Data Localisation: India's Double Edged Sword?

Abstract

India’s digital trade is expected to grow more than 14-fold by 2030, from US$35bn currently. The revenue of the IT-BPM industry was US$167bn in 2017-18 and has the potential of reaching US$280bn to US$350bn by 2025. The IT-BPM industry alone is expected to contribute a quarter of the US$1 trillion digital sector objective by 2025.

Worryingly, we are now seeing a rise in global digital protectionism, including a series of policies restricting the international processing, storage, and transfer of data, often referred to as “data localisation” (DL). This study measures the economic importance of digital services exports for the Indian economy and analyses the implications of foreign and domestic data flow restrictions on the economy. We found that digital services exports have a positive and statistically significant impact on the country’s GDP. To elaborate, an increase in digital services exports by 1 per cent would advance India’s GDP by 0.02 per cent and vice versa. Moreover, digital services exports have a positive correlation with the indicators of innovation such as the number of start-ups and patents filed. In view of this, policies enabling digital services exports such as seamless cross-border data flows (CBDF) would be crucial for boosting the country’s GDP and advancing innovation.

The study also builds seven scenarios, each varying in the level of restrictiveness imposed on CBDF by the Government of India and by its major trading partners in retaliation. The scenarios estimate retaliation from India’s top export destinations for digital services due to restricted market access. All seven scenarios estimate a decline in digital services exports and GDP. India’s digital services exports may plunge by 10 to 19 per cent due to increasing data flow restrictions instituted by India and its major trading partners. Moreover, the decline in digital services exports may negatively affect GDP by 0.2 percent to 0.34 percent. This further translates to a shortfall in the Government’s objective to be a US$5tn economy by 2025. Further the paper also quantifies the losses that investment and welfare will foresee by 2025 under complete data localisation.

In addition to the econometric analysis conducted, the study includes views of industry stakeholders, collected via in-depth interviews, which details the impact of DL on India’s domestic industry. The primary finding of these interactions was that the financial and operational consequences that will be incurred to comply with DL would be colossal. The innovation and start-up ecosystem may also be affected, as the ability to scale up globally and participate in global data value chains would be compromised.

Our findings illustrate that such policies may likely harm India’s digital services exports, GDP, investment, welfare, innovation and start-ups. It is crucial to consider these implications in formulating and implementing data privacy and data protection policies or else the undesirable economic ramifications may outweigh purported benefits. A stance that mandates data localisation or unduly restricts CBDF could place India on a reverse course, impacting its potential to be the world leader in the IT-BPM industry.

Keywords: Data Localisation, Cross-Border Data Flow, Data Sovereignty, Data Privacy, Digital Exports, Digital Trade, Digital Services Exports, Economic cost, Investment and Welfare losses, Regulation, Asia, Security, Surveillance, Internet Governance, Globalization

JEL Classification: F13, F68, O14, O33, O53, L51, O38, O31