An analysis examines the overlooked impact of India's new data center policy on investment and buildout.

India has emerged as APAC's second-largest data center market, with 1.6GW of capacity, according to Cushman and Wakefield's *Global Data Center Market Comparison 2026* report.

The country also ranks in the global top three for development pipeline, with 3.1GW of construction planned. This trend is anchored by Mumbai, which is expected to surpass 1GW of capacity by the end of 2026. This makes Mumbai not only India's but one of Asia's fastest-growing data center hubs.

There is still considerable room for growth. India's data center market remains structurally underpenetrated, with vacancy levels declining to 12.9 percent in Q4 FY25. Furthermore, India produces 20 percent of the world's data but houses only three percent of its data centers: approximately 150 out of an estimated 11,000.

These numbers, along with calls to gain "sovereign" control over the country's data, prompted the Indian government to act. When Finance Minister Nirmala Sitharaman announced the FY27 budget, she unveiled a major policy initiative to encourage the buildout of digital infrastructure in India: a tax holiday until 2047 for eligible foreign cloud service providers.

**Understanding the policy**

The policy provides a complete tax exemption to foreign cloud service providers in specific situations, provided the following criteria are met:

- The foreign entity is notified and approved by the central government upon application.

- The physical data center is owned and operated by an Indian entity.

- The data center is approved by the Ministry of Electronics and Information Technology (MeitY).

- The services are provided to global, non-Indian clients.

However, if a cloud service provider such as AWS wishes to serve Indian customers from a new data center in India, it must do so through an "Indian reseller entity," and that revenue will not be tax-free.

The Indian operator entity, which will likely be a subsidiary of the foreign entity, will be taxed under a special 15 percent safe harbor margin. This allows the local operator to earn a profit margin of 15 percent over operating expenses, bypassing subjective valuation procedures, with the guarantee that tax authorities will accept the return without initiating a transfer pricing dispute.

This safe harbor does not apply to the Indian reseller entity. The standard operating procedure for that entity has yet to be seen, but services provided to Indian firms will likely be taxed at the full corporate tax rate.

Setting the complex tax mechanics aside, the policy offers clear insight into the government's goals. Beyond the planned 3.1GW of digital infrastructure, the government is thinking long-term about making India a digital infrastructure hub for the world. It hopes the tax holiday will incentivize firms to build more infrastructure here to serve Indian and global clients alike, which would allow service providers such as AWS to serve their Indian clients using domestic capacity.

**Why does this matter for the economy?**

The investment is expected to create jobs. Union Minister of Science and Technology Dr Jitendra Singh stated that the sector will generate 100,000 engineering jobs. The timeline and calculation behind this figure are unknown, but it is reasonable to expect the buildout to generate significant employment in India and particularly in the Mumbai region.

There is, however, a point of contention. Studies conducted in the US show that counties receiving their first large data center see total private employment rise by four to five percent over five to six years. This includes positive effects on construction and information technology jobs. While temporary employment such as construction work is important for India, given its large unskilled workforce, the real economic value lies in permanent IT jobs that continue to contribute to productivity after the initial buildout phase.

The research finds that wages rise by three to four percent for both existing and new workers. It also highlights a critical distinction between hyperscale and colocation data centers. Hyperscale counties see large gains in information sector employment, while colocation counties do not. A hyperscale campus creates demand for IT contractors, firms that lease space nearby to manage the campus. A colocation facility that simply leases space to remote tenants does not create the same demand. Moreover, counties with four or more data centers see the greatest gains in information sector employment.

These findings support two critical conclusions. First, hyperscale data centers are, for the most part, better for economic development. Second, four or more data centers represent the critical mass needed to create an ecosystem and an informal "network effect" that enables a boom in information sector employment.

Viewed through this lens, India's policy moves in the right direction. An S&P Global article from 2025 stated that more than 95 percent of the increase in India's data center capacity over the next five years is expected to come from leased facilities (colocation).

That is not a good sign for employment, and it makes the policy's approach more understandable. The policy is an attempt to attract cloud service providers (hyperscalers) such as Amazon, Meta, Google, and others to set up in India and serve local and global demand, while creating long-term employment to support the region's economic development.

The policy appears to be working already. Meta recently announced plans to lease a 168MW facility from Reliance Industries to bolster its global infrastructure.

**The challenges of the buildout**

As noted, Mumbai is the hub of India's data center operations. It also has the highest concentration of subsea cable landings in the country, often described as the gateway for digital infrastructure in India. This is precisely why much of the investment the government hopes to spur will flow into Mumbai and neighboring cities such as Navi Mumbai.

However, this brings many environmental and socioeconomic challenges. Any data center needs three key things: land, electricity, and water. Because of Mumbai's geographic limitations, including its tapering shape and high land prices, much of the data center buildout has shifted to the Thane and Navi Mumbai regions.

In Panvel, a region near Navi Mumbai, 3,500 families were slated for rehabilitation in 2015 to make way for data center projects. However, as of 2025, thousands of these families were still living in precarious conditions, lacking reliable electricity or a stable water supply. Acquiring land, even in suburban areas, requires meticulous planning and rehabilitation to ensure the region experiences economic development rather than displacement in the service of data center buildout.

Adani Electricity Mumbai Limited (AEML), one of the city's major power providers, has projected a sharp rise in the electricity the region requires, from 50MW in FY23 to 638MW by FY27. Of that increase, 354MW is expected to come from data centers. This demand must be met from some source, and AEML has planned for the coal-fired Dahanu power plant to help provide round-the-clock electricity.

This has negative environmental implications, as many Indian cities already face serious Air Quality Index (AQI) problems. Recently, 40 Indian cities took the top 40 spots in the world's worst AQI rankings. The impact goes deeper, however, with socioeconomic consequences for underprivileged communities.

Many low-income neighborhoods in the Mumbai region served by AEML report frequent outages and rising bills. With such a large buildout planned for the coming years, India cannot afford to plan its power infrastructure separately. The country has made major strides in the right direction, ranking third globally in installed renewable energy capacity. In June 2025, India reached the milestone of 50 percent of its installed capacity from non-fossil fuel sources, five years ahead of its 2030 target. These are positive signs that must continue to deliver results over the next five to 10 years if India is to become a hub for sustainable digital infrastructure.

Finally, digital infrastructure requires water, and Mumbai is currently at the center of one of its worst water shortages to date. Less than seven percent of water stock remained in reservoirs as of June 29, 2026, significantly lower than the 39.5 percent recorded on the same day last year. Concerns over the city's delayed monsoon and forecasts of strong El Niño conditions have led the government to impose a 10 percent water cut in Mumbai since