Data localisation can trigger ‘contagion effect’ on other sectors, affecting costs and operations for such businesses
By Amitayu Sengupta
Think tank ICRIER recently released the report ‘Economic Implications of Cross-Border Data Flows’, which is pertinent to ongoing discourse on data localisation, especially as initiated by the draft Personal Data Protection Bill (PDP).
The PDP by the expert committee under Justice Srikrishna (Srikrishna Committee) suggested staggered localisation of personal data from the perspective of protecting privacy. The white paper by the Srikrishna Committee that accompanied the draft PDP noted that “the representations made to us have not persuaded us of the possible economic implications of local storage and processing of personal data in India. It is our considered view that the size and potential of the Indian market trumps the additional cost that some entities may have to bear on account of a mandate to process personal data locally.”
It seems, for the committee, the understanding of ‘economic implications’ was restricted to operative costs of relocating data servers in India. The understanding was thereby limited to ‘some entities’, predominantly those engaged in digital services, and the committee perhaps was of the opinion that the economies of scale offered by a market as large as India more than offset the initial ‘cost’.
However, the actual economic cost of data localisation goes beyond mere relocation of data servers in India, and the ICRIER report is perhaps the first such detailed study that tries to capture the whole picture.
In the report, the ICRIER team has estimated the impact of cross-border data flows on India’s international trade at the macro level. The report finds that 1% increase in international internet bandwidth leads to an increase of $696.71 million in total volume of goods trade for India. Between 2016-17 and 2017-18, about 12% of the growth of India’s total volume of trade can be attributed to increase in international bandwidth. The impact is much higher when bilateral services trade is added into consideration. Therefore, in any form, a freeze on cross-border data flows risks derailing this positive network effect.
The report by itself has certain limitations that need to be taken into cognisance. For instance, it takes international bandwidth as a proxy for volume of cross-border data flows. Consequently, this study cannot distinguish what proportion of actual cross-border data flows are to be affected by the provisions of localisation of personal data (given the PDP keeps anonymised data outside its ambit), nor distinguish in terms of direction of data flows—inflow or outflow from India. Moreover, there is no analysis of sectoral impact—for instance, which sectors will be affected and how, which all services sectors are most susceptible, and what impact will it have on other sectors?—or how any data localisation will alter trade balance (how much does it affect imports, or how are exports affected?).
Nonetheless, the report clearly draws the bigger picture of data, data flows, and how intrinsically it is linked to the overall economy. Much of the argument over data localisation is guilty of being myopic as they perceive data as a specific asset/resource particular to digital services. The ICRIER report proves that data flows cannot be seen in silos. As a corollary, regulations like data localisation are not mere sectoral regulations that will only affect the digital services sector, but will have much broader implications.
A critical component of the study is the opportunity cost of data localisation, based on industry survey conducted for the purpose. The report suggests that opportunity costs of data localisation vary based on various parameters: the industry in consideration, the size and maturity stage of the business, local or multinational service providers, etc. IT, telecom, financial services are most likely to be directly impacted by data localisation. But the report also touches upon the far-reaching consequences such a policy can have.
For instance, as the report reveals, a major food and lifestyle company of Indian origin that uses cloud services hosted in Singapore is worried about the quality and cost of data services under forced data localisation. Thus, data localisation can trigger a form of ‘contagion effect’ on other sectors, thereby affecting costs and operations for such businesses, even though they may not directly involve in cross-border data flow businesses.
Any policy mandate of data localisation by the government of India also risks consequences that can impact the Indian economy. For instance, the report highlights that the risk of retaliatory measures (by other jurisdictions) and potential fragmentation of the internet need to be evaluated as these are bound to have repercussions for the Indian economy. Similarly, the economic cost of delayed availability of latest services/technologies and the overall negative impact data localisation can have on innovation is another area of concern. This is critical given the nascent start-up sector in India and how much India is actually banking on this sector for the near future.
The ICRIER report captures the various direct and indirect avenues by which data localisation can affect the Indian economy. Even though the report may not quantify them all, it does provide enough macro insights for a more nuanced and informed choice on the matter, for both policymakers and industry alike.
The author works with the Internet and Mobile Association of India. Views are personal