In a monumental policy declaration, India has unveiled a sweeping initiative designed to position the nation as a premier global hub for artificial intelligence (AI) computing. The Indian government is offering foreign cloud service providers a complete tax exemption on revenues generated from services sold outside the country, provided these operations are housed within data centers located on Indian soil. This unprecedented tax holiday, extending until 2047, is a strategic gambit to attract the next wave of massive AI infrastructure investments, even as the country navigates critical challenges such as power availability and water scarcity.

A Bold Fiscal Maneuver for Digital Dominance

The proposal, announced by India’s Finance Minister Nirmala Sitharaman during the nation’s annual budget presentation, underscores a clear intent to capitalize on the burgeoning global demand for AI compute capacity. Under the new regime, foreign cloud providers will benefit from zero taxes on income derived from international clients. However, sales catering to India’s vast domestic market will necessitate routing through locally incorporated resellers and will be subject to existing domestic tax laws. Furthermore, the budget introduces a 15% cost-plus safe harbor provision for Indian data center operators that provide services to related foreign entities, aiming to foster a symbiotic relationship between international investors and local infrastructure providers.

This policy comes at a pivotal moment in the global technology landscape. The race to build robust AI infrastructure is intensifying, with leading U.S. cloud giants like Amazon, Google, and Microsoft pouring billions into expanding their data center footprints worldwide. India, with its rapidly growing digital economy, vast pool of engineering talent, and strategic geographical location, has emerged as an increasingly attractive, viable alternative to established compute infrastructure hubs in the U.S., Europe, and parts of Asia.

The Global AI Infrastructure Race and India’s Position

The demand for AI-specific compute resources is exploding, driven by advancements in large language models, generative AI, and complex machine learning applications. These technologies require unprecedented levels of processing power and data storage, making high-capacity, energy-intensive data centers the foundational pillars of the AI era. Nations worldwide are vying to host these critical facilities, recognizing their potential to spur economic growth, create high-skill jobs, and cement their position in the future digital economy.

Historically, India has been a significant player in the global IT services sector, leveraging its large, English-speaking, and technically skilled workforce. However, its role has primarily been in software development and IT outsourcing. The current initiative marks a strategic shift, aiming to move India up the value chain by attracting core hardware infrastructure and advanced computing operations. This aligns with the broader "Digital India" vision, launched in 2015, which seeks to transform the country into a digitally empowered society and knowledge economy. By offering a long-term tax incentive, India is signaling its commitment to providing a stable and attractive environment for sustained investment in this capital-intensive sector.

Major Tech Giants Pledge Billions

Even before the latest tax incentives, major global tech players had begun signaling their commitment to India. In October, Google announced plans to invest $15 billion to establish an AI hub and expand its data center infrastructure in India, building on a previous $10 billion commitment made in 2020. This was Google’s largest single investment in the country to date, underscoring the strategic importance of the Indian market.

Microsoft followed suit in December, outlining a plan to invest $17.5 billion by 2029. This substantial commitment aims to expand its AI and cloud footprint across India, funding new data centers, critical infrastructure upgrades, and comprehensive training programs designed to cultivate a skilled workforce ready for the AI economy. Amazon, a dominant force in both e-commerce and cloud services, also significantly ramped up its spending. In December, the company declared an additional $35 billion investment in India by 2030, bringing its total planned commitment to an estimated $75 billion as it continues to expand its retail and cloud operations, particularly its Amazon Web Services (AWS) division.

These commitments from the "hyperscalers" — the largest global cloud providers — are critical. Their presence not only brings direct investment but also establishes an ecosystem that attracts other businesses and developers, further stimulating digital transformation within the country.

Bolstering Domestic Digital Ecosystems

The domestic data center sector in India is also gearing up to meet the anticipated surge in demand, both global and local. A notable example is Digital Connexion, a joint venture backed by Reliance Industries, Brookfield Asset Management, and Digital Realty Trust. This consortium announced in November its intention to invest $11 billion by 2030 to develop a colossal 1-gigawatt, AI-focused data center campus in Visakhapatnam, Andhra Pradesh. Spanning approximately 400 acres, this project is among the largest announced in India and highlights the growing confidence of both domestic and international investors in the country’s potential as an AI infrastructure powerhouse. Separately, the Adani Group, a major Indian conglomerate, revealed plans in December to invest up to $5 billion alongside Google in its AI data center project, further diversifying the investment landscape.

These investments are expected to have a profound market and social impact. The construction and operation of such large-scale data centers will generate significant employment opportunities, both direct and indirect, across various sectors including construction, engineering, IT, security, and maintenance. Furthermore, the enhanced digital infrastructure will support local startups, small and medium-sized enterprises (SMEs), and government initiatives, potentially accelerating digital inclusion and economic development across different regions of India.

