India is moving towards becoming an AI infrastructure hub. One way to do this is to make it easier for foreign companies to set up data centers in India. Data centers are computer systems facilities used to store data and support everything from cloud storage to AI. In this year’s budget, foreign companies have been given 21 years of tax exemption to set up data centers in India. Apart from this tax exemption from the Centre, state governments have also given various incentives to foreign data centres. But if we look at America, the proposals of these companies for big investment in data centers have been withdrawn due to local opposition. The question then arises whether hosting foreign data centers is the right strategy for India to enter the AI economy? First of all, let us see that there are no conditions for technology transfer for foreign companies availing this tax exemption, nor are there any provisions for increasing AI manufacturing and technical capacity in India. Under the existing India-US trade framework, India has promised to buy up to $500 billion worth of American goods and services, including technology. The US will also remove import restrictions on information and communication technology equipment. In such a situation, there is a great possibility that companies running data centers in India will import equipment from America instead of developing domestic capacity. It is also worth noting that Indian companies running data centers do not get the benefit of this tax exemption, because it is only for foreign companies. In these circumstances, without technology transfer, data centers become mere warehouses and not engines of innovation. For this tax exemption, it is necessary that the Ministry of Electronics and Information Technology comes up with a scheme for data centres. This should include provision of knowledge transfer and direct incentives for Indian companies. Without these, India will be limited to providing infrastructure and will not be able to develop AI capabilities. Secondly, data centers consume a lot of power and require a lot of water for cooling. There is a need for regulatory provisions for these in a country like India, where heatwave and water crisis are already affecting life. The general argument is that India needs to build infrastructure and that environmental concerns are a luxury for Western countries. But this argument ignores the threat of water crisis in India. India has 18% of the world’s population, but only 4% of its water resources. India’s existing 50 data centers are already in areas where there is acute water shortage. There are also geopolitical risks of keeping foreign data in India. In the US-Iran war, Iran attacked AWS data centers in the UAE and Bahrain. The list of targets that Iran released also included data centers of major US tech companies and were classified as ‘enemy technology infrastructure’. The principle of data sovereignty also states that digital data is subject to the laws of the country or jurisdiction where it is physically generated and stored. There is also a provision in the budget that the foreign company should work through ‘specified data centre’ which is Indian owned. (These are the authors’ own views)
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Column by Richa Roy and Arundhati Katju: How appropriate is the exemption for foreign data centers to advance in AI?
