India’s Finance Minister Nirmala Sitharaman made clear New Delhi’s ambition to attract greater investment in artificial intelligence and data centres as she presented the country’s annual budget on Sunday.
Sitharaman promised not to impose any taxes on foreign companies using data centres built in the country to provide services to global clients until 2047 on those outbound services.
The firms will, however, need to provide services to domestic customers through an Indian resale entity, Sitharaman added, meaning New Delhi will still earn taxes from them.
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The finance minister further proposed a safe harbour of 15% on cost if the company providing data centre services from India is a related entity.
The announcements make clear that India is looking to position itself as the hub for upcoming global investments in AI computing, as the industry shifts from developing chatbots to establishing agentic AI infrastructure.
Scores of data centres have been built in India in recent years, with several billion worth of investments announced in the last four months alone.
In October, Google announced a $15 billion investment in an AI data centre project in Andhra Pradesh state, while in December, Microsoft announced a $17.5 billion investment by 2030 to build AI-focused data centres. That was the largest investment in Asia by the maker of Windows.
That same month, Amazon also announced a more than $35 billion investment in India by 2030 to boost its artificial intelligence capabilities and increase exports.
Investments are also expected from Sam Altman’s OpenAI, along with Indian conglomerates Adani and Reliance.
Reuters reported that Sitharaman’s announcements on Sunday helped alleviate concerns about such potential investments, as firms were previously worried that New Delhi could impose taxes on their global income in the future for using a data centre located in the country.
“This announcement helps in bringing clarity to foreign companies and lends stability in (their) tax position in India till 2047,” Vaibhav Gupta, partner at tax firm Dhruva Advisors, told Reuters.
India aims to position itself as a global leader in services, with a 10% global share by 2047. Sitharaman said her taxation incentives were intended to enable critical infrastructure and boost investment in data centres.
India’s IT minister Ashwini Vaishnav also told reporters on Sunday that “data centres will be a major strength for India through which we can provide new services to the world.”
Big opportunities
New Delhi’s thirst for greater AI investment links to its already strengthening role in the services industry, particularly due to the massive industry of global capability centres (GCCs).
India is home to more than half of the world’s GCCs — centres that act as offices for global companies and support their daily operations, finance, research and development. Experts have previously said that India’s GCC market could be worth $100 billion by the end of the decade, while generating up to 2.8 million jobs.
GCCs, in turn, are closely linked to the expansion of data centres, particularly through their high demand for cloud, AI, and data processing infrastructure that powers the service industry. These GCCs need vast data storage capacity and computing resources — a requirement that well-established data centres can directly meet.
Aside from that, India is also playing catch-up in the global expansion of artificial intelligence. Finance minister Sitharaman outlined on Sunday plans to integrate AI into education, farming, trade and even governance, all of which will require robust data centres.
Bigger challenges
But New Delhi faces very real challenges in bringing its data centre dream to fruition. Data centres require huge amounts of power and water to operate, and India already struggles to provide both those resources adequately.
Just last week, millions of people in the Indian capital lost access to water as six of the city’s nine major water plants shut down for more than a week due to huge levels of pollution in the city’s main water source — the Yamuna River.
Water scarcity in India is so serious that in 2018, a government agency went as far as to say that the country was dealing with the “worst water crisis in its history”. And years of uncertain climates, heatwaves and droughts since have not helped.
Most of India’s data centres are also located in heavily populated urban centres like Mumbai and Hyderabad, which face a soaring demand for water.
“With high water demand from data centres for cooling needs estimated at about 25.5 million litres per year for a 1 MW load, according to data from the Uptime Institute, the computing infrastructure in these cities may face operational disruption risks without government intervention,” S&P Global Commodity Insights noted in a report last September.
Similar problems afflict newly announced projects, like one from Google in the state of Andhra Pradesh. Days after the investment was announced, advocacy group the Human Rights Forum said Google’s data centres represent “a looming environmental, economic disaster”.
“In Visakhapatnam (one of the cities where Google’s investments are headed), where groundwater depletion, erratic rainfall and climate variability have already created acute water stress, such a project will almost certainly intensify the crisis, diverting precious water from local residents and amounting to a grave injustice,” the HRF said in a statement in October.
Similarly, data centres in India’s most populated state, Uttar Pradesh, are also being built in areas that already struggle with a scarcity of clean water, according to local reports.
Spike in power needs
Experts have also raised concerns about how India will meet the power demands of the data centre build-out.
The rapid growth of data centres in India will result in their share of electricity demand more than tripling to about 2.6% in 2030 from 0.8% in 2024, S&P said in September.
India’s power demand over this period is expected to grow at a 5.3% annual average rate, but demand from data centres will grow at a much faster clip — of 28%, it added.
As the country faces increasingly harsher summers, this presents serious challenges.
“Imagine shutdowns of data centres in peak summer due to lack of water for cooling — how might this impact banking services, medical systems in hospitals using cloud services, transit system operations and more,” Sahana Goswami, senior programme manager with Water Resilience practice at think-tank WRI India, told BBC News in November last year.
‘Data centres a double-edged sword’
For what it’s worth, the Narendra Modi-led government does not seem to be denying these challenges.
In the Economic Survey for 2025-26 released last week, the Indian finance ministry noted that “addressing structural constraints such as energy shortages will be critical for India to position itself as a global AI data centre hub.” The Economic Survey presents the government’s annual review of economic progress, key structural hurdles, and main policy focuses.
“Data centres are also double-edged swords as they are very energy-intensive,” the Survey noted.
It proposed enabling energy-intensive data centres to access renewable power. It also called for “deploying AI in a way that is economically grounded and socially responsive,” warning that data centres “can place significant strains on existing energy systems even in advanced economies.”
“If India scales up AI data centres, it has the potential to add an extraordinary amount of stress on our already strained groundwater and freshwater reserves,” the Survey warned.
Still, “India has the benefit of hindsight”, the Survey concluded, noting that the challenge before India would be to “design AI systems that are more resource-efficient and aligned with public objectives from the outset”.
- Vishakha Saxena
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