Chennai: Water consumption by data centres is set to more than double to 358 billion litres by 2030 and new capacities are getting added. These centres are also projected to account for 5-6% of power consumption. While India offers huge incentives, including a tax holiday till 2047, the government must bring in adequate guardrails that will ensure water conservation, use of renewable energy and link incentives to measurable outcomes, finds Shalini Dawar, digital infrastructure leader and technology services partner, EY Parthenon.
Q) How much investment has already been invested in India’s data centre industry, and how much more investment is expected? What is the current operational capacity, and how much additional capacity could come online over the next five to six years?
India is currently an underserved market. Developed countries have built vibrant data centre ecosystems over several decades, while India’s market has taken shape largely over the past five to six years. Growing data consumption, digitisation and OTT usage, along with India’s strategic importance to cloud and neocloud providers, are driving expansion.
India currently has around 1.7-2 gigawatts of live capacity, spread across more than 10 operators. We expect this to reach 8-10 gigawatts by 2032. More than 25 operators are present at different stages of capacity development. Investments of around $10-30 billion have already gone into the sector, and another $150 billion could be required over the next five to six years to support the expected growth.
Q) The government has reportedly doubled its projection of data centre power demand to 26.3 gigawatts by 2032. How much pressure will this put on the power sector? Can India rely on renewable energy when data centres require uninterrupted power supply?
Data centres have three critical power requirements: adequate electricity, round-the-clock connectivity and high-quality power with minimal voltage fluctuations. Meeting these requirements will require additional infrastructure.
Data centres currently consume around 1% of India’s electricity, and their share could rise to 5-6% by 2034. We do not expect electricity generation itself to become a bottleneck over the next five to six years. However, transmission infrastructure and substations will need significant investment to ensure reliable supply.
Q) The World Bank has warned that rising data centre power requirements could push up electricity tariffs in South Asia. How serious is this risk for India? Could additional demand also increase dependence on coal and raise emissions?
The risk of higher tariffs is concentrated in grid-stressed clusters such as Mumbai, Chennai, Hyderabad and the National Capital Region, which are also witnessing significant data centre expansion.
A bigger concern is the possibility of locking in coal-based power. Coal accounts for around 70% of India’s electricity generation, and additional coal capacity is being planned. Some data centre demand will inevitably be met through the existing grid. At the same time, operators and customers are increasingly focused on renewable energy. India needs to balance capacity expansion with a healthier mix of solar, wind and other clean energy sources.
Q) How far have data centre operators progressed in shifting to renewable energy? Is their ambition of sourcing 80-90% of their power from renewables by 2030 realistic?
Most operators currently source around 20-40% of their power from renewables. Their ambition is to cross 80-90% by 2030, with the remaining requirement met through the grid and other solutions.
This target is feasible, provided the ecosystem for battery storage and backup power improves. Batteries are expensive today, but technological advances could make them more viable over the next five to six years.
Renewable energy is also a business requirement. Hyperscalers such as AWS, Microsoft and Google, along with neocloud providers, increasingly prioritise environmental, social and governance considerations. Higher renewable usage can help operators meet customer requirements, improve their sustainability credentials and potentially lower their total cost of operations.
Q) Is the government mandating higher renewable energy consumption by data centres?
There is no hard-and-fast mandate at present. However, the economics of the business are encouraging operators to increase renewable usage. From both a commercial and sustainability perspective, raising the renewable share makes sense.
Q) Water is another critical input for cooling data centres. How much water can a large facility consume? Should governments require detailed water-impact assessments before approving projects, particularly in water-stressed regions?
A 100-megawatt facility using evaporative cooling can consume around 800,000 litres of water a day. With capacity expansion, water consumption across data centres is projected to rise from 150 billion litres in 2025 to 358 billion litres by 2030—more than doubling.
Water stress is already a concern in several markets. India must build the infrastructure it needs, but it must do so responsibly. Alternative cooling technologies, including liquid cooling systems that can reduce water requirements, offer an important opportunity. Many such technologies are currently imported, creating scope for Indian companies to develop domestic capabilities.
We also need responsible water management, including treatment, recycling and systems that recover water wherever feasible. Technology improvements, lower dependence on water-intensive cooling and responsible use of available water will all be important.
Q) These alternative cooling systems can be capital-intensive. Should operators be required to assess local water availability and demonstrate that projects will not worsen water scarcity?
Absolutely. Data centres are capital-intensive businesses designed to operate over a 20-year horizon. Operators therefore have a responsibility to assess the sustainability of their resource requirements.
The government also needs to provide clear guidelines and link tax incentives and rebates to appropriate safeguards. Water-impact assessments should be part of responsible infrastructure planning, particularly in regions facing scarcity.
Q) India imports a significant share of the specialised equipment required by data centres. Could rising investment increase the country’s trade deficit?
The impact will depend on how quickly the domestic ecosystem develops. As capacity expands, India cannot continue importing equipment at the current proportion. There are opportunities to build domestic capabilities in chillers, heating, ventilation and air-conditioning systems, transformers, chips and cooling technologies.
Private-sector interest in developing these businesses is growing. Government support and an enabling ecosystem will be necessary to strengthen domestic manufacturing and reduce import dependence.
Q) What is the typical payback period for a data centre project? How vulnerable are returns if rentals fall, utilisation disappoints or AI demand slows? Is the industry building capacity based on actual demand or overly optimistic projections?
The Indian market remains supply-constrained, with demand exceeding supply. AI is an important growth driver. A typical data centre project takes around seven to eight years to achieve payback, depending on when demand materialises, the operator’s financial strength and its ability to run facilities efficiently.
In the medium term, demand is expected to grow faster than supply. Over the longer term, however, the pace of AI adoption remains uncertain. Operators with financial discipline, strong operating capabilities and the ability to deploy capital efficiently will be better positioned.
Q) With concerns about an AI bubble and debt-funded investment, could the industry face excess capacity if demand contracts?
Data centre capacity is generally built in stages. An operator planning a 200-megawatt campus might develop five 40-megawatt buildings rather than build the entire capacity upfront. It can establish customer demand before committing capital to the next phase.
This makes the risk of large, vacant facilities lower, provided operators remain disciplined and deploy capital against credible demand signals. Nobody can predict the future with certainty, but phased construction can help manage the risk of overcapacity.
Q) The government offers land subsidies, stamp-duty concessions, electricity-duty exemptions and a tax holiday. Given that data centres generate relatively few permanent jobs, do the wider economic benefits justify these incentives? Should concessions be linked to measurable outcomes?
The government provides several incentives, including support for land acquisition and leases, stamp-duty concessions and electricity-duty exemptions. Power accounts for around 70% of a data centre’s operating expenditure, making electricity-related concessions particularly significant. Incentives are also being used to encourage renewable energy adoption.
Linking incentives to measurable outcomes would be desirable. In the current market, where India is still underdeveloped in terms of data centre capacity, attracting investment remains important. However, incentives should be linked to milestones such as capacity becoming operational. If projects are delayed or abandoned, the corresponding benefits should be proportionately adjusted.
These safeguards are still evolving and are not fully in place.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: deccanchronicle.com
