India’s Digital Economy: Unlocking Opportunities for Global Data Centres

As India’s digital economy continues its rapid ascent, the demand for data centres—facilities that provide the backbone for cloud computing, data storage, and IT outsourcing—has surged. The country’s growing reliance on digital services, bolstered by cloud adoption and artificial intelligence (AI), presents significant investment opportunities. However, financing these capital-intensive projects requires innovative approaches that blend traditional models with modern, sustainability-driven financing solutions.

Leveraging Long-Term Contracts for Secure Financing

One of the key strengths of data centres is their ability to secure long-term contracts with high-credit tenants, including major technology firms, global cloud providers, and government bodies. These long-term agreements provide a stable and predictable revenue stream, which is particularly attractive to lenders and investors. This is crucial for accessing innovative financing options through asset-backed securities (ABS), although pure ABS models remain rare in India's data centre sector. As the sector matures, such structures could become more feasible.

Innovative Financing Models

Data centres are increasingly turning to innovative financial structures beyond traditional bank loans. Green bonds are among the popular methods that align financing with operational sustainability. Sustainability-linked loans (SLLs), for example, tie interest rates to environmental performance metrics, such as energy efficiency or the reduction of carbon emissions.

With the Indian Government’s focus on sustainability under initiatives like the National Action Plan on Climate Change, data centres that incorporate renewable energy sources and efficient cooling systems can secure more favourable financing. This approach not only improves the long-term viability of data centres but also makes them attractive to investors who are increasingly prioritising ESG (Environmental, Social, Governance) considerations.

Foreign Investment and Global Collaborations Drive Growth

India’s liberalised Foreign Direct Investment (FDI) policies have made the country a preferred destination for global technology giants looking to expand their data infrastructure. Foreign Companies are increasingly collaborating with Indian firms to build and operate large-scale data centres. These partnerships bring substantial foreign capital and advanced technology, helping to accelerate the development of the data centre market.

However, challenges such as regulatory complexity, particularly in land acquisition and environmental approvals, remain significant. These obstacles can slow down project timelines, adding costs and uncertainty for investors. Despite these challenges, the long-term potential of India’s growing digital economy continues to draw major investments.

Structuring Data Centre debt

India’s data centre market is still developing, and financing structures are evolving to meet the specific needs of this high-growth sector. The trend of securing long term agreements with global cloud service providers and large enterprises is crucial for Indian data centre operators. Such contracts provide predictable cash flows, which can be leveraged to raise debt through asset-backed securities (ABS) of other financing models. Furthermore, there is a growing trend towards hybrid financing models that blend traditional project finance with infrastructure and real estate financing principles. For example, AdaniConneX secured USD 1.44 billion in sustainability linked financing blending project finance with infrastructure funding. Similarly, Digital Edge, NIIF, and AGP invested USD 2 billion to develop hyperscale facilities, combining private equity, project finance and infrastructure incentives. These structures, coupled with state-level incentives such as land subsidies and energy cost reductions, create a favourable environment for debt-financed data centre expansion in India.

Local Frameworks and Incentives - State-Level Guidelines

While national policies provide a broad framework for the development of data centres, state-level guidelines and incentives play a critical role in their execution. Each Indian state offers varying degrees of support through land acquisition policies, power tariffs, and environmental regulations. States like Maharashtra, Tamil Nadu, and Karnataka, being major IT hubs, have tailored their policies to attract investments by offering streamlined land acquisition processes, subsidies on energy costs, and reduced regulatory hurdles.

For instance, Maharashtra has introduced a specific data centre policy offering incentives like reduced stamp duties, subsidised electricity, and single-window clearances for regulatory approvals. Similarly, Karnataka has focused on providing long-term energy solutions to data centres, knowing that power reliability is crucial to their operations. These state-specific incentives create a competitive landscape where data centre operators can choose locations based on the most favourable business environment.

However, challenges remain in states where infrastructure support lags behind, particularly in terms of land acquisition and water and power supply. Operators must carefully navigate state-specific regulations that may involve bureaucratic delays or complex environmental clearance processes, making it critical to have a localised strategy when setting up data centres.

Data Centres: Infrastructure or not?

In dealing with the interpretation of whether data centres fall under the infrastructure category in India, a more robust approach would involve legislative clarity and unified guidelines at both national and state levels. While the central government has granted infrastructure status to data centres, there remains ambiguity in its implementation across various states, especially regarding land acquisition, environmental approvals, and the interpretation of tax incentives.

A potential solution would be the introduction of a dedicated national policy for data centres, that outlines clear legal definitions, standardises regulatory frameworks, and provides consistency in applying infrastructure benefits across all states. This national policy could align land acquisition procedures with existing infrastructure laws like the Right to Fair Compensation and Transparency in Land Acquisition Act, 2013, and ensure all states have similar guidelines for approvals.

Data Privacy Framework

From a lender’s perspective, the potential for government interception or seizure of data in India represents a significant business risk, particularly when compared to jurisdictions like the EU, UK, or US, where stronger legal frameworks protect data privacy. In India, while data centres are governed by laws such as the Information Technology Act, these laws still allow broader government access, which could result in reputational damage or loss of client trust, particularly for international businesses reliant on secure and private data handling. While the Digital Personal Data Protection Act, 2023 (DPDP Act) is set to improve data privacy standards, the framework remains under development, and it primarily governs the handling of personal data. If a data centre entity merely provides space and infrastructure support without monitoring or accessing the personal data stored on its servers, it may not be considered as "processing" data under the DPDP Act.

For lenders, this raises concerns about the long-term viability and attractiveness of investing in data centres that might face legal uncertainties or face diminished demand from companies wary of weak data protections. The lack of robust safeguards similar to GDPR or US legal standards could hinder the ability to attract foreign investment, increase financing costs, or lead to heightened operational risks, making this a key factor to consider when structuring financing for such projects in India.

Challenges Ahead

Despite the vast opportunities, India’s data centres face several challenges. One of the most pressing concerns is not just the cost of energy but the ability to source reliable, uninterrupted power, which is essential for continuous operations. This challenge is further compounded by the growing demand for low-carbon energy solutions, particularly from global clients and off takers prioritizing sustainability.

Data centres are inherently power-intensive operations, and while many operators are transitioning to renewable energy sources, the pace of this transition remains slow. The availability and scalability of renewable energy are key limiting factors for the growth of data centre capacity in India, mirroring global trends. Additionally, India’s complex and evolving regulatory landscape, particularly around environmental compliance and land use, adds further hurdles to expansion efforts. The growth of India’s data centre industry is therefore intricately tied to the development and accessibility of sustainable energy infrastructure.

Real estate and securing land is another challenge in India, given the fragmented ownership and varying regulations across states. Despite the state incentives, the variability in land costs across different states means that real estate financing models need to be flexible to cater to both metropolitan and Tier 2 cities where data centres are expanding.

Conclusion: A Bright Future for Data Centre Financing

India’s digital economy presents a wealth of opportunities for data centre operators and investors. The combination of long-term contract stability, innovative financing models, state-specific incentives, and government support provides a strong foundation for the continued expansion of this sector. As global demand for digital services grows, India is well-positioned to become a major hub for data centre infrastructure, particularly as operators continue to adopt sustainable and energy-efficient practices.

However, addressing challenges related to energy costs, availability of reliable and uninterrupted power supply, state-level regulatory frameworks, and environmental compliance will be key to unlocking the full potential of India’s data centres. By leveraging global partnerships, public-private collaboration, and sustainability-focused financing, India’s data centre market is poised for significant growth, positioning the country as a leader in the digital economy.