Written by: Devi Shankar, President – Industrial Logistics & Data Centres, ANAROCK Capital
India’s data centre market has been on a sharp growth curve over the last 2 years, primarily triggered by the new data localization rules requiring data generated in India to be stored within the country. It was a smart move by the incumbent government which simultaneously stimulated innovation, data centre sector-specific jobs, and appropriate real estate products.
That the government means business is beyond dispute. There are several high-profile instances of clamp-down under this regulation wherein large financial services institutions and social media companies are under fire for non-compliance.
The largest demand for data centre facilities currently emanates from global cloud service providers. These are the decision-makers and demand catalysts who determine site selection criteria and the final land acquisitions by data centre operators. As the world’s second-most populous country with an ever-increasing smartphone adoption rate, India is a very interesting market for hyperscalers – entities that provide large-scale internet, networking and cloud services to organizations – for the next 5 years and beyond.
Mumbai is by far the most popular destination for data centres due to its proximity to cable landing stations and is expected to see planned capacity augmentation from the current 270 MW to an additional 800+ MW in the future. There are approx. 160 acres of land parcels in this micro-market that are being marketed to data centre operators for potential sale and establishment of data centre parks.
India is a natural fit for global data centre operators looking at their expansion in Asia due to its large domestic consumer base, additionally aided by the fact that data centre supply is reaching saturation point in cities like Singapore.
The Indian data centre sector has already drawn considerable global capital and with its immense potential, is also being eyed by domestic private equity. In fact, 2021 was a very important year for the industry. While the actual deployment of private equity has been lower in 2021 (at $150 mn), there are 2 large platforms announced this year viz. Everstone-Yondr platform of $1 bn and Brookfield-Digital Realty platform of $2 bn. .
Meanwhile, hyperscalers are actively committing investment in digital infrastructure in India; for example, Google has committed to invest $10 bn and Amazon Web Services (AWS) intends to inject $1.6 bn in their two upcoming data centers in Hyderabad.
Without a doubt, the sector is attracting considerable capital and 2022 will see even more such announcements. The trend is now tilting towards creating platforms that are directed towards a future REIT listing.
Geographic Distribution – Current and Future
Large data centres are looking to primarily set up facilities in major cities to service most of India – and in the future, other regions in Asia as well. Establishing data centres in multiple cities is expensive due to the massive costs involved in laying inland fibre optic cables from the nearest paths. For this reason, most of the current demand is focused on cities like Mumbai, Chennai, Noida and Hyderabad, followed by Bangalore, Pune and Kolkata.
Nevertheless, there are certain services where operators will need to ensure minimal to zero latency – primarily for edge services such as autonomous vehicles, smart cities, IOT applications for home or industries, surveillance, gaming, etc. In such scenarios, there is merit in storing data close to end users. Further, the data requirements of Tier II cities are on the rise because of a decentralised workforce.
This will also increase demand for rapidly deployable smaller colocation data centres built closer to smaller cities. We are already seeing some traction to set up small data centres of sub 2 MW capacities in Tier II cities. However, their scale will be limited to begin with.
What the Government Can Do
There is merit in envisaging the long-term impact of data centres while formulating policy. Many global cities have paused new construction of data centres within the city to divert resources such as power and water for other basic needs, and to focus on environmental sustainability.
Taking a cue from these global trends, India can introduce provisions for fiscal and non-fiscal incentives for the development of data centres away from urban agglomerations. Naturally, this calls for considerable and consistent infrastructure of fibre and power. The Government will need to identify specific clusters around the country by factoring in the correct technical criteria to create a policy for data hubs in those clusters. It will also have to consider implementing common minimum building codes to ensure safety, security and sustainability.
Globally, data centre operators and hyperscalers are large off-takers of renewable energy, and this trend is visible in India too. The demand for renewable energy is anywhere between 50-100% of the envisaged capacity of the facility. Creating incentives for renewable energy developers or ensuring a simplified power policy and smooth regulatory approval processes for offtake can help the industry.
Land Acquisition – An Ongoing Challenge
One of the key challenges data centre operators face in India today is land acquisition. The technical criteria evaluation for data centres are extremely stringent. Some of the factors include proximity to power substation, fiber path, soil and air quality, risks of natural disasters, distance from oil terminals or mass rapid transport systems, distance from residential locations, etc.
Satisfying all or most of these criteria can obviously be extremely challenging in India, since most existing availability zones are in erstwhile industrial locations that are rapidly becoming mainstream. This makes options limited and land prices sticky. Moreover, there are often complexities in land titles.
This has become a pressing concern of data centre operators. Land prices in some micro-markets such as Navi Mumbai and Ambattur (in Chennai) have almost tripled over the last 3 years.
Also, local regulatory approvals can be time consuming and can create bottlenecks in commissioning timelines for data centres. A simplified single-window clearance to fast-track permissions can go a long way in increasing global confidence.
Data centres is a power-guzzling industry. Although power may not be an immediate concern, very soon we will see a huge uptick in demand for power. This could add strain on certain states to be able to supply uninterrupted power in large capacities. We will require a robust generation and transmission infrastructure to meet this critical requirement. While states are supportive and co-operative in committing to such requirements, the actual implementation will be crucial to sustain industry’s growth.
It’s Only Just Begun
There is an inherent and fundamental driver for the boom in the data centre industry in India. In 2020, India consumed about 13 GB of data per month per internet user. Considering around 750 mn internet users in India in 2020, this works out to an aggregate of 110 exabytes of data consumed last year – which is estimated to more than double by 2025.
Increasing local data consumption and digital adoption by both households and corporates offer a healthy base demand from both hyperscalers and enterprises for data warehousing. There is a positive momentum amplified by Government policies to support growth, such as the draft Data Centre Policy released in 2020 that aims to propel India into a global data centre hub and promote investments in the sector.
While India’s advantage still needs to be leveraged with appropriate infrastructure support from the Government, the country has already attracted large global operators over the past two years. With adequate support from all stakeholders, India can potentially emerge as a regional data hub. This is an unprecedented opportunity which must be taken seriously.