive threat of surveillance from foreign entities and companies which forms the backbone of the data localisation debate.

How does the economy get roped into the debate?

Open borders have enabled significant growth in trade of services and merchandise. India has emerged as a global hub for a skilled IT workforce at efficient wages for the firms and accounts for nearly 55% of the global IT services exports. Post the dot-com boom, the Indian IT and BPO industry makes up 9.1% of the Nominal GDP. Tech giants like Apple and Google have set up research and operational facilities in India and have benefitted from the large amount of data and workforce at their disposal to evolve their operations.

According to a study by the European Centre for International Political Economy (214), implementing data localisation regulations can impact up to 0.8% of India’s GDP.

A free and seamless digital economy becomes an enabler and benefits, different stakeholders, in the following ways-

Source: Chart prepared by author

Introducing a data localisation regime can prove to be detrimental to the existing business infrastructure and the way India has integrated the benefits of a free digital economy. According to a study by the European Centre for International Political Economy (214), implementing data localisation regulations can impact up to 0.8% of India’s GDP. The results are based on simulations made by engaging with different stakeholders and processing their inputs through econometric models which is a predictive analysis of what can be the economic consequences of higher costs owing to regulatory compliance associated with shifting to localised Indian servers. Some more outcomes of the simulations are posted in the graphic below –

Source: Chart prepared by author

As can be seen, the localisation move will have a number of consequences on different sectors of the economy. The businesses and industries most dependent on data will be facing higher compliance costs and in turn their production costs and supply chains get compromised with the added costs. The regulations mandate the use of local servers and data centres that may not be able to adequately cater to the demands in a cost effective manner. As a result of this the costs are likely to be transferred as increased prices for the consumers and potentially contributing to inflation in the economy.

The global nature of modern businesses have resulted in an expansion of operations and supply chain network across the globe to realise the maximum efficiency and output for their investments. Localisation becomes a direct challenge and threat to this existing ecosystem.

Global businesses

The global nature of modern businesses have resulted in an expansion of operations and supply chain network across the globe to realise the maximum efficiency and output for their investments. Additionally, their technologies leverage the seamless connectivity and flow of data across borders in order to derive real time inputs that become valuable in strategising their business plans. Localisation becomes a direct challenge and threat to this existing ecosystem. For instance, a payments portal that detects online payment frauds by scoping for unusual spending patterns across different geographies in real time will not be able to do so because of the increased time and cost to carry out this operation due to the regulation and compliance requirements.

Mandates for localisation of data will entail storage of if not all, at least a sizeable chunk of data within India. To accomplish this businesses will have to fragment and categorise the data they obtain according to how the government and the regulator classify it. This in turn will lead to higher costs in processing and storing as different servers and data centres will be needed for different kinds of data, further adding to the costs of the companies.

Domestic Implications

The dangers of a reciprocal push

As is evident, the government of India may implement a data localisation regime that could severely impact operations of businesses. These businesses reflect the economic interests of other nations that partner with India in exchange of goods and services. There is a possible danger of a reciprocal push, either in terms of similar barriers for data flow from other jurisdictions or in form of other sanctions and increased tariffs, thereby causing an imbalance in the trade and current account of the Indian economy. A case in point being a stalling in negotiations at the RCEP and G20 forums on trade agreements where other countries raised objections to these increased restrictions that impede business interests and investment potential.

The contested claims on job creation

It is often argued that localisation will lead to development of Indian data centres and data server infrastructure, however, a quantitative study reveals that after the initial period of setting up that employs construction labour and inputs, the actual employment generated is marginal. It is estimated that a large data centre takes an investment up to USD 1 billion (NIPFP 2019) and need an operational staff of just 50 people for its maintenance and functioning. Moreover, the inputs that go into setting up the data centre are more often than not imported due to reasons of efficiency and cost minimization, which goes directly against the stated objective of boosting productivity of the local software and hardware economy.

A major barrier in the successful implementation of data localisation is the underdeveloped data infrastructure in India along with the high costs of setting it up. Infrastructural woes such as interruptions in power supply, lack of subsidies, and excessive control over licensing make it expensive for business to operationalise their businesses.

Way Forward

We have seen the costs that will follow the implementation of data localisation norms in India. Where on one hand we must acknowledge the government’s rightful stance in initiating the will to implement a stronger data protection regime (of which data localisation is a tool in a way) we must also be sensitive to the needs and ground realities faced by the industry. What will be the actual outcome and how the current pandemic will shape the future of businesses and their structuring both in India and across the globe will unfold in due time. However, the government should explore the suggestions and advocacy by different stakeholders in the process and use those insights to polish and ascertain the kind of data localisation that will best fit and not hurt the Indian economy.

(Nilay Pratap Singh is currently pursuing his Masters in Public Policy from NLSIU, Bangalore. He holds a bachelors degree in Physics from Hindu College, University of Delhi. Nilay is an ardent supporter of technology for social good and has a keen interest in exploring the intersectionality between technology, good governance and development. He can be reached at nilaysingh@nls.ac.in)

References

ICRIER. 2019. ‘Economic Impacts of cross-border data flows’ https://icrier.org/pdf/Economic_Implications_of_Cross-Border_Data_Flows.pdf

Matthias Bauer et al. 2014. ‘The costs of Data localisation : Friendly fire on Economic Recovery’ . ​ECIPE Occasional paper 3/2014

Justice BN SriKrishna. 2019. ‘Committee of experts on the Personal Data Protection Bill 2019’. https://meity.gov.in/writereaddata/files/Data_Protection_Committee_Report.pdf

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