Technology giant Microsoft expects the AI revolution to have a significant impact on the architecture underpinning data processing. In an interview with ET last week, CEO Satya Nadella said that the company is focused on leading research work on what the next model architecture will be, so that it can stay ahead of the curve in anticipating the next generation of the data centre system.
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“If data centres are the new computers, they’re going to look very different given all that’s happening with these AI accelerators,” Nadella said. Small wonder then that the industry is set for major growth. But first, a reality check. India has over 800 million internet users, far ahead of developed countries like the US and the UK.
The digital economy is expected to contribute 20 per cent to the country’s GDP by 2026. Yet, the country doesn’t rank even in the top 10 in the world in terms of data centre capacity. Things are changing, however, with growth coming at a fast clip. The Indian data centre industry’s capacity more than doubled from 350 megawatts in 2019 to 778 megawatts as of H1 2023, a CAGR growth of 25 per cent, Rachit Mohan, APAC lead, data centre leasing, and India lead, data centre transactions, JLL.
According to reports by real estate consultancy CBRE, the Indian data centre industry attracted investment commitments of about $ 35 billion between 2018 and 2023 and is expected to reach a market size of $4.5 billion by 2025.
“Currently, data centres are located in the top metros. However, the launch of 5G and need for edge computing is expected to drive their growth in tier-2 and tier-3 cities too,” Mohan said.
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Data centre players like Nxtra and CtrlS are set to expand their edge computing infrastructure in these towns to meet demand.
Expansion at the edge
Edge data centres are much smaller than hyperscale facilities and are located closer to end users and devices to enable faster response times, crucial for these use cases that are time-sensitive and need low latency speeds. “Currently, 5-7 per cent of India’s data centre capacity resides in its tier-2/tier-3 cities, which makes the potential for growth quite significant,” Ashish Arora, chief executive of Airtel’s data centre arm Nxtra, told ET.
“As high-speed internet becomes ubiquitous, OTT, gaming, CDN (content delivery network) and tier2/3 ISP (internet service provider) industries are driving the edge data centres market, since they rely more on fast response times and minimal lag to elevate the application performance,” he added. Nxtra currently operates 120 edge data centres across 65 cities.
These have capacities of 1-5 megawatts in tier-2 and 3 locations where they are present, such as places like Bhopal, Nagpur, Cuttack, Ranchi, Patna, Raipur, Kanpur, Madurai and Leh. “We plan to further expand capacity in our edge data centre infrastructure,” Arora said.
“Our edge data centres are already serving major content delivery players who have co-located at our facilities, expanding the peering beyond top metros into smaller cities.”
Cloud computing company CtrlS envisions creating over 20 edge data centres across tier-2 and tier3 cities in the coming years, said Vipin Jain, president, data centre operations at the firm.
CtrlS currently has edge data centres in Lucknow and Patna, where it plans to expand capacity this year, in addition to opening a new facility in Kolkata. “Smart factories leveraging automation, IoT (internet of things) and edge computing are emerging in tier-2 and tier-3 locations, contributing to increased operational efficiency,” Jain said, adding that edge facilities are critical to realising the low-latency promises of 5G.
“Warehousing and inventory management, where companies like Amazon and Ekart are using robotics, is also a heavy use case,” said Akshara Bassi, senior analyst, Counterpoint Research. “Companies have warehouses and distribution centres in tier-2/3 cities, and to cater to that, they need edge processing centres there.”
But proliferation in these cities will bring with it cost and management challenges. In fact, if network quality and cost of intercity bandwidth can be improved in the coming years, to ensure similar latency as having edge data centres in every city and town, we may not even need to establish so many new facilities in tier-2 and tier-3 locations, said Manoj Paul, managing director, Equinix India, which has three edge data centres in Mumbai.
Data centres for AI
AI applications in sectors like manufacturing, health care, smart utilities and other smart city initiatives would require single digit millisecond latency, that edge data centres enable, for real-time processing and analysis and faster decision-making.
“Edge data centres and computing will also be critical for generative AI adoption, as they bring the processing power closer to source of data, enabling real-time analysis and faster decision making, which is crucial for critical AI applications,” said Arora.
CtrlS’s Jain said collaborations between edge data centre providers and AI solution developers are becoming common. “By offering integrated solutions that combine AI capabilities with localised computing power, these collaborations enhance the accessibility and effectiveness of AI applications across different industries in India,” he said.
While traditionally, edge data centres were perceived as scaleddown replicas of full-fledged data centres, presenting challenges related to physical security, power consumption and cooling, there has been a transformative shift. “The new edge data centre is inherently software-defined, operating on commodity hardware,” Jain added.
Big-ticket forays
In recent years, some of India’s largest conglomerates have established data centre subsidiaries. In 2021, Adani Enterprises announced a $122-million investment in a joint venture with global data centre operator EdgeConneX to establish AdaniConneX.
