Digital economy
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This article is written by Paridhi Dave, a student at the Institute of Law, Nirma University. This is an exhaustive article which deals with the concept of the digital economy and data localisation laws and practices.

Introduction

The world is continuously evolving and one of the foremost drivers of this change is digital transformation. The entire global economy is undergoing a phase of digital transformation as billions of everyday transactions shift online. People engage in numerous online commercial dealings. This leads to the creation of huge amounts of data. Several companies have proposed the localisation of this data. But a significant question that arises is that data protection should be given equal importance as well.

Digital economy

The internet has brought the third wave of capitalism which will play a crucial aspect in the transformation in many areas of the global marketplace, ranging from consumer behaviour to business models. The digital economy is used as an umbrella term which encompasses within it all economic transactions that take place on the internet. It is alternatively known as the internet economy or the web economy. Owing to globalisation and the advent of technology, the traditional and digital economies are merging into one.

The backbone of this digital economy is the hyperconnectivity between people. With each passing day, the interconnectedness between people, organisations, businesses, etc. is growing. This is due to the use of the internet, mobile technology and the internet of things (IoT). The key factors of production in this economy are digitized information and knowledge. Various advanced technologies such as cloud computing, big data, fintech, etc. are being used for the collection, storage, analysis and sharing of information digitally, for the purpose of transformation of social interactions.

Characteristics of digital economy

The ways in which people connected and communicated before has changed now. Certain characteristics of the digital economy are highlighted below:

The economy is digitized and tracked 

Owing to the advent of technology, the devices that are currently in use generate digital signals which can be measured, tracked and analyzed.

Improved connectedness

The digital economy acts as a catalyst for better communication between buyers, suppliers, workers and stakeholders by interlinking them. Moreover, because of the sharing of data, the different needs of the company are fulfilled.

Increased personalization

The economy is dependent on customer personalization to a considerable extent. Companies aim to manufacture and deliver goods and services which are as per the demand of the consumer. 

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Advantages 

  1. It promotes the use of the internet, which increases the investment in technology and subsequently increases the demand for hardware, software, etc.
  2. The importance of the e-commerce industry is constantly increasing owing to its simplified process as every task is just one click away. The goods and services are now available online as well, which makes it easier to access.
  3. Since the transactions take place online, it creates evidence regarding the payment. More often than not, huge cash transactions can lead to corruption and an increase in black money. Digital economy helps to combat the same.

Disadvantages

  1. Since all the industries are shifting to technology-intensive techniques from labour-intensive techniques, there is an increase in unemployment. The human resources are not as much required comparatively. There is also a rise in frictional unemployment because people who do not have the requisite understanding of technology. have to either leave the job or remain without a job till they acquire the necessary skills.
  2. The successful functioning of the digital economy requires huge investments and resources, which is not possible in less developed areas. Therefore, technical development in these areas is comparatively less than other developed areas. This is a drawback of the digital economy, as it is not accessible to the people residing in rural or semi-rural areas.
  3. As huge investments are required for setting up a functional digital economy, the costs involved in establishing the infrastructure is extremely high.

Data localisation

In contemporary times, people have come across a lot of instances wherein the hard-earned money of individuals is taken out of their bank accounts and other digital payment platforms via phishing and various scams. People’s faith in the digital system is shaken due to the rise in these cybercrimes. The potential of emerging companies is affected due to this scepticism concerning online transactions. 

Although many cases go unreported, in cases that are reported – the investigation process comes to a standstill due to lack of access to data. This is because most companies have no permanent establishment in India and they try to take cover under various privacy laws of the countries which they are based in. A prominent example is a revelation that Facebook shared its user data with Cambridge Analytica which allegedly rigged the voting process.

Resultantly, this has called for data localisation. Data localisation is a process wherein the data is stored on any device which is physically present within the territorial borders of a country. It refers to a set of rules and regulations that dictate how data should be collected from the nation’s citizens and subsequently processed and stored inside the country.

Need for data localisation

The primary concern behind data localisation is the protection of personal and financial information of the citizens and residents from foreign surveillance. Additionally, it is to give jurisdiction and accessibility power to the local governments and regulators to call for data as and when required.

Data localisation plays a significant role in the sovereignty and national security of a country. When the data is stored locally, it helps the law-enforcement agencies to have access to crucial information that is required for the detection of cybercrimes or to gather evidence. In cases where the data is not localised, the agencies have to rely on Mutual Legal Assistance Treaties to gain access to information, which leads to considerable delays in investigations.

