India may be seen as an anti-AI story where we don’t have AI winners among our companies whilst at the same time AI’s displacement of jobs can undo our expected demographic dividend. Yet, there is reason to cheer as over the past year, hyperscalers such as Google, Amazon and Microsoft and Indian conglomerates like Adani, Reliance and Tata alike have announced massive investments running into tens of billions of dollars into AI data centres. Whilst it undoubtedly brings much need stable FDI when the currency has been under the pump and capex intensity, we are warned by none other than India’s Chief Economic Advisor V Ananth Nageswaran about getting these investments on the right terms. Along with Akash Poojari, he writes in this column for the Mint about the pitfalls we need to guard against.
Indian states are rushing to win these investments by offering subsidised power and water, which these data centres guzzle. The authors note: “…policymakers should ask whether hosting them is the best use of scarce resources, and whether the incentives on offer have been weighed against their costs.…two-thirds of the cost of an artificial intelligence (AI) campus goes on computing hardware, which has an economic life of around six years.
The building and its power supply will outlast the chips, but the tenant’s economics rests on the chips. Its commitment to any one site can therefore be far shorter than the concessions and grid investments made to attract it. Nor do these facilities create many jobs once built. Virginia’s legislative audit commission found in 2024 that a typical facility runs on around 50 full-time staff, about half of them contractors.”
They argue that neither does having a data center in India ensure our citizens’ data stays on our soil. “Where a facility sits and whose data it holds are separate questions. The work that must stay at home, such as government records or payments data, needs far less capacity than the hyperscale now being attracted.
…On the wrong terms, then, hosting a hyperscale data centre can amount to a new kind of value transfer. The host country supplies land, subsidized power and scarce water, and absorbs the strain on its grid, while the rents accrue to a handful of firms headquartered in advanced economies. These firms bring capital, but much of it is spent abroad on equipment”
Especially given the benefits of AI are not entirely certain, they urge policy makers to consider the risks: “In an emerging economy, the developer, its lenders and the distribution company that serves the facility are all exposed to a single tenant, on lease terms shorter than the life of the assets. If demand falls short or the hardware ages faster than expected, the tenant may walk away or default, leaving the building, the loans and idle grid capacity with domestic banks, utilities and, ultimately, taxpayers. The gains would flow abroad, while the costs of disappointment would be borne at home.”
The article points to NITI Aayog’s new guidelines for states to evaluate these investments in light of benefits weighed against these costs and risks than competing purely on subsidies.
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