Photo: Bloomberg
Photo: Bloomberg

Opinion | Data localization as a catalyst for FDI 5.0

Such a policy regime would be open but strategic about data localization, legal subsidiarization and fair taxation

The notion that data localization is digital protectionism ( is, at best, self-interest masquerading as national interest, and, at worst, a threat masquerading as advice. The Reserve Bank of India’s (RBI’s) actions around localization of payment data represent common sense, prudence and ambition. We’d like to make the case that this issue should be a catalyst for FDI 5.0: a policy regime for foreign direct investment (FDI) that is open but strategic about data localization, legal subsidiarization and fair taxation.

Payment data being offshore defies common sense. Payments in Russia stopped working for a few days when it invaded Crimea and America is close to cutting off Iran’s access to SWIFT. Payment systems can be used as tools or weapons of foreign policy. Pending an important global debate on who owns data, the digital exhaust of Indians continues to be used offshore to profile and track them.

Openness is crucial to prosperity but hardly inconsistent with believing that NSE must bring back the Singapore trading of their index and Barack Obama was justified in his refusal to stay at the Hotel Waldorf Astoria in New York because it is owned by a government-linked Chinese company.

Data localization is prudent not only for access by, and continuity for, India, but also for prevention of data access by foreign governments. For example even a junior policeman in China or Singapore could get easy access to our payment data if the servers are in their jurisdictions. A positive side effect will be accelerating the capabilities and lowering the costs of Indian data centre capacity.

Countries are path dependent; history matters. In 1686, the East India Company’s unwillingness to pay a 3% customs duty led to a war that created an empire and began FDI 1.0. The recent book, India Conquered, by Jon Wilson not only debunks frequently cited upsides of FDI 1.0 (railways, social justice, rule of law, education, etc.) but elegantly explains the contrast between a YouGov 2014 poll finding (49% of British people felt the empire had made the colonies better off) and India’s 1947 realities (only 0.2% of 5 lakh villages had electricity, life expectancy was 31 years, 12% of the population was literate, and per capita income hadn’t changed in 100 years).

Given FDI 1.0, it wasn’t surprising that the years of FDI 2.0—between 1947 and 1991—were hostile. FDI 3.0 began after 1991. FDI 4.0 in 2014 crossed an important psychological barrier with 100% FDI being allowed in defence. FDI 5.0 is the next evolution; open but strategic.

FDI 5.0 is not about protectionism. Without FDI, we would still be driving Ambassador or Padmini cars. This may also seem like a bad time to be playing hard-to-get. Cross-border financial assets and inflows of global foreign direct investment as a share of world GDP have fallen from 57% and 3.3% in 2007 to 36% and 2.2% respectively today. The upsides of FDI are obvious, substantial and broad—technology, supply chain, processes, markets, brands, management, logistics, etc. Surely FDI is fastest way to access foreign markets (55% of Chinese exports come from foreign companies).

But the biggest impact of FDI may be human capital via multinational corporation alumni. Deepak Parekh of HDFC worked at Citibank, D.B. Gupta of Lupin worked at Rhône-Poulenc, and Bhavish Aggarwal of Ola worked at Microsoft.

More strategically, foreign companies invested in India create a vested interest for India overseas with higher access to politicians, academics, press, etc in their host countries. This is evidenced by conversations about the nuclear deal, technology visa regime, etc. So FDI 5.0 must, above all, do no harm.

India has too many people to ignore in a low-growth world. We must avoid protectionism—animals bred in captivity find it hard to live in the jungle. But we must also participate in the global re-evaluation of free monopolies, privacy defaults, data opt-ins, foreign ownership risks, cyber vulnerabilities, home bias, public company governance, and much else. As Sheila Dhar wrote in her 1973 classic This India, “Throughout history foreign people have come to India to settle, to travel, to learn, to loot, and to conquer. The new ways of life they brought were not cast away by the people who lived in India but absorbed and made their own. In a way our culture is like a bicycle; it is stable because it keeps moving."

Insisting on good corporate citizenship including localizing data, incorporating subsidiaries and paying taxes where income is made should hardly count as hostility or protectionism. We live in a society, not in an economy.

Some MNCs routinely avoid taxes by using transfer pricing or royalty payments using the convenient fiction that different units of multinationals are really separate companies (Apple’s European profits were allocated to a paper internal head office with an effective tax rate of 0.005%). India has already adopted some of the action plans under the 93-country base erosion and profit shifting tax project but must do more. Subsidiarization is important for risk: The global financial crisis taught us that banks are global in their life but local in their death because living wills can only be enforced locally. The same holds true for taxation. New Zealand forced Facebook to incorporate locally for revenues rather than booking them out of Singapore.

RBI has restored its institutional integrity after decades of invertebrate mimicry by ending shameful bad loan forbearance that essentially stole from our grandchildren. Its new directive on data localization ends another kind of undesirable forbearance. RBI must stay the course. 

Manish Sabharwal and Sachin Bansal are, respectively, co-founders of TeamLease and Flipkart