India's data centre industry: Here's why the sector is seeing a flurry of new players joining in

September 11, 2001: A plane hijacked by terrorists crashes into the iconic World Trade Center in New York, killing thousands and causing billions of dollars of losses for businesses. Not to mention setting off a war and other long-term geopolitical consequences.

March 11, 2011: A deep-sea quake triggers a tsunami of monstrous power and scale, which smashes into Japan and wreaks havoc on its citizens and infrastructure. Again, the loss to life and business is mind-boggling.

April 6, 2018: The Reserve Bank of India (RBI) asks payments system providers in India to use data collected within the country to be locally stored within six months. Reason: Perceived data security risks associated with sensitive data being parked overseas.

A terrorist attack. A natural disaster. A policy change. Three incidents, three different locations, three different points in time. Isolated. Unconnected.

Yet, they had one common impact. They impressed upon businesses the need to protect their digital frameworks and data, preferably on the cloud, and within very large ‘warehouses’ of servers, networking infrastructure and software systems, called data centres. As data centres mushroomed in developed markets, the RBI’s action—and a subsequent government proposal for a new data protection Bill in 2019 in particular—brought home the boom to a digitally savvy India.

Described as the ‘data factory to the world’, data centres are a key element in today’s internet experience. Without it, you wouldn’t be able to send a WhatsApp message or initiate a UPI transaction or binge-watch your favourite show on Netflix. Why so? Practically all the data we generate and consume—when we use our smartphones and the internet, trade in stocks, access banking services, purchase goods, or engage in any other online activity—is stored, processed and managed through these huge computing powerhouses.

And it is in that backdrop that many domestic infrastructure firms, from Adani Group to L&T to Hiranandani Group to global giants such as NTT, Google, Microsoft and Amazon, have plans to create greenfield data centres in the country or increase the capacity of their existing data centres. With companies pouring in billions of dollars in capital to set up these power-guzzling infrastructure components, about 4,900-5,000 MW of data centre capacity is expected to be added in the next six years, according to research firm ICRA Ratings, involving investments of nearly Rs 1.5 lakh crore.

With 138 data centres, India is currently the world’s 13th largest market. And 45 new data centres—covering 13 million sq. ft and 1,015 MW of capacity, are expected to pop up by the end of 2025, per research by ANAROCK-Binswanger. According to Arizton Advisory & Intelligence, a Chicago-based market research firm, India’s data centre market was valued at $4.35 billion in 2021. “By 2027, it is predicted to grow to $10.09 billion, a 132 per cent surge in just six years,” says Manoj Paul, MD of Equinix India, a part of US-based data centre player Equinix that is investing $86 million in India.

The numbers are real. India had more than 700 million internet users at the end of 2022, almost double that in the US, per data from Statista. With a population of 1.4 billion and a growing base of smartphone users (currently at 600 million, according to the Ministry of Information and Broadcasting), digital services becoming ubiquitous thanks to cheap data, and 5G telecom services promising to explode, India needs massive infrastructure to store and manage the data deluge that is coming. “The demand for data centres has been growing over the years due to several factors, such as the increasing adoption of cloud computing, the growth of big data, the rise of the Internet of Things (IoT), and the proliferation of mobile devices,” says Sunil Gupta, Co-founder & CEO of Yotta Data Services, a Hiranandani Group company.

Booming Business

Till a few years ago, most of India’s data was stored elsewhere, zipping between faraway locations (such as Singapore) through undersea cables in the Indian Ocean. From India’s financial capital Mumbai, it would take milliseconds for a data packet to reach there and return—long enough to change the fortunes of a stockbroker or frustrate a gamer. But with data centres located in India, the travel time falls to nanoseconds. Not only will this help improve the users’ online experience, it will also strengthen the digital revolution. And with strong forecasts of India’s growing digital economy, the demand for new data centres is expected to stay firm.

