IGI Logo

India has the potential to add another 500 MW data centre capacity over next the four years, as demand for artificial intelligence (AI) use cases surge in the country, a report said on Wednesday. 

With AI workloads set to surge and eventually outpace traditional cloud computing, the demand for data centres is also expected to rise sharply, according to the report by Avendus Capital, one of the country’s largest investment banks.

The data centre sector doubled from 540 MW in 2019 to 1,011 MW in 2023, making India among the fastest-growing markets globally.

According to Jhawar, the industry is maturing with the entry of long-term investors with commitments of over $250 million per investment, offering de-risked returns.

Expected to grow at a CAGR of 26 per cent over the next three years, the sector is attracting considerable attention from a wide range of investors, from growth stage private equity (PEs) to long-term pension and sovereign wealth funds.

“We believe that India’s data centre market will pave the way for the next wave of investments in real estate and AI, unlocking tremendous stakeholder value,” said Prateek Jhawar, Managing Director and Head, infrastructure and real assets investment banking, Avendus Capital.

Developers can expect to generate more than 25 per cent internal rate of return (IRR) with a build-and-sell model, highlighting the sector’s potential for superior returns compared to other yielding real asset classes.

“This will drive demand for DC capacity in India, which is expected to double to 2GW by 2026,” Jhawar mentioned.

In a major deviation from global trends, hyperscalers in the country are opting to build and own data centres tailored to their specifications -- bolstered by long-term growth potential and regulatory guidance for data sovereignty in the country.

According to the report, nearly 94 per cent of the current installed data centre capacity is concentrated in India’s top seven cities.

Over the next five years, around 40 per cent of the total additional capacity is projected to be added in Mumbai, underscoring the city’s significance in the space.

Chennai is expected to contribute about 25 per cent of the new capacity, while Delhi will account for around 15 per cent.

“Edge data centres (smaller facilities located close to the populations they serve) are anticipated to experience substantial demand due to rising data generation and consumption in tier 2 and Tier 3 cities,” the report noted.