Data Localization and its Impact on Global Tech Companies Operating in India

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Data Localization and its Impact on Global Tech Companies Operating in India

Written by Keyur Tripathi

Table of Contents

Introduction

In the digital age, data is often referred to as the “new oil.” As the volume and value of personal, financial, and behavioral data grow exponentially, governments worldwide are re-evaluating how data is collected, stored, and transferred across borders. One significant trend in this direction is the rise of data localization—a policy that mandates companies to store and process data within the borders of a country where it is generated.

In India, the push for data localization has gained momentum in recent years. While the Indian government argues that localization enhances data sovereignty, national security, and law enforcement access, global tech companies have expressed concerns about operational costs, regulatory fragmentation, and trade barriers. This article explores the concept of data localization, the Indian regulatory framework, and its implications for global tech companies operating in India.

What is Data Localization?

Data localization refers to the practice of requiring data, especially personal or sensitive data, to be stored and/or processed on servers physically located within the country of origin. Some countries permit the cross-border transfer of data with conditions (soft localization), while others impose strict prohibitions (hard localization).

Localization can be:

  • Full Localization: No transfer of data outside national borders (e.g., China’s cybersecurity law).
  • Conditional Localization: Data can be transferred outside, but a copy must be stored locally (e.g., India’s RBI mandate).
  • Sectoral Localization: Applicable only to specific types of data like financial or health records.

1. The Digital Personal Data Protection Act, 2023 (DPDPA)

India’s new DPDPA 2023, which replaces earlier drafts of the Personal Data Protection Bill, introduces a more liberal cross-border data flow regime compared to previous versions. Key features include:

  • No blanket data localization requirement.
  • Cross-border data transfer allowed to countries notified by the central government.
  • Exemptions for government agencies in the interest of national security and public order.

While the DPDPA diluted some earlier localization mandates, it still retains government discretion to regulate data transfers, making it a flexible but uncertain regime.

2. Sector-Specific Regulations

Despite the DPDPA’s leniency, certain sectors continue to impose data localization requirements:

  • Reserve Bank of India (RBI):
    • In 2018, RBI mandated that all payment data must be stored exclusively on servers located in India.
    • This impacts companies like Visa, Mastercard, PayPal, and Google Pay.
  • Insurance Regulatory and Development Authority of India (IRDAI):
    • Requires insurance companies to store data on servers located in India.
  • Telecom Regulatory Authority of India (TRAI):
    • In 2018, TRAI recommended that critical personal data should be stored locally.
  • Health Data Regulations (Draft):
    • The proposed Digital Information Security in Healthcare Act (DISHA) seeks local storage of health data, though it is yet to be enacted.

These sectoral mandates continue to enforce partial localization, regardless of the general framework under DPDPA.

Rationale Behind India’s Push for Data Localization

  1. Data Sovereignty:
    • Ensures that Indian data is governed by Indian laws and not subject to foreign jurisdictions.
  2. Law Enforcement and Investigation:
    • Facilitates timely access to data for investigative agencies, especially in cases involving foreign service providers.
  3. Cybersecurity and National Security:
    • Reduces exposure to foreign surveillance or cyberattacks.
    • Promotes critical infrastructure protection.
  4. Economic Development:
    • Encourages the development of local data centers, boosts investment in digital infrastructure, and creates jobs.
  5. Consumer Privacy:
    • Aligns with the global shift toward stronger data privacy norms like the EU’s GDPR.

Impact on Global Tech Companies Operating in India

1. Increased Operational Costs

  • Setting up localized data centers or partnering with local vendors leads to significant capital and operational expenditure.
  • Small and medium foreign enterprises may find it commercially unviable to operate in India.

2. Compliance Burden

  • Navigating multiple sector-specific regulations alongside evolving national laws creates a compliance maze.
  • Companies must revamp data architectures, vendor contracts, and audit mechanisms.

3. Barriers to Innovation and Efficiency

  • Centralized data analytics and AI models that rely on global data pooling become restricted.
  • Localization hinders cloud computing scalability and cross-border service integration.

4. Conflict with International Trade Rules

  • Data localization may violate free trade agreements (FTAs) and commitments under the World Trade Organization (WTO).
  • Countries like the US have opposed India’s localization measures in bilateral forums.

5. Risk of Data Fragmentation (Data Nationalism)

  • The global tech ecosystem thrives on interoperability and seamless access to data across geographies.
  • Fragmentation of the internet through localization creates “data islands”, harming the free flow of information.

6. Strategic Recalibration

  • Despite concerns, many companies are adapting to India’s requirements:
    • Amazon and Microsoft have set up cloud data centers in India.
    • Google committed to expanding its India Cloud Region to comply with local mandates.

India’s Position in the Global Context

India’s approach to data localization is seen as a middle path:

  • Not as restrictive as China, which demands full localization and enforces strict cyber sovereignty.
  • More assertive than the US and EU, which generally permit cross-border data flows under strict safeguards (like GDPR’s adequacy or standard contractual clauses).

With its growing digital economy and massive user base, India’s regulatory stance on data can influence global tech policy and shape the norms of digital sovereignty.

The Way Forward: Striking a Balance

India must balance its sovereign interests with economic competitiveness and innovation. A nuanced approach could involve:

  1. Clarity in Data Classification:
    • Clearly define what constitutes critical, sensitive, and non-sensitive data to avoid overreach.
  2. Adequacy-Based Transfers:
    • Create frameworks for trusted foreign jurisdictions with high data protection standards.
  3. Strengthening Infrastructure:
    • Encourage public-private partnerships to build affordable and efficient local data centers.
  4. International Cooperation:
    • Engage in bilateral and multilateral data-sharing agreements to ensure lawful access across borders.
  5. Harmonization with Trade Policies:
    • Align data policies with India’s international trade obligations and Digital India vision.

Conclusion

Data localization is no longer a theoretical policy—it is a practical reality that global tech companies must address while operating in India. While the intent behind localization—sovereignty, security, and consumer protection—is legitimate, its implementation must be proportionate, transparent, and innovation-friendly.

As India positions itself as a global digital leader, the challenge lies in crafting a regulatory ecosystem that respects privacy, promotes business, and enables cross-border data flow with adequate safeguards. For global tech companies, compliance is essential, but so is engagement with policymakers to create a fair and growth-oriented digital economy.