Data Center Investment: India's Digital Future

India's data centre industry is experiencing a surge in investment, with a range of factors contributing to its appeal as a destination for data centres. The country's burgeoning need for data across industries has attracted new players, while existing players are also expanding. The increasing usage of AI, IoT, machine learning, and now generative AI, is accelerating investment trends in data centres in India. The push for data localisation, spurred by India's data protection norms and the proposed data centre policy, has also swayed global data majors towards the country.

Additionally, India possesses several attributes that make it an attractive data centre hub, including cost advantages, robust legislation, minimal climate risks, a skilled workforce, and enticing government incentives. The government has also granted infrastructure status to data centres, streamlining the process of raising capital.

The massive growth and investments in the sector will be driven by the expansion of global hyperscalers in India, who are ramping up their presence in the country. Hyperscalers are large companies that operate massive data centres with immense computing power, storage capacity, and network resources. Examples include global tech giants such as Amazon, Google, Microsoft, Oracle, and Yotta Infrastructure.

With the country's digital revolution and the exponential increase in data consumption, storage, and governmental thrust on data localisation, India is expected to see significant investments in its data centre infrastructure in the coming years.

The benefits of investing in data centres in India

A Burgeoning Need for Data

The need for data in India is burgeoning across industries, with the country witnessing the mainstream adoption of digital technologies. This transition is resulting in a significant influx of data, requiring extensive generation, storage, management, and consumption. India had more than 700 million internet users at the end of 2022, almost double that of the US. With a population of 1.4 billion and a growing base of smartphone users (600 million), digital services becoming ubiquitous, and the advent of 5G, India needs massive infrastructure to manage the data deluge.

Favourable Government Policies

The Indian government has implemented policies that foster data security, ease of doing business, connectivity, sustainability, and a skilled workforce, driving the expansion of the data centre industry. The government has also granted infrastructure status to data centres, with state governments offering subsidised land, power subsidies, exemptions on stamp duty, and discounts on the usage of renewable energy and procurement of IT components made locally. Additionally, the new submarine cable infrastructure linking Mumbai and Chennai to Singapore, Southeast Asia, Europe, and the Middle East will help position India as a more attractive location for data centre development, expansion, and investment.

Strong Investment Opportunities

The data centre market in India is expected to grow significantly, offering prime investment opportunities. The market was valued at $4.35 billion in 2021 and is predicted to reach $10.09 billion by 2027, a 132% surge in six years. Nasscom predicts that global investments in data centres will hit $200 billion annually by 2025, with India expected to attract around $5 billion annually within two years. This influx of investment is driven by the need for data localisation, cost efficiency, and the growing demand from businesses migrating to the cloud and segments such as BFSI and government services.

Sustainable Opportunities

As sustainability gains emphasis, investors and developers are finding ample opportunities in the data centre sector. Edge data centres, in particular, are gaining traction as a promising avenue, offering smaller footprints and lower energy consumption. Tier-II cities in India, such as Vijayawada, Nagpur, Raipur, Kochi, Patna, and Mangalore, are being eyed by key data centre operators for the establishment of edge data centres and disaster recovery sites.

Supportive Ecosystem

The convergence of real estate, tech expertise, a thriving enterprise market, a high number of smartphone users, and the government's reliance on data for governance all contribute to India's ideal data centre ecosystem. Additionally, India's climate poses no significant threats to data centre operations, making it a favourable location for data centre investments.

The role of data localisation in increasing demand for data centres

Data localisation has become a significant policy issue in India, with the government presenting it as a way to boost growth and help law enforcement access data for investigations. The country has seen a burgeoning need for data across industries, with existing players ramping up and several new players entering the market.

Data localisation refers to the act of storing data on any physical device that may be present within the territorial borders of a country where the data has been generated. The Indian government has four stated objectives for pursuing data localisation:

• Securing faster and better access to personal data for law enforcement
• Increasing economic growth and boosting employment
• Preventing foreign surveillance
• Better enforcing data protection laws

The need for data localisation in India has been driven by data protection norms and the proposed data centre policy. The push for data localisation has swayed global data majors towards the country.

The Impact of Data Localisation on Data Centre Demand

Data localisation and cost efficiency are the main driving factors for data centre demand in India. The need for data centres in India has been further intensified by the government's introduction of the concept of "trusted geographies", limiting cross-border data storage to selected nations.

The current surge in data centre development has been brewing for over a decade, with cloud services making services universal, and analytics aiding data comprehension. The mainstream adoption of digital technologies in India is yielding robust use cases and business models, resulting in a significant influx of data. This transition has led to a substantial need for data generation, storage, management, and consumption on a large scale.

The increasing usage of AI, IoT, machine learning, and now generative AI is also accelerating the demand for data centres in India. With a growing digital economy, the demand for new data centres in the country is expected to remain firm.

The Future of Data Centre Demand in India

The roll-out and deployment of 5G, IoT, smart cities, and the advent of edge computing will continue to drive data centre demand in India. The country's potential in this sector remains substantial, with an era of robust digital infrastructure, innovation, and resilience ahead.

However, there are challenges to India's fledgling data centre industry. The approval processes, though improved, can still take a couple of months. Data centres demand huge investments, but the return on investment is slow, which might deter some companies.

Given the increasing need for data centres in the coming years, there is room for more players to enter the market. Ultimately, the data centre industry in India is expected to consolidate into five or six major players.

