India is intensifying global competition for artificial intelligence, cloud computing, and digital infrastructure. While governments and corporations worldwide vie for computing power, data sovereignty, and technological leadership, India is using tax incentives to establish itself as a long-term hub for AI workloads. The new federal budget clearly demonstrates that data centers, cloud services, and semiconductor manufacturing are now considered strategic pillars of economic development.
Looking ahead to 2047, India is pursuing a long-term industrial and technological policy. The goal is to attract global investment, retain value creation within the country, and simultaneously develop its own technological capabilities. Tax exemptions for foreign cloud providers, investments in data centers, and targeted programs for electronics, semiconductors, and critical raw materials are all interconnected. At the same time, structural challenges such as electricity supply, water scarcity, and federal permitting processes remain key risk factors.
Tax exemption until 2047 for global cloud services
In the current federal budget, Finance Minister Nirmala Sitharaman announced that revenues from cloud services will remain tax-free until 2047, provided these services are sold outside India and the underlying workloads are operated from data centers within the country. This effectively offers foreign cloud providers zero taxation on a significant portion of their international business.
Sales to Indian customers are excluded from this regulation. These must be processed through locally based resellers and are subject to regular domestic taxation. Additionally, the budget includes a so-called safe harbor provision: Indian data center operators are permitted to charge a 15 percent markup on services provided to affiliated foreign companies.
Global cloud companies are increasing their commitment in India
The tax incentives coincide with an already strong investment trend. US cloud and technology companies are expanding their data center capacity worldwide to handle the rapid increase in AI workloads. India is increasingly coming into focus, as the country has a large pool of engineers, is showing growing demand for cloud services, and is positioning itself as an alternative to locations in the US, Europe, and parts of Asia.
In October, Google announced it would invest $15 billion in building an AI hub and expanding its data center infrastructure in India. The company had already pledged $10 billion in 2020. Microsoft followed suit in December with plans to invest approximately $17.5 billion by 2029 to expand its AI and cloud presence, including new data centers, infrastructure projects, and training programs.
Amazon also significantly increased its investments in December. An additional $35 billion is planned for India by 2030, bringing the company's total planned commitment to approximately $75 billion. These investments will cover both cloud computing and retail.
Expansion of the domestic data center industry
Alongside international investments, India's domestic data center sector is also preparing for increased demand. In November, Digital Connexion, a joint venture of Reliance Industries, Brookfield Asset Management, and Digital Realty Trust, announced plans to invest approximately US$11 billion by 2030 in an AI-focused data center project in the state of Andhra Pradesh.
The planned data center is expected to have a capacity of one gigawatt and will cover approximately 400 acres in Visakhapatnam. It is among the largest projects announced in India to date. Additionally, in December, the Adani Group announced its intention to invest up to $5 billion in an AI data center project in the country, in partnership with Google.
Growing market volume, increasing energy demand
The installed capacity of data centers in India currently stands at just over one gigawatt. It is expected to rise to over two gigawatts by 2026. By 2030, capital investments of more than US$30 billion could more than quintuple the capacity to over eight gigawatts.
However, this growth brings significant challenges. Irregular power supplies, high electricity prices, and increasing water scarcity pose serious obstacles to operating energy-intensive AI workloads. These factors could slow expansion and increase operating costs for cloud providers.
Opportunities and risks of the tax strategy
Recent announcements demonstrate that data centers in India are increasingly being perceived as a strategic economic sector, rather than simply as technical backend infrastructure. The tax exemptions are expected to attract additional private investment and strengthen India's role as a regional data and data center hub.
At the same time, implementation remains challenging. Issues with electricity supply, land availability, and state-level permitting processes could delay projects. Furthermore, the tax exemption until 2047 is seen as a strategic bet on global big-tech companies, even though India could produce its own technology leaders in the coming decades.
Another point of criticism concerns the requirement to serve Indian customers through local resellers. This could put smaller domestic providers in intense margin competition without providing comparable incentives for higher-value activities.
Increased support for electronics and semiconductor manufacturing
Beyond AI and cloud computing, India is increasingly focusing on expanding its electronics and semiconductor industries. The federal budget provides for the launch of a second phase of the India Semiconductor Mission. The focus is on domestic production of equipment and materials, the development of full-stack chip IP, and the expansion of robust supply chains. In addition, industry-led research and training centers will be supported to train qualified specialists.
The budget for the Electronics Components Manufacturing Scheme has been significantly increased, from 229.19 billion rupees to 400 billion rupees. The program provides performance-based incentives for companies that manufacture key components such as printed circuit boards, camera modules, connectors, and other parts for smartphones, servers, and data centers. Payments are linked to actual production volumes to increase local value creation and reduce reliance on imports.
Tax breaks for foreign suppliers
In addition, the budget provides for a five-year tax exemption, starting in April, for foreign companies that supply equipment and tools to electronics contract manufacturers in free trade zones. This is expected to particularly benefit companies that rely heavily on contract manufacturing in India. The measure clarifies the tax treatment of high-value production equipment.
Focus on critical minerals and rare earths
Another focus is on securing critical minerals. India is responding to global shortages of rare earth elements, which are essential for electric vehicles, electronic devices, and defense systems. The German government intends to support mineral-rich states such as Odisha, Kerala, Andhra Pradesh, and Tamil Nadu in developing dedicated rare earth corridors.
These corridors are intended to consolidate mining, processing, research, and manufacturing. They build on an already approved seven-year support program to increase domestic production of rare-earth magnets following restrictions on access to supplies from China.
Facilitation of cross-border e-commerce
In addition to industry and infrastructure, India is also focusing on expanding cross-border e-commerce. The previous value limit of one million rupees per shipment for courier exports is being lifted. This will particularly benefit small manufacturers, artisans, and start-ups that sell their products internationally via online platforms.
In addition, the processing of rejected and returned shipments will be simplified using technology. This addresses a long-standing bottleneck for exporters.
India's path to becoming a global technology and AI hub
The current measures underscore India's ambition to establish itself as a long-term hub for global technology infrastructure. Tax exemptions for cloud services, massive investments in AI data centers, targeted support for electronics and semiconductors, and initiatives for critical raw materials form a comprehensive strategy.
Whether India can develop a lasting leadership role in the AI age depends crucially on implementation. A reliable electricity and water supply, efficient permitting processes, and balanced support for domestic innovation will determine whether political incentives translate into sustainable economic strength. (Image: Shutterstock / Visuals6x)
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