And so it is that capital is pouring in from pure-play data centre players like NTT, CtrlS and NxtGen; hyperscalers such as Amazon Web Services (AWS), Microsoft and Google; and infrastructure players such as Adani Group and Hiranandani Group. What has got the Adanis and Hiranandanis to jump in? These giants are not heading for the tech space. Instead, they are building infrastructure with the help of some tech partners, by going for the co-location or colo model. In the colo model, data centre players construct the building, supply power, cooling, physical racks, security and other support measures. Customers (in this case, enterprises) bring their own IT hardware and expertise. Gupta says more than 75 per cent of data centre service providers worldwide are in the colo space. In India, too, almost every new entrant that has come has colo as its business model, he adds.

Here is how this works. Data centres basically charge for the space they provide. And as data centres require a huge amount of consistent power supply, “the charging model for co-location simply becomes how many racks a customer is taking and how much power they will consume”, explains Gupta. It’s like taking an apartment on rent, and paying the monthly rental and electricity bill.

In July 2019, real estate major Hiranandani Group forayed into the segment with Yotta Infrastructure (now known as Yotta Data Services)—a managed data centre service provider that designs, builds and operates large-scale data centres. For now, Yotta has two operational data centres—Yotta NM1 in Navi Mumbai; and Yotta D1 in Greater Noida. Additionally, the firm is building a network of data centre parks in places like Mumbai, Pune, Chennai, Kolkata and Gujarat. “With a presence in real estate, construction and power, and experience in building large-scale infrastructure projects, infrastructure players are best poised to tackle the industry’s challenges and build a network of data centres,” says Gupta.

To get a sense of the scale, Yotta D1—the first of six data centre buildings that will come up at its Data Center Park in Greater Noida—has been set up with an investment of around Rs 1,500 crore. Spread across 300,000 sq. ft, it offers an IT load capacity of 28.8 MW and can house 5,000 server racks across seven server floors; it also provides 48-hour power backup on full load. The remaining five buildings will be set up with an investment of another Rs 9,000 crore over five to seven years.

Similarly, in February 2021, Adani Enterprises entered into a joint venture with EdgeConneX, a leading global data centre operator with 50 facilities in 30 markets. The JV plans to set up 1 GW of data centre capacity by 2031. Walmart-owned Flipkart, which already has two data centres in Hyderabad and Chennai, zeroed in on AdaniConneX for its third data centre at the Chennai facility. It also makes sense for start-ups to go for the colo model. Explains Gupta: “By utilising services from a data centre and cloud service provider, start-ups can access enterprise-grade infrastructure and support without the need for significant upfront investments. This allows them to focus their resources on their core business operations and drive growth while benefitting from the scaleability, reliability and security provided by data centre service providers.”

Growth Drivers

“Initially, data centres were seen as a necessity by large enterprises and institutions with huge data volumes or were driven by compliance mandates. As internet penetration improved at the customer end with broadband and mobile, a multitude of services that leveraged digital access came into being and gave rise to the world we see today,” explains Shekhar Sharma, CEO of NTT Global Data Centers & Cloud Infrastructure India and NTT Communications India, the leaders in India’s data centre business. Even on the enterprise side, the increased adoption of Cloud, AI, loT and automation technologies is fuelling the demand for data centres. “Today, practically all public and private enterprises depend upon reliable, always-on data centre operations, whether owned or outsourced,” says Sharma.

Various factors have contributed to this boom. Starting from the early 2000s, it was boosted a decade later with the proliferation of e-commerce. The space saw another quantum jump when a few years later, hyperscalers such as AWS, Google, and Microsoft entered the market and placed orders of, say, 2,000 racks in a single instance. For a pure-play data centre player like NTT, it meant meeting its monthly target in a day.

The boom is partly driven by favourable regulatory policies. Acknowledging its importance during the pandemic, the government has awarded infrastructure status to data centres, with even state governments offering subsidised land, power subsidies, exemptions on stamp duty, discounts on usage of renewable energy and procurement of IT components made locally, etc. The government’s initiative to build a backbone for digital transactions and authorisation with the JAM trinity (Jan Dhan-Aadhaar-Mobile), UPI, and India Stack APIs, proved to be a major catalyst in driving the explosion of data generation. And this could only be scaled on the backbone of domestic data centres.