The impact of government policies on the data centre industry

The Indian government has played a pivotal role in fostering the growth of the data centre industry, introducing favourable policies and incentives that create a conducive environment for investment. The government has recognised data centres as key initiators of digitalization in the country and has granted them infrastructure status, streamlining the process of raising capital. This has encouraged many new players to enter the market and existing players to expand.

The government's Digital India program and data localisation mandates have been significant drivers of the industry's growth. The need for data localisation was emphasised with the introduction of the concept of "trusted geographies", limiting cross-border data storage to selected nations. This led to a surge in demand for data centres in India, as global data majors were swayed towards the country. The government's initiative to build a backbone for digital transactions and authorisation with the JAM trinity (Jan Dhan-Aadhaar-Mobile), UPI, and India Stack APIs also fuelled the explosion of data generation, which could only be scaled through domestic data centres.

The Reserve Bank of India (RBI) has also played a role in the development of the data centre industry. In 2018, the RBI directed payments system providers in India to store data collected within the country locally, citing data security risks associated with sensitive data being stored overseas. This move further emphasised the need for data centres in India.

The government has also introduced various incentives to attract investments in the data centre industry. These include offering subsidised land, power subsidies, exemptions on stamp duty, discounts on the usage of renewable energy, and procurement of IT components made locally. Additionally, data centres have been included under the Essential Services Maintenance Act (ESMA), and the government has proposed the creation of Data Centre Facilitation Units (DCFU) and Data Centre Economic Zones to support the industry's growth.

The government's support has been crucial in addressing the challenges faced by the data centre industry in India. One of the key challenges is the need for huge investments and the slow return on investment, which might deter some companies from entering the market. The government's incentives and the infrastructure status granted to data centres help mitigate these challenges by making it easier for companies to raise capital and access various benefits.

The Indian government's policies and initiatives have had a significant positive impact on the data centre industry in the country. By prioritising stable data centre infrastructure, the government has ensured uninterrupted internet access, data security, and cloud computing, which are essential for the country's thriving digital economy. The government's efforts have also contributed to India's ranking as the 13th largest data centre market in the world, with 138 data centres as of March 2022. The industry is expected to continue its rapid expansion, with a projected market size of $8 billion by 2026.

The potential of edge data centres in India

India is witnessing a digital revolution, with an ever-growing number of internet users, currently at 700 million, and a rising adoption of digital technologies. This has led to a surge in data consumption and the need for data centres. As a result, the data centre industry in India is booming, attracting investments in hyperscale data centres.

Edge data centres, in particular, are gaining traction as they are well-suited to meet the growing demand for data in Tier 2 and Tier 3 cities. These are small, scalable, and software-defined centres located at the periphery of networks, providing efficient and secure access to data and applications for businesses, governments, and consumers. They are designed to support critical applications and workloads, similar to larger core data centres, but with a lower form factor and capacity.

The strategic placement of edge data centres is crucial for improving user experience and aiding in the adoption of digital services. They help telcos provide faster performance and lower latency by processing data closer to the end-users, resulting in a more stable and responsive network. This is especially important as India moves towards the rollout of 5G networks, which will further increase data generation and consumption.

The Indian government's push for data localisation, driven by data protection norms and the proposed data centre policy, has also contributed to the rise of edge data centres. The government has introduced data localisation laws, mandating that personal data of Indian citizens be stored within the country. This has led to the development of edge data centres in Tier 2 and Tier 3 towns by companies such as NxtGen Datacenter and Cloud Technologies, and the government's PSU RailTel.

The growth of edge data centres in India offers a golden opportunity for investors. The demand for data centres is expected to remain strong due to the increasing adoption of cloud computing, big data, the Internet of Things (IoT), and the proliferation of mobile devices. The colocation market, where enterprises rent space for their servers and hardware, is also expected to grow significantly, offering alternative investment opportunities.

However, there are challenges to be aware of, such as the need for skilled workers proficient in specialised areas and the high costs and slow return on investment associated with data centres. Nevertheless, with the right partners and capital, edge data centres in India present a promising avenue for investors, supporting the country's journey towards a digitally empowered future.

The challenges of investing in data centres in India

While India's data centre industry is burgeoning, there are some challenges to its development. Here are some of the key challenges that investors should be aware of:

Approval processes

Although approval processes have improved significantly since the industry was granted infrastructure status, it can still take several months to obtain the necessary approvals. This can delay projects and increase costs.

High investment and slow returns

Data centres demand huge upfront investments, but the return on investment is typically very slow. This may act as a deterrent for some investors who are looking for quicker returns. The high costs involved in setting up a data centre include factors such as location, size, design, technology and infrastructure.

Recurring costs

In addition to the high upfront costs, data centres also incur significant recurring costs. These include hardware maintenance and upgrades, facility upkeep, and skilled workforce expenses. These ongoing costs can impact the profitability of data centres over time.

Competition

The data centre industry in India is becoming increasingly competitive, with a growing number of players entering the market. This competition may lead to pricing pressures and impact the profitability of individual data centres.

Regulatory changes

The regulatory environment in India is subject to change, and this can impact the data centre industry. For example, the proposed Digital Personal Data Protection Bill, 2022, aims to monitor smooth data flow and establish severe penalties for any violations. Investors need to stay abreast of regulatory changes and manage the associated risks.

Power supply

Data centres require a consistent and reliable power supply to function effectively. India's power infrastructure may need to improve to meet the growing demand for data centres.

Frequently asked questions