India's Data Centre Surge: A Decade of Growth Ahead

ICRA predicts India's data centre industry to surge, fueled by increasing internet penetration and favorable policies. Operational capacity is expected to double by 2027, with significant investments planned. The focus on AI, cloud, and 5G, along with strategic locations like Mumbai and Chennai, drives the sector's growth.

The data centre industry in India is witnessing significant growth, underpinned by rising internet usage and strong data localisation initiatives, according to rating agency ICRA.

ICRA projects that India's data centre operational capacity is anticipated to reach between 2,000-2,100 MW by March 2027, up from around 1,150 MW as of December 2024, involving investments ranging from Rs 40,000-45,000 crore during 2025-26 and 2026-27. Established and new data centre entities have outlined development plans of 3.0-3.5 GW set to unfold over the next 7-10 years, demanding substantial investments of Rs 2.0-2.3 lakh crore.

Broadband and mobile internet expansion, Digital India initiatives, increased adoption of cloud services and AI, alongside growth in social media, e-commerce, gaming, and OTT services, are the primary catalysts for India's digital upsurge. Furthermore, the Digital Personal Data Protection Bill, the infrastructure status conferred on data centres, and government incentives are key growth drivers.

Anupama Reddy, Vice President and Co-Group Head of Corporate Ratings at ICRA, highlighted that evolving technologies such as cloud computing, 5G, machine learning, and IoT will amplify data storage demands. The global trend of substantial deals by hyperscalers for generative AI-driven high computing needs is expected to reflect in India soon.

In response to these trends, the Union Budget 2025-26 proposes establishing an AI Centre of Excellence, advancing the BharatNet project to ensure broadband connectivity to gram panchayats, and inaugurating the Deeptech Fund of Funds to boost AI, cybersecurity, and cloud computing skills. Such initiatives bolster the promising growth prospects for India's data centre sector.

Data centre operators prioritize locations with features such as landing stations, fibre connectivity, reliable power supply, proximity to tenant headquarters, and disaster resilience. Presently, Mumbai and Chennai are the most preferred sites, thanks to their numerous landing stations.

A projected 75% of forthcoming data centre capacities within the next three years will be centralized around Mumbai, Chennai, and Hyderabad. ICRA forecasts the revenues for India's top five data centre players, comprising approximately 75-80% of the industry's operational capacity, to grow significantly by 18-20% annually in 2025-26.

While operating margins are expected to maintain healthy levels of around 40-41% during 2025-26, continuous capital expenditure mode among data centre players will keep the return on capital employed moderate. As competition intensifies with new entries, pricing flexibility may diminish, potentially impacting profitability and return metrics. However, ICRA remains confident that these players' leverage and coverage metrics will stay stable over the medium term.