Beyond AI Compute: A Comprehensive Industrial Strategy

India’s ambition extends beyond merely hosting AI workloads. The recent budget and accompanying policy announcements reveal a multi-pronged strategy to enhance the country’s position across the entire technology value chain.

• Semiconductor and Electronics Manufacturing: Recognizing the strategic importance of semiconductors, the government announced the launch of a second phase for the India Semiconductor Mission. This phase will focus on developing domestic capabilities in producing equipment and materials, fostering full-stack indigenous chip intellectual property, and strengthening supply chains. The mission aims to back industry-led research and training centers to build a highly skilled workforce, crucial for a sophisticated manufacturing ecosystem. This builds on the "Make in India" initiative, which seeks to boost local manufacturing and reduce reliance on imports.
• Enhanced Electronics Components Manufacturing Scheme (ECMS): The outlay for the ECMS has been significantly increased to ₹400 billion (approximately $4.36 billion) from its original ₹229.19 billion (about $2.50 billion). This program, launched in April 2025, offers incentives tied to incremental production and investment, reimbursing a portion of costs for companies manufacturing key components such as printed circuit boards, camera modules, and connectors used in smartphones, servers, and data center hardware. By linking payouts to actual output rather than upfront subsidies, the scheme aims to attract global suppliers deeper into India’s electronics supply chain and mitigate a long-standing reliance on imported components.
• Tax Exemption for Equipment Suppliers: To further facilitate electronics manufacturing, the federal budget proposed a five-year tax exemption, starting in April, for foreign companies supplying equipment and tooling to electronics toll manufacturers operating in bonded zones. This change is particularly significant for companies like Apple, which heavily relies on contract manufacturing in India and has previously sought clarity from New Delhi on the tax treatment of high-end iPhone production equipment supplied to its partners. This move could significantly streamline operations for major global brands.
• Critical Minerals Security: Addressing vulnerabilities in critical minerals, vital for electric vehicles, electronics, and defense systems, the finance minister announced support for mineral-rich states like Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. The goal is to establish dedicated rare-earth corridors to promote mining, processing, research, and manufacturing. This initiative follows a seven-year incentive program approved in late 2025 to boost domestic production of rare-earth magnets, aiming to reduce dependence on China, which currently dominates global output.
• Boosting Cross-Border E-commerce: To empower smaller businesses and artisans, the government also moved to boost cross-border e-commerce. The existing ₹1 million (around $11,000) value cap per consignment on courier exports will be removed, a measure expected to benefit small manufacturers and startups selling overseas through online platforms. Additionally, the government plans to streamline the handling of rejected and returned shipments using technology, addressing a persistent bottleneck for exporters.

Tackling the Resource Conundrum

Despite the ambitious policy framework and significant investment pledges, scaling up data center capacity in India presents considerable challenges. Patchy power availability, high electricity costs, and increasing water scarcity pose key constraints for energy-intensive AI workloads. Data centers are enormous consumers of electricity, and sophisticated cooling systems require substantial amounts of water. These resource limitations could potentially slow construction timelines and significantly elevate operating costs for cloud providers.

Rohit Kumar, founding partner of The Quantum Hub, a public policy and tech consulting firm in New Delhi, observed that "The announcements on data centers signal that they are being treated as a strategic business sector rather than just back-end infrastructure." While he believes this push will attract private investment and strengthen India’s position as a regional data and compute hub, he cautioned that "execution challenges around power availability, land access, and state-level clearances remain."

Sagar Vishnoi, co-founder and director of Noida-based think tank Future Shift Labs, highlighted that India’s data center power capacity is projected to surpass 2 gigawatts by 2026, up from just over 1 gigawatt currently, and could expand more than fivefold to exceed 8 gigawatts by 2030, driven by capital investments exceeding $30 billion. Vishnoi views the tax-free profit scheme until 2047 as a "strategic bet on global Big Tech," acknowledging that while it signals clear intent to accelerate digital infrastructure, it could potentially leave smaller domestic players competing for thin margins rather than receiving comparable upstream incentives.

Navigating the Road Ahead

The comprehensive measures introduced by the Indian government underscore a clear, long-term ambition to establish the nation as a formidable global technology infrastructure hub. By targeting cloud computing, advanced electronics manufacturing, and critical minerals, India aims to strategically capitalize on the surging demand for AI and the ongoing shifts in global supply chains.

The success of this audacious strategy, however, will ultimately hinge on effective execution. Ensuring reliable and sustainable access to power and water for energy-hungry data centers, simplifying land acquisition processes, fostering robust domestic innovation alongside foreign investment, and navigating complex state-level clearances will be paramount. As global companies and investors weigh their options, India’s ability to translate these bold policy incentives into durable leadership in the AI era will be closely watched. The next few years will be crucial in determining if India can truly forge a new digital horizon and emerge as a global technology powerhouse.