Is data localization compatible with Atmanirbhar Bharat? Here’s what govt must do to make it successful

Financial Express, July 29, 2020

By Udai S. Mehta, Shagufta Gupta and Kapil Gupta

The free flow of data has so far been possible due to favorable cross border data flow policies at home and abroad as well as open market access granted to Indian digital exports by its foreign trading partners.

The relentless pursuit of data localization by the government runs contrary to India’s recently professed ambition of Atmanirbhar Bharat. This statement sounds stark but stands true in the case of India’s digital services exports, as is reiterated in an empirical study titled “Data Localisation – India’s Double-Edged Sword?” by CUTS international. Understood in the present context, the clarion call for self-reliance is not a call for protectionism but a call to make domestic sectors world-class, sectors that hold a greater share in the global value chain.

Cross Border Data Flows

One such domestic sector that is already world-class and holds a prime position in the global value chain is the IT-BPM sector of India. Beyond doubt, this sector has been propelled into being a global force by the exports of digital services more than anything else. Digital services exports have tremendously benefited from cross border data flows. The free flow of data has so far been possible due to favorable cross border data flow policies at home and abroad as well as open market access granted to Indian digital exports by its foreign trading partners.

Worryingly, through proposed/implemented data localisation (DL) provisions in RBI’s directive on Storage of Payment System Data 2018, Personal Data Protection Bill 2019 (PDPB), draft National E-commerce Policy 2019, and most recently, the report of the committee on non-personal data, India seems to be wading towards digital protectionism.

The impact of such measures, which could be further exacerbated by retaliatory measures by importing countries (the world of trade runs on the tenet of reciprocity), could drive down India’s digital services exports. CUTS’ study estimates various scenarios that suggest a decline of 10 per cent to 19 per cent in the digital services exports as a consequence of data localisation. Putting this in context of the $1-trillion digital economy by 2025 objective announced by MeitY, it translates to a shortfall of $19 billion to $36 billion. Clearly, the evidence suggests that such measures of digital protectionism will take us many steps backward rather than driving us in the direction of Atmanirbhar Bharat.

The implications of such policy measures can be debilitating not only to the digital exports but via intricate and well-documented linkages to employment, investment, and innovation as well. The Indian economy and more specifically the economies of states such as Karnataka, Maharashtra, Telangana, and Tamil Nadu that host much of India’s IT-BPM industry benefit from higher standards of living, employment, foreign direct investment, and innovation. CUTS’ study finds a strong correlation between digital exports and these variables.

It also estimates a likely decline in India’s GDP due to DL measures to the extent of 0.2 per cent to 0.34 per cent, creating a shortfall of $9 billion to $17 billion in the increasingly tough target of $5 trillion economy by 2025. This is far from what we need for Atmanirbhar Bharat.

Being Atmanirbhar

Interestingly, for the Indian Government, DL seems to be less of an economic issue than a key link in its vision for a data sovereign India. It is abundantly clear at this point in the discourse that spurring domestic innovation, FDI, and employment generation justification for DL do not hold solid ground. This has been emphasized by many stakeholders in the CUTS study too. On the national security and law enforcement access front as well, there are many other less disruptive options possible. Adopting DL to achieve the objectives that the government has espoused would be letting go of the bird in hand for two in the bush.

As it stands right now, the Indian digital services is a sector, which is not only ‘Atmanirbhar’, in the current sense of the word, but is also at a vantage point to take a lead in innovation in data-driven emerging technologies such as artificial intelligence, machine learning, quantum computing, and Internet of Things (IoT). The fuel for such future technologies is large, steady, and increasing the free flow of data from as many sources as possible. If the government wants to preserve this ‘Atmanirbharta’, all it has to do is to ditch the data protectionist mindset and make room for dialogue, negotiation, and regulatory convergence around cross border data flows.

Just like the US and EU did after Schrems I judgment in 2015 when the Safe Harbor Framework of data transfer between the US and EU was rendered invalid and now, in the wake of Schrems II that has stirred the waters of cross border data flows yet again. Just like countries that signed Data Free Flow with Trust declaration have pledged to do.

Schrems II not only has broad ramifications for the Indian digital services exports that use Standard Contractual Clauses for data transfer from the EU, but also makes its dream of becoming the data center of the world that much more impossible to achieve with the current protectionist stance of DL. Unless the government lets go of its heavy-handed approach of data balkanization and works in close co-operation and constant deliberation with other countries.

India decided to miss the boat of international co-operation for cross border data flows in 2019 when it didn’t sign the Data Free Flow with Trust (DFFT) in Osaka. Since then the government has ‘possibly’ realized its importance, which is reflected in the recent signing of India-EU Strategic Partnership roadmap 2025. We need to see more such policy initiatives by the government if it is serious about making the “Atmanirbhar Bharat” initiative, a successful one. Policy initiatives that are evidence-based and have undergone rigorous impact assessments. Data localisation fails to pass this criterion by a long shot.

Udai S Mehta is the Deputy Executive Director, Shagufta Gupta is the Independent Researcher, and Kapil Gupta is the Asst Policy Analyst at Cuts International. Views expressed are the authors’ own.


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