Then in July 2018, the Data Protection Act, prepared by the Srikrishna Committee, suggested that citizens’ data could be protected by storing it locally. This move led to many companies ramping up data centre capacity. “This led to increased interest in India with local players ramping up new developments aggressively and foreign players looking to enter India and capture a part of the pie,” says Devi Shankar, President-Industrial & Logistics and Data Center, ANAROCK Capital. Amazon invested around $197 million in its data services arm in the country. Not to be left behind, companies like Google and Microsoft also announced similar plans. Even markets regulator Sebi announced its intention to develop guidelines that would mandate foreign entities to store data pertaining to India locally. It was a good enough trigger for the data centre industry.

Although the new Personal Data Protection Act recommends data transfer to friendly countries subject to permissions, the law is unclear on how easy or cumbersome this process could be. But industry experts believe this is unlikely to impact the data centre boom.

With the government’s digital initiative and support from various stakeholders, a significant transformation has been witnessed in sectors such as education, healthcare, e-commerce and life sciences. “This has led to strong growth for data centre storage and computing, which is reflected in the continued growth of the Indian data centre industry,” says Seema Ambastha, CEO of BAM Digital Realty, who expects 681 MW data centre capacity to be added by end-2024, which will double India’s data centre capacity to 1,318 MW. BAM Digital Realty—a JV between Digital Realty and Brookfield Infrastructure—plans to come up with its first data centre in India by December 2023 in Chennai, with more than 100 MW capacity. Globally, Digital Realty has over 310 data centres and the JV plans to invest $2 billion over the next few years, say industry sources.

According to the Ministry of Electronics & IT, the size of the digital economy in India is estimated to grow from $200 billion in 2017-18 to $1 trillion by 2025, “which further necessitates strong growth of data centres”, says Ranganath Sadasiva, CTO of Hybrid IT at Hewlett Packard Enterprise, India. Due to this explosion of data emanating from the growth of the digital economy, some enterprises are also adopting cloud-only models. And India is fast emerging as the world’s cloud computing and data centre hub, adds Sadasiva.

In addition, the roll-out and deployment of 5G, IoT, smart cities and the advent of edge computing will drive data centre demand in the future. No wonder then, that AdaniConneX, in addition to developing full-scale data centres, says it will also develop a portfolio of edge data centres strategically located throughout India. This will support the need for more proximate capacity. These edge sites are designed and planned to scale with demand and become full-scale data centre campuses easily. While there isn’t a single model that fits all, edge data centres are said to be crucial for certain sectors that are dependent on low latency. It will help with real-time information monitoring and processing, management of expanding IoT applications and delivery of improved service provider experiences. Edge computing will transform how businesses leverage and benefit from data. As processing is done close to the data source, it allows for reduced response time while producing precise and desired outcomes.

However, there are a few challenges to India’s fledgeling data centre industry. Though approval processes have improved quite significantly after the industry was granted infra status, it still takes a couple of months at times. Data centres demand huge investments, but the return on investment is very slow, which might act as a deterrent for some. Says Gupta: “The costs involved in setting up a data centre or a data centre park can vary depending on factors such as the location, size, design, technology and infrastructure. The recurring costs in a data centre include a range of things such as hardware maintenance and upgrade, upkeeping of the facility and a skilled workforce.”

Given that the need for data centres is set to go through the roof in the coming years, there is enough space for more players to grab a piece of the growing pie. From just a single-digit count of data centre players in India, there has been an influx of many players just in the last three-four years. However, Sharma of NTT, who has over 25 years of experience in this space, says, “Data centre is a very capex-heavy industry. So, definitely, not anybody or everybody can afford it. But yes, these companies [who survive] are the ones who have the strength, muscle power and finances to run it. A lot of them will test the waters in the coming years.” And this trend is expected to continue in the coming years with healthy competition in the space. Ultimately, just like the telecom industry, some of them will exist, while some of them will sell out, consolidating the industry into five or six major players. For instance, Equinix acquired GPX India in an all-cash transaction valued at $161 million in 2020 to enter the Indian data centre market.

All said and done, as businesses embrace local service providers, data protection and localisation, be it a handful of colo players or a full stack operator, data centres in India is a greenfield space with strong odds.

@nidhisingal