By Kazim Rizvi
Over the past two decades or so, India has been one of the biggest beneficiaries of cross-border data flows globally. The emergence of Bengaluru as a technology hub is a testament to India’s ability to bank on emerging business trends. India today is a global hub for business process outsourcing. The South Asian giant commands a leadership position in the field. Apart from outsourcing of business operations, there has been significant growth in India’s IT sector, with the $167 billion IT services industry projected to expand at a rate of 7-9% in 2019. MNC branches in India offer their services globally and benefit from the free flow of data that enables them to do so.
The recent policy shift to mainstream data localisation in India however is expected to slow down the economy in the short- to medium-term.
The economic cost of localisation of data in India could be 0.8% of the GDP, as per a European Centre for International Political Economy study. Localisation will also hit India’s projected growth by 20%. Regarding investments, exports, and long-term growth, a blanket data localisation measure would result in a 1.9% drop. Losses in welfare alone could reach as high as $ 3.1-14.5 billion. To give a perspective on how it might affect the average Indian, the adverse welfare effect would cost an Indian worker almost 11% of their average monthly salary.
According to a study conducted by the British think tank Chatham House and the Centre for International Governance (CIGI), data localisation laws have had adverse effects on the Indian economy. India has implemented localisation laws in specific areas such as company law, insurance sector, and telecom sector. The study claims that the regulations have increased prices and decreased productivity in India, resulting in a loss of 0.25% of real GDP annually. The study also quantified total factor productivity (TFP) costs that India will incur due to the new regulations. The losses are expected to be around 1.35% in the communications sector, 0.50% in the ICT business services sector, and 0.20% in the finance and insurance sector.
At the same time, it could significantly have an impact on how organisations and data servers operate around the world. The data centre industry is still going to survive by finding cheaper alternatives elsewhere. This is India’s chance to present itself as a viable option for economic as well as technological progress. Thus, at best, data localisation and the increased organisational complexities that come with it will be a missed opportunity for a developing country like India. At worst, however, it can mean a global restructuring of where data centres will be located for years to come.
Similarly, data localisation will be a step backward for the digital payments industry. Not only would it make it costlier for international banks to operate, it would also reduce the incentive for them to innovate and try out new forms of payment on the front and back end.
A likely by-product of the increased costs and lowered efficiency is the reduction of the global reach of organisations. Data localisation laws can not only deter but can cause organisations to exit countries. When a private entity no longer considers costs to be worth the benefits, operations may cease to exist. The direct impact on the firm is the reduction of scope, leading to the company reinvesting the capital that it had originally invested in India elsewhere. The firm will be forced to invest in other countries that have more liberal policies around storage and processing of data. That would affect the arrangement of data servers around the world. This would serve as a blow to emerging economies like India that have giant IT and service sectors. The industry is still going to survive by finding cheaper alternatives elsewhere. However, it is up to India to present itself as a viable option, not only for the good of the economy but also to keep at the forefront of innovation.
Finally, by investing in markets that warranted no investments in the first place, organisations would be stripped of resources to invest/reinvest in areas that did warrant those investments. Moreover, it would hinder the capabilities of private actors to provide the best possible experience to their customers who may well be spread internationally. In addition, data localisation would have costs for efficiency because of the lack of suitable alternatives for safe data storage and processing in India. The standards and conditions of data storage are better abroad. This is of utmost importance when considering where the data will be most secure. Domestic localisation might mean fewer foreign threats, but it would make the servers more vulnerable to domestic entities. This is not taking into account the lack of existing infrastructure that can facilitate safe storage of data as well as cool the data storage facility.
Data localisation as is being pushed in its current avatar is detrimental to India’s economic growth, and to the data centre industry. It will cause pain to organisations operating out of Indian market. A more measured and responsible approach could be incentivising storage in India through progressive policy mechanisms which duly support PM Modi’s vision of making India a global hub of information technology.
The question we therefore need to ask is — do we force a particular policy on the industry, or should we first develop the infrastructure, enact stringent laws, bring in due process of law and subsequently, sow the seeds for organic growth of data storage capacity in India?
Kazim Rizvi is a public policy entrepreneur and founder of an emerging policy think tank, The Dialogue.