Why even heavy local data storage costs aren’t deterring US firms in India

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Published: April 15, 2019 4:45:05 AM

Why aren’t the large costs of local data storage capacities deterring American payment system providers from operating in India? The answer is the size of the Indian market.

There is no denying that creating local storage capacities would involve large expenses for digital payment services.

Data localisation is the latest flashpoint in India-US trade relations. The conflict was implicit in the US’s decision to withdraw GSP benefits from India, something which alluded to India not providing sufficient market access to US businesses in ‘numerous’ sectors. Data policies were not specifically mentioned in the decision. But the fact that India’s data localisation initiatives began kicking in from around the same time the US initiated a review of India’s GSP eligibility cannot be overlooked. The impact of the Indian policies would have been evident given the problems faced by US online retail businesses and payment system providers in India.

What was implicit has now become explicit after the sharp criticism of the policies in the USTR’s latest National Trade Estimate Report on foreign trade barriers. The report categorically mentions data localisation requirements as barriers to digital trade between the US and India. According to the report, the policies increase ‘costs for suppliers of data-intensive services by forcing the construction of unnecessary, redundant data centres and prevent local firms from taking advantage of the best global services available’. The main rules being alluded to here are data localisation guidelines issued for payment system providers operating in India by RBI and the draft national e-commerce policy encouraging data localisation for growth of ‘home-grown’ champions.

The USTR’s criticism is unlikely to change India’s data policies. Indian agencies would actually be vindicated by reports gesturing towards WhatsApp’s intention to comply with RBI guidelines for its payments system, WhatsApp Pay. Though RBI had set October 15, 2018, as the deadline for complying with its guidelines, WhatsApp had refrained from doing so. Instead of agreeing to store data exclusively in India, it was looking to ‘mirror’ or retain a copy of the financial transactions in an Indian server while storing the data in foreign servers. This, though, wouldn’t have satisfied RBI, which insists on storage of ‘end-to-end transactions’ data only in India, though data for the foreign leg of the transaction is allowed to be stored overseas. Recent reports point to WhatsApp moving towards a compliance framework, including the establishing of third-party audit mechanisms for checking compliance.

WhatsApp’s decision follows similar decisions taken by Visa and Mastercard earlier. The fact that these major American e-payment businesses, even if reluctantly, are complying with local data storage rules means that they are also looking to invest in such storage capacities, precisely the ones that the USTR considers redundant and cost-escalating. There is no denying that creating local storage capacities would involve large expenses for digital payment services. The costs would include fixed costs for building data servers as well as running operations and maintenance costs, particularly energy costs. There is a possibility of the government of India declaring data servers as critical infrastructure, enabling their developers to obtain long-term tax benefits. That, however, won’t offset the initial upfront costs.

But why aren’t the large costs deterring American payment system providers from operating in India? The answer, ostensibly, is the size of the Indian market. WhatsApp has an active user base of around 200 million in India. Even if a fraction of this user base begins using WhatsApp Pay, the sales prospects are significant. Financial transactions in India are slowly taking on a ‘less cash’ character with more transactions turning digital. The Indian e-payments market is projected to reach $1 trillion in the foreseeable future. The scale and scope of the market is enormous—a fact noted by both American businesses as well as Indian agencies.

Major Indian agencies involved in data protection—RBI, ministry of electronics and information technology (Meity), department of industrial promotion and policy (DIPP) and department of commerce—are using the Indian market to employ the proverbial ‘carrot and stick’ policy. The dangling carrot of the humongous Indian market adapting to digital payments at a fast clip is a tempting bait. It is made more enticing by China having restricted foreign payment systems and the inescapable fact that digital payment users in India would increase along with the greater availability of such payment systems. WhatsApp Pay and Google Pay, amongst others, anticipate great long-term benefits by locking on to India notwithstanding the heavy ‘stick’ of data localisation.

Indian agencies, though, shouldn’t begin celebrating early. Foreign payment system providers are at an advantage compared with their domestic counterparts in the data game. The sheer depth of pockets of the former can make them last longer distances till sales volumes fetch sufficient revenue for recovering data storage costs. The cost disadvantage might see domestic payments systems being bought over foreign systems for obtaining horizontal scale benefits. Much like the famous acquisition of Flipkart by Walmart, similar buy-outs might be awaiting the Indian e-payment industry, making it a turf for mutual competition between American businesses, or between American and other foreign businesses. One wonders whether this is what ‘India’s data for India’s development’ meant to achieve.

(The author is Senior research fellow and research lead (trade and economic policy) at the Institute of South Asian Studies at NUS. Views are personal)

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