We Don’t Need No Data-Centre Coddling

The 21-year tax holiday doled out by the Union Budget to foreign firms that do data centre business in India should be rolled back, and the tax proceeds that would accrue by removing that largesse used to prepare Indian industry for the shock that would be delivered when artificial intelligence gets embodied in machines — robotic arms or humanoid robots — that take over many tasks, such as polishing diamonds or stitching garments, that have traditionally been considered labour-intensive.

Many of us might have been led to think, listening to the Budget speech, that the government has extended a 21-year tax holiday, in Budget 2026-27, to get cloud service providers like Amazon, Google and Microsoft, to set up data centres in India, in addition to the capacities these companies have already proposed to set up here, collectively investing some $67.5 billion. We would have thought wrong.

If Google were to set up a wholly-owned data centre in India, it would get no tax holiday. If it were to buy the services of a notified, Indian-owned data centre provider, like Adani, Ambani, or Tata, it would get the tax holiday, provided it uses an Indian reseller to sell its data centre services. This is perverse, in multiple ways.

If the data centre is built by an Indian operator, and the marketing of its services is done by the foreign hyperscaler, why does the government insist on bringing in an Indian intermediary in the shape of a reseller? What value does he bring to the operation? Wouldn’t this reseller be a state-fostered freerider, passing on a share of the data centre business revenue to politically well-connected rent seekers who present themselves as resellers?

What if an Indian entrepreneur wishes to buy bulk data centre capacity from those who have set it up, and market it on his own, would he not be at a disadvantage vis-a-via a foreign marketer, who gets an extended tax holiday? Does this not amount to negative protection for Indian industry?

The only benefit from the tax holiday is to help Indian data centre builders market their wares to foreign buyers throwing in a tax holiday as an incentive. The beneficiary of the tax holiday would be an Adani, Ambani, Tata or Bharti entity that sets up data centre capacity.

Peter Navarro, Trump’s maverick trade advisor, raised a valid question as to why America should bear the energy, water and financial cost of Indian users of Artificial Intelligence running queries or generating videos or morphing photographs in obnoxious ways. Creating one minute of AI slop — the mindless videos that proliferate on social media seeking to pique the viewer’s curiosity and engage it for a few minutes — uses up some 1.5 kWh of power.

When the high-powered Graphic Processing Units of data centres crunch data, they generate a lot of heat, which has to be removed using power and water. Capturing the waste heat and putting it to productive use is a business opportunity that waits to be fully exploited. Data centre capacity is measured in megawatt and gigawatt because of the scale of the power required to cool them. The chips themselves consume a tiny proportion of the total power consumption.

And the power that data centres consume must be of the highest quality. There can be no interruptions in supply or frequency fluctuations. In India, the bulk, 70%, of power generation is still from burning coal, creating high levels of pollution, even if half the installed generation capacity is green. Even if we assume that the water used to cool data centres would be recycled, in toto, the environmental fallout in terms of greenhouse gases and particulate matter from the power generation that has to accompany data centres would be a major cost, in terms of people’s health. For a few dollars more in the kitty of big data centre developers, why should the health of the populace at large be put to risk?

What does India stand to gain by hosting data centres that crunch data for foreign clients, and using up gigawatt hours of power and huge amounts of water in the process? Does Microsoft Azure servicing its clients in Indonesia from data centres in India help Indian programmers develop artificial intelligence? Absolutely not.

Local storage of data is not a sufficient condition to ensure access to that data for Indian AI developers. If outsiders’ data is being sent to India for processing, it will be because India has laws to ensure the integrity of the data. That cannot be breached.

What Indian tech companies are likely to get busy with is developing AI applications that run on existing AI models. To develop AI applications based on existing foundation models and their special forms as large language models, Indian tech companies do not need large data centre capacity. For most applications, you probably need a high-end gaming laptop. For something more complex like getting the model to learn an Indian language it is not familiar with, you would need a little more computing power, but nothing more than a few hours of compute from a data centre.

India needs large-scale data centre capacity only for developing a foundation model of its own. Why expect commercial data centre operators to run their data centres with sufficient unused capacity on their servers for India to use to develop its own foundation model? That does not make commercial sense.

Once India decides to create its own foundation model, which it must, so as to avoid national security operations becoming vulnerable to external withdrawal or corruption of services at crucial times, it will need lots of capacity, dedicated capacity. The cost of building that computing capacity will have to be built into the foundation model’s development cost, which is what all developers of foundation models do. It can be recovered from making the model available to users for specific applications.

Data centres are built to create extremely profitable business with high operating margins in the 45-55% region. Of course, depreciation would be high, given the huge outlay on physical stock and chips that grow obsolete at a rapid rate. Even then, data centres are a sector over which private equity swarms like bees over a pot of honey — there is no need to additionally sprinkle some sugar to attract the insects.

If the worry is that without such incentives, hyperscalers would choose to store Indian data somewhere else, that sort of anxiety calls for medical treatment, not tax incentives. India only needs to mandate that data on Indians should be stored in India, necessarily, even if it is mirrored elsewhere, for data localization to happen.

Indians promise, collectively, to generate a sizeable chunk of global data, and there is every incentive for companies to store their data on local data centres, even without such a mandate. In any case, the big tech companies have revealed their preference to build data centres in India, even before tax concessions were announced.

We will need data centres and even our own chips. But that calls for intelligent investment, not tax breaks. The money wasted on tax breaks no foreign hyperscaler is asking for would come in handy for such investment.

Jobs would be generated in creating AI applications and agents, using already fleshed out, fully trained AI models, and using data of businesses already stored on some cloud or the other. There are no major jobs, apart from those in construction, coal mining and power projects, in setting up data centres.

We don’t need no data-centre coddling.