Infra status may help data centres attract FDI but sector needs data protection bill

The data center industry, which is expecting to grow rapidly on the back of a sizeable flow of foreign investment and private capital into the sector following Tuesday's Union Budget announcement granting it infrastructure status, may also spur digital businesses including fintech, health tech, edtech and others that generate a large quantum of data, say industry experts.

“The Infrastructure status allows data centers to play a key role in enabling a digital economy, as it allows accessing foreign investments and private capital, borrowing funds at lower cost, and thereby rapid deployment of data centers across the country,” said B.S.Rao, Vice President, Marketing, CtrlS Datacenters. 

Both infrastructure and industry status provide better access to financing. However, an industry status would have also allowed data centres to be included in the state or central industrial policy.

“It would also be considered in industrial land-use charges, thereby reducing the cost of setting up a data center, which requires significant capital expense for land procurement,” said Sunil Gupta, Co-Founder & CEO, Yotta Infrastructure. He added, however, that the infrastructure status would allow “better access to capital borrowings at a reduced rate” since banks have a relaxation in the maintenance of capital adequacy for infrastructure lending.

The demand for digital infrastructure in India is expected to rise rapidly in the coming years. India’s geographic location and favourable policies are expected to make the country a hub for data centers catering to the South-East Asian region in the next five years or so, industry experts said.

“This change will create incentives for tech players looking to invest in this space. If we combine it with the push on clean energy, such as solar and other renewables, then it supports firms across industries to meet their sustainability goals as well,” said Ashutosh Sharma, research director, Forrester Research India.

Further, P.N. Sudarshan, Partner and TMT Leader at Deloitte India, noted that data centers are of strategic importance to digital infrastructure, and in securing data by localization. He said that granting infrastructure status will help spur “all digital businesses”, including fintech, health tech, ed-tech and others that generate a large quantum of data.

The India data center market will witness investments of $8 billion by 2026, growing at a CAGR of 12% during 2021-2026, according to market research firm Arizton. It has identified about 79 unique data center facilities and 23 upcoming facilities in India. In 2020, the top three states in India (Maharashtra, Tamil Nadu and West Bengal) cumulatively added more than a million square feet of data center space.

For instance, earlier this month Singapore-based realty firm CapitaLand said it will invest $1.5-2 billion to ramp up its data centre presence in India. Global data centre firm Equinix Inc had also completed a $161 million acquisition of GPX India, the Indian operations of GPX Global Systems Inc, and plans to set up multiple new centres in India. 

That said, industry experts point out that the lack of a Data Protection Bill in India could spoil the party. They explained that the government needs to introduce a clear framework on the regulations around hosting data in third-party data centers. 

Yotta’s Gupta, for instance, said incentives for the industry “should be linked with quality certifications of data centers”, which would help build world-class infrastructure in India. He added that the government should have promoted indigenous manufacturing of equipment or components used in data centers, which would help advance projects like Make In India. 

Even with data centers being listed as infrastructure providers, much still hinges on the data protection bill (DPB), said Sanchit Vir Gogia, chief analyst and founder of Greyhound Research. “Unless the DPB is in place and data protection laws aren't solid, infrastructure status may still not pull in investments given that some stakeholders, especially the investors from overseas could have hesitancy to invest. The DPB should have the provisions that will match up with the standards of the overseas companies wanting to invest in India,” Gogia said.

Another issue, according to Naveen Mishra, senior director analyst at market research firm Gartner, is network connectivity that has not been addressed, and is keeping data centers from being built in smaller cities.

“The draft finance bill does not appear to have made any direct provisions for data centers but the budget’s emphasis on the digitization journey will naturally and positively influence the growth of the data center segment,” pointed out Deloitte’s Sudarshan.