It plans to build nine data centres with one gigawatt total capacity by 2030. In 2023, the company said it will spend $1.5 billion on the data centre business over three years. There will be a network of hyperscale data centres beginning with Chennai, Navi Mumbai, Hyderabad, and tier-2 sites like Noida and Vishakhapatnam.
“AdaniConneX will also develop a portfolio of edge data centres strategically located throughout India that will support the need for more proximate capacity. These sites are designed and planned to easily scale with demand and become full-scale data centre campuses,” the company had said in a statement.
Reliance Industries in 2023 had also announced a data centre joint venture Digital Connexion alongside infrastructure company Brookfield Infrastructure and a real estate investment trust-backed global data centre firm Digital Realty.
The JV will have a footprint in Chennai and Mumbai. In 2019, real estate major Hiranandani Group forayed into the space with its subsidiary Yotta Data Services, and in 2022, launched north India’s first hyperscale data centre in Greater Noida, signing a memorandum of understanding with the Uttar Pradesh government to invest Rs 39,000 crore over five to seven years.
“Yotta’s ongoing panIndia investments in hyperscale data centre facilities and an extensive edge data centre network are aimed at transforming India’s digital landscape,” the company had said.
Government push
In addition, expansion is also backed by the various fiscal and non-fiscal sops offered by multiple state governments. “State governments have realised the opportunity and growth in data centres,” said Devi Shankar, president – industrial and logistics, data centres, Anarock Capital.
“Every megawatt of capacity installed results in $5-7 million of investment. This is a huge investment opportunity for states and also has the potential to create employment opportunities.”
States like Maharashtra , Karnataka, Tamil Nadu, Uttar Pradesh and Telangana have conducive real estate policies that help in reducing upfront and operation cost by supporting major aspects of data centre setup like stamp duty approvals, faster construction approvals, etc, she added.
For instance, the UP government’s data centre policy provides for capital subsidy of up to seven per cent to be paid over 10 years, interest subsidy of up to 60 per cent, land subsidy of 25-50 per cent, in addition to dual power grid supply and electricity and stamp duty exemptions.
It aims to attract private investments worth Rs 30,000 crore for Noida’s data centre infrastructure and is allotting 50 acres of land to develop data centres along the Noida Yamuna expressway. Karnataka seeks to develop a ‘globally competitive’ data centre industry in the state.
It provides 10 per cent land subsidy, concessional registration charges, electricity duty exemption, and self-certification under certain labour laws.
Tamil Nadu offers fiscal incentives on land and building, dual power and subsidy to MSMEs for services to data centres and has removed zoning and other restrictions.
Madhya Pradesh, in its 2023 IT policy, provides up to 75 per cent land subsidy to set up data centres, with capital expenditure assistance of 25 per cent for the first five data centres with minimum investment of Rs 500 crore.
It offers duty and power tariff reimbursements. Odisha provides 20 per cent subsidy on fixed capital investment as well as subsidies for land, power bill and internet bandwidth. It even granted permission for women to work night shifts at the facilities.
Additionally, the central government has accorded “infrastructure status” to the industry, Mohan pointed out, which has enabled access to long-term finance at competitive rates. Further, the central government is also planning to come out with a data centre park policy.
Investment opportunity
Data centres have emerged as one of the fastest growing alternate real estate investment options in India, Shankar said, adding that data centre real estate is expected to double from the current 12 million square feet to 25 million square feet in three years.
Additionally, hyperscalers and various data centre operators have land banks of around 500 acres.
According to Mohan, real estate space occupied by data centres increased from 8.2 million square feet in 2019 to 14.3 million square feet by 2023.
Among the metros, Mumbai and Chennai account for a substantial share due to stable power supply, proximity to submarine cable landings and large end-user market, while DelhiNCR, Hyderabad, Bengaluru, Kolkata and Pune account for the rest, Mohan said. NCR-Delhi and Hyderabad have witnessed growth recently due to regulatory incentives and the potential for demand from government agencies.
“The growth of data centres beyond tier-1 cities is also dependent on the availability of reliable power, access to optic fibre networks and skilled human resources. Most of the tier-2 and tier-3 cities are in various levels of maturity in terms of digital infrastructure required for the operations of data centres,” Mohan said.
He added that hyperscale data centres are expanding their capacities in the core markets while edge data centres are still at an early stage of evolution.
JLL estimates that the data centre industry will drive demand for 8.8 million square feet of additional real estate space, as increasing digital growth, digital public infrastructure, 5G rollout, and new AI applications coupled with data protection laws and state incentives will lead to additional capacity of nearly 700 megawatts by 2026.
“The capacity expansion would create demand opportunities across the value chain in real estate construction, hardware infrastructure, renewable energy, fibre connectivity, power infrastructure and skilled resources. Data centre infrastructure and real estate construction would require investments of $4.4 billion to make the planned supply operational,” Mohan said.
