India’s data localisation push can give rise to new business opportunity

No one has ever doubted the sheer consumerism of Indian festivity, but its presence reaches further than you would believe. For, all that data on what smartphones or shirts, boots or white goods that we buy and how we pay for it, rarely stays on our shores.

This week’s festive season sales may generate online business of up to $3 billion. But much of the data from those sales, on e-commerce platforms and more, is likely to be hosted and stored in US data farms. While this has been happening since the start of online shopping and even earlier, this time, the Reserve Bank of India (RBI) has firmly stated that all financial transactions’ data must be locally stored.

This is driving data centre infrastructure spending, which could touch $4.5 billion by end of 2018 and $7 billion by 2020, according to real estate consultant Cushman & Wakefield’s blog on data centre growth in India. In fact, research and advisory firm Gartner sees data centre hardware spend alone to be $2.7 billion by 2018. India had built up data centre infrastructure of 1.3 million square feet in 2008, expected to scale to 10.9 million sq feet by end of 2018, says Cushman & Wakefield. By 2050, India will be at number 5 spot in size of data centre market.

This explosion will be driven by localisation and backed by clichés — data is the new oil, why should data of over one billion Indians not be in India, data is strategic and foreign entities could cripple India in event of war or sanctions, how will Indian law enforcement go after data gangs in Macau, Moscow, Madrid or Manhattan if systems are compromised and so on.

Kartik Shinde, partner, cybersecurity, EY India, says, “If the end beneficiary is in Macau, where there are a lot of casinos, you have to liaise with lawyers in Macau.

That’s easier said than done. Fraudsters (in and outside India) study the system and number of hops (number of countries and banks it goes via), say for money transfer, and devise the best way to defraud.”
DRIVING EFFICIENCY

The benefits are obvious. Rakshit Daga, vice-president, engineering, BigBasket, says, “It will speed up transactions and reduce network latency.” When the online grocery store shifted its data centre (hosted on Amazon Web Services) from Singapore to Mumbai, it noticed up to 10 per cent improvements in transaction efficiency. “Shifting from the US to India could lead to up to 30 per cent better speeds,” he adds.

A chief information officer of a multinational manufacturing firm, which has been keeping Asia Pacific enterprise data in India for the past four years, says it saved 30-40 per cent in costs. India is an ideal location for the lower cost of operations, availability of quality talent and round-the-clock service, he says.

B Srinivasa Rao, chief marketing officer, CtrlS Datacentres, which runs Asia’s largest Tier IV data centres in Hyderabad, Mumbai and Gurgaon, says many e-commerce and fintech clients see India as a cost saver. The manpower, real estate and bandwidth costs come down by about 80 per cent compared to a top-tier data centre in the US or Singapore. Imran Iraqi, the principal, financial technology services, CtrlS, believes it will continue to grow at the same pace over the next five years.

CtrlS is spending Rs 1,500 crore on setting up hyper-scale data centres in Hyderabad and Mumbai, which would require about 100MW and 50MW, respectively. NetMagic, acquired by Japan’s NTT Com in 2012, has nine data hosting facilities in India, two of which were set up early this year at an investment of $144 million. Flipkart’s PhonePe and Alibaba-backed Paytm claim their transactions are processed locally.

Siddharth Vishwanath, partner, cybersecurity, PwC India, says, “Global companies will need to invest more in infrastructure development and re-architect the way applications work.” He points out that companies such as Google Pay, which have a common global data backbone for multiple countries, will also need a separate one for India to comply with local regulations.

“Data is a digital transactions footprint. During war or hostilities, data centres could be switched off. Such scenarios, among others, are pushing countries towards local infrastructure,” he adds.

Even when Indian user shops at Macy’s in New York on an Indian bank’s credit card, transactions may be routed via Wells Fargo (which issues card swipe machines to Macy’s) in the US and stored there rather than in India (See graphic).

MIRROR, MIRROR ON THE WALL

Some companies are insisting on mirroring rather than storing information only in India. Earlier this month, WhatsApp said it has built a system to store payments-related data locally in India through mirroring. “We hope to expand WhatsApp payments to all of India soon so we can contribute to financial inclusion goals,” a company statement noted.

But mirroring has not cut ice. “It’s like a photocopy. The original will be outside India. Mirroring is not good enough,” says Shinde of EY India. Vishwanath adds, “Mirroring is a subset. The regulator is stating that data cannot go out, so mirroring is not a solution.”

The banking regulator insisted on hard localisation by October 15, though global payments companies have been lobbying with the finance ministry and RBI for relaxation. Some have sought a year’s extension but to no avail so far.

Among reasons for local hosting are ease of access for law enforcement and privacy. However, Prashant Pradhan, vice-president, IBM Asia Pacific, says, “Physical location does not eliminate need for protocols and permissions to access. Situations (like sanctions or war) might be driving intent, but access is not controlled by the Government of India but by the owner.”

Global tech and payments giants consider forced localisation against the grain of free trade and data flow. In a strongly worded letter to Prime Minister Narendra Modi, US Senators John Cornyn and Mark Warner – co-chairs of the Senate’s India caucus that comprises over 30 members – urged India to instead adopt a “light touch” regulatory framework that would allow data to flow freely cross-border.

“We see this as a fundamental issue to further development of digital trade and one that is crucial to our economic partnership,” they wrote on October 12.

Echoing the sentiment, Mukesh Aghi, chief executive, US India Strategic Partnership Forum (USISPF), says the forum supports the free flow of data and opposes forced data localisation. USISPF is a trade body representing US corporates in India, such as Visa, MasterCard. Amex, Amazon and Western Union, among others.

“We expect these requirements (of local centres) to raise the cost of procuring and delivering services, including for local Indian businesses, which will ultimately increase costs and reduce the availability of data-dependent services.”

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