The initiatives of the Government towards data localisation and cross-border data transfer is a clear indicator that data functions as a collective resource and a national asset. The citizens have a sovereign right over this data. Consequently, the process of sharing of data requires that certain restrictions are set in place. This can be mandated via two ways, either the country can make it mandatory that the storage of local copies of data stays within the territory of that country or it can impose certain restrictions on the cross-border movement of data.

Advantages of data localisation

Some of the advantages of data localisation are mentioned below:

Protectionism

There is a new saying in the market, ‘data is the new oil.’ This phrase implies that data is extremely valuable and if it is properly stored and analysed, it could become the backbone of a successful digital economy. Governments that choose to implement data localisation policies want to ensure that it gives a competitive edge to the local corporations. Hence, the data will be available to local companies only, instead of it being transferred to foreign countries.

Taxation

People who support data localisation also believe that it has to be considered as a national resource. This would imply that just like other resources, the government should have a right to collect revenue that arises out of this resource. Therefore, the movement of data from one country to another, both inflow and outflow, could be taxed.

Foreign Surveillance

The threat of foreign surveillance hampers the sovereignty and digital economy of the country. Free internet allows the storage of data in any country. In cases, where two countries are not on good terms, for example, the US and China were involved in a trade war. In such a circumstance, if data pertaining to China is stored in servers located in the US, then it is likely that it would be subject to foreign surveillance. Data localisation aims to protect from such circumstances.

Other benefits

Other benefits include greater accountability from various multinational companies. Law enforcement agencies will be benefitted and it will secure the data of citizens.

Disadvantages of data localisation

While some people support data localisation, others do not believe in the restriction on the flow of data or imposition of taxes on it.

End of the internet 

The internet is accessible to all and it has free data movement. If this free movement is hampered by the imposition of policies and taxes, it will lead to the destruction of the internet. Several companies prefer the internet because it is cheaper and has negligible regulations. Data localisation would impinge on this freedom.

Government surveillance 

All people agree that cybersecurity threats should be minimized. Storing data in one place brings with it several security problems such as it is opposite to the diversification process that is followed by various multinational companies. Further, if the data is stored in a single location, then the government would have an upper hand in collecting all the data and subsequently, invading the privacy of individuals if a need arises.

Huge costs

To meet the requirements of data localisation, companies would have to invest huge amounts for setting up servers locally. Such infrastructural costs would be a huge obstacle for existing companies in India as well as will act as a deterrent for the new entrants in the market.

Data localisation in India

Justice B.N. Srikrishna Committee Report

The concept of data localisation is relatively new for India. India is gradually progressing in this domain as this topic is being debated upon at great lengths. Pursuant to this, the Justice B.N. Srikrishna Committee was formed in July 2018 to deal with this lacuna. 

The Committee in its report stated that concerning data localisation, different models are required to deal with different types of personal data instead of the one-size-fits-all model. It suggested that India should frame a policy maintaining a balance between possible enforcement benefits of data localisation as well as the costs involved in mandating such a policy.

The panel has disallowed cross-border transfer of all critical personal data. It further added that a live copy of data concerning Indian citizens should be kept on servers in the country by all the organisations at all times. According to the Committee, data localisation plays a crucial role in the process of law enforcement.

The Personal Data Protection Bill, 2019

This bill has received severe backlash as it gives the government unfettered access to private data. This bill is a byproduct of the Personal Data Protection Bill, 2018 which was proposed by the Justice Srikrishna Committee. Under this 2019 bill, personal data has been classified into two broad categories:

(i) Sensitive Personal Data

(ii) Critical Personal Data

The former has been defined vividly but the latter is relatively ambiguous. This bill relaxes the data localisation restrictions and proposes that these restrictions would only apply to sensitive and critical personal data. It also removes the provision for compulsory storage of all personal data in India. The sensitive data can be transferred overseas but it has to be stored in India too. Apart from this, there are several other conditions which have to be fulfilled to transfer the data outside India.

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RBI Circular on Payment System Data

The Reserve Bank of India (RBI) in its circular issued on 6 April 2018, directed that all payment system providers have to ensure that data relating to their payment systems should be stored in systems which are located within the geographical limits of India. This data would include everything ranging from end-to-end transaction details to information collected as a part of the message or payment instruction.

Further, the RBI clarified that in certain circumstances, the data can be stored overseas as well; for example, cross border transaction data wherein a foreign component and a domestic component are involved, then if it is required, a copy of the domestic component may also be stored overseas.

