Regulating a Digital Economy: An Indian Perspective

The “fourth industrial revolution” which has been characterised by end-to-end digitalisation has led to unprecedented increases in connectivity and data flows. By 2017, Asia had the largest number of internet users in the world, with 1.9 billion people online.

Joshua Meltzer, Senior Fellow, Global Economy and Development at the Brookings Institution, spoke about regulating the digital economy at a Brookings India Development Seminar on April 20, 2018.

In 2014 cross-border data flows were 45 times larger than in 2005, raising global gross domestic product (GDP) by approximately 3.5 per cent, equivalent to $2.8 trillion dollars in 2014. According to the World Bank, it is expected that a 10 per cent increase in internet penetration in the exporting country would lead to a 1.9 per cent increase in exports. In fact, in the U.S. alone internet and data use increased GDP by 3.4-4.8 per cent, as per estimates of the United States International Trade Commission.

In India, the digital economy is expected to contribute $550bn-$1tr in GDP by 2025, and add 1.5-2 million jobs by 2018 through its Digital India initiative.

The economic opportunities from technologies such as cloud computing, big data and the internet of things are also not limited to the IT sector but are economy-wide, including in sectors such as manufacturing and agriculture, Meltzer argued based on his working paper “Regulating for a digital economy: Understanding the importance of cross-border data flows in Asia”.

Over 40 per cent of India’s goods and services exports consist of software services and IT-enabled services (ITES) from financial analysis, accounting, medical transcription to the provision of applications for smartphones. Cross-border data flows remain vital for India’s exports of services.

Governments, however, are increasingly introducing measures that restrict data flows.

In order to build the digital economy, India will need to determine a fit-for-purpose regulation especially in privacy, consumer protection, intellectual property and financial regulation.

Cross-border data flow restrictions can take one of several forms, from restrictions on data being transferred outside national borders and requiring prior consent for global transfers. According to a study by Bauer et al, the cost of proposed and enacted data localisation measures in India would reduce its GDP by 0.1 per cent.

Meltzer argued that restrictions on cross-border data flows harm both the competitiveness of the country implementing the policies and other countries that rely on that data from those countries.

In India, a few examples of government regulations and rules include the Information Technology Rules (2011) that limits cross-border transfer of sensitive personal data. The National Data Sharing and Accessibility Policy (2012) which requires government data be stored in India, particularly for cloud providers. The Companies (Accounts) Rules (2014) which requires backups of financial information, if stored overseas, to be stored in India. The National Telecom M2M roadmap (2015) which requires gateways and app servers that serve Indian customers to be located in India.

Data flow restrictions are enacted with several goals in mind – from protecting citizens’ personal privacy, to ensuring national security and protecting local businesses. The capacity to move large quantities of data seamlessly and rapidly across borders can undermine domestic regulatory standards in areas such as privacy and consumer protection.

Meltzer argued that such data restrictions limit access to digital commerce networks and online resources and the ability of businesses to synthesise large data sets, on a wider scale they affect business models, reduce productivity, innovation as well as business competitiveness by forcing businesses to invest in lower quality data facilities.

So, while this wave of digitisation has massive economy wide positive impacts, data localisation could have massive economic costs, he added.

Meltzer recommended that the realisation of legitimate regulatory goals such as privacy and security must happen alongside maximising the economic and trade opportunities cross-border data flows offer. The focus for regulators needs to be using existing technologies to harness economy-wide benefits.

Robust domestic privacy laws that manage risks and maximise opportunities and the proper enforcement of security protocols through laws offer a way of ensuring data restrictions don’t negatively impact businesses and trade flows.

At the centre of all of this lies building a trustworthy environment where mutual assistance is offered and data-sharing agreements and contracts are negotiated bilaterally and multilaterally. In essence, government backdoors that erode trust in the internet must be avoided under any circumstances.

The discussants during the seminar provided unique perspectives and critiques to some of Meltzer’s arguments.

Former diplomat Asoke Mukerji spoke about how interdependent countries were when it came to data flows. He focused on how in addition to maximising the impact of data flows for economic growth, India also needs to look at data and its flow in terms of its socio-economic sustainable development goals, anchored in its inclusive “Sabka saath, Sabka vikas” policy.

The focus of data and data flows in India remains as much on the citizen as on the market, he said.

Bringing an aspect of human nature as well as the issue of the concentration of data in the hands of a few private players, Mudit Kapoor, associate professor at the Indian Statistical Institute, warned of the pitfalls of this free market of digital data flows.

He pointed out that flow of data is distinct from flow of goods and services across borders. This is largely due to the inter-relationship between industry and security concerns of each country. Given the asymmetry in data-sharing rules between companies and government agencies across the world, we are likely to over-simply the true and complex nature of international data flows by treating it like any other commodity or services.

Kapoor also highlighted the markets for fake news and the limited capacity of the governments to regulate such markets. These can have phenomenal implications on institutions in democratic countries.

Avik Sarkar, OSD of the Data Analytics Cell at NITI Aayog, spoke about the digitisation efforts of the government, giving examples of how machine-learning, artificial intelligence and big data analytics could help bring about profound impacts on policies and programmes, especially those in health and early disease prevention.

In order to build the digital economy, India will need to determine a fit-for-purpose regulation especially in privacy, consumer protection, intellectual property and financial regulation. The big push needs to be from the top, ensuring governments at all levels – national, state and local — go digital and consider the delivery of services through digital technologies.

Overall the vibrant debate on this forum and many alike on cross-border data flows in India remains a part of a larger global discussion on the need for an international framework to provide predictability, security and stability of cyberspace.