Draft National E-Commerce Policy

This policy is pertaining to the subject matter of the digital economy. It contains several measures which aim at data localisation. The objective of this legislation is to create a facilitative system which boosts India’s digital economy. 

It includes within its ambit various aspects such as data which is generated by users through the usage of various social platforms, including social media, e-commerce platforms, etc. This aforementioned data is required to be stored within the territory of India and the cross-border transfer will be regulated.

Impact of data localisation on the digital economy

Impact on the Indian Economy

The government is constantly pushing for data localisation which will create a barrier against the free flow of data, which has acted as one of the key catalysts in the success of industrial giants such as Tata Consultancy Services and Wipro. The $167 billion Information Technology industry of India is export-driven and deals with data of citizens and various companies located across the world. This one section of the Indian industry enjoys comparative trade advantages and the mandate of data localisation regime could act as a restrictive trade barrier.

Further, the competitive gains arising out of data localisation would be short-lived. It would increase the infrastructural costs for Indian technology start-ups and other small to mid-size enterprises (SMEs). Data localisation might prove to be useful for the growth of the data centres and the cloud computing industry in India but from the wider lens of public policy, this approach is myopic. Protectionism can help until a certain extent but beyond that only competitiveness can help in yielding positive outcomes in the longer term.

Impact on the Global Economy

Data localisation will particularly impact international internet-based companies such as Google, Twitter, Facebook, etc. who have a huge user-base in India but store their data at remote locations. Further, global data storage companies such as Amazon Web Services, Microsoft Azure and Google Cloud will face difficulties in offering global pricing because of the mandate of data localisation. Global data storage companies will avoid setting up shop in India.

Further, this regime could lead to strained economic relations between India and other countries. A report published by a US-based Think Tank called Information Technology and Innovation Foundation (ITIF) has stated that data localisation policies present a new barrier to global digital trade. It also argued that there are no benefits in terms of cybersecurity by insisting on data localisation. The report states that the global GDP (Gross Domestic Product) could face considerable reductions along with a reduction in the national GDP as well.

Data localisation vs. Data globalisation

The 1991 economic reforms introduced in India are popularly known as the ‘Liberalisation, Privatisation, Globalisation’ model. The objective of this model was to open the Indian economy to the world and make India a globally competitive economy. Trade restrictions were relaxed, structural reforms were made, stabilisation measures were introduced to simplify matters. 

India is still hailed as a technological superpower and has one of the largest data processing industries. The problem is that the current legal framework is lacking and is not well-equipped to deal with the challenges of data protection.

The Apex Court in 2017, in its landmark judgment Justice K.S. Puttaswamy & Anr. v. Union of India & Ors, declared privacy as a fundamental right under Article 21 of the Constitution of India. Since then, two draft bills regarding personal data protection have been introduced. The legislations provide some relaxation in data localisation instead of incorporating stringent blanket provisions.

It has to be understood that digital information plays a crucial role in geopolitics and global business. The cybersecurity risks are ever-increasing as the internet is the new platform for criminals to steal valuable data. Because the internet is freely accessible, the risk increases because the data is accessible anywhere across the world. Owing to this, several countries have started paving the way for data localisation. 

Although there are advantages of localisation, it leads to an increased risk of isolation from the global network. The only possible solution is to invest in infrastructure and ensure that data breaches are minimal. Countries should focus more on data protection laws than data localisation laws.

International practice

  • Several countries across the world are taking measures for the implementation of data localisation laws. These countries include China, Brazil, Indonesia, Russia and the USA.
  • Countries such as Canada and Australia are very protective of the health data of their citizens. China has mandated strict data localisation in servers within its geographical territory. 
  • The European Union has enacted the General Data Protection Regulation (GDPR) wherein the right to privacy has been established as a fundamental right. The regulation requires that for the usage of data, explicit consent of the consumer is required.

Conclusion

Data functions as the lifeblood of the modern global digital economy. It is expected that digital trade and cross-border data flow would grow at a faster pace than the overall rate of global trade. A growing number of countries are imposing such restrictions that make transferring data overseas a cumbersome process, if not illegal. The costs of these policies are significant for the nations imposing them and for the entire global economy.

The global digital economy and data localisation are closely interconnected in a symbiotic relationship. A slight change in the latter could create huge impacts on the former. It is essential that policies are framed in a holistic manner.


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