India is attracting global AI investment by offering foreign cloud providers zero taxes until 2047 for services sold internationally, provided these workloads operate from Indian data centers. This initiative aims to draw significant AI computing investment, despite potential challenges like power shortages and water scarcity within the country.
India’s finance minister, Nirmala Sitharaman, presented this proposal in the annual budget. It grants a tax exemption on revenues from cloud services sold internationally, contingent on the services being hosted in Indian data centers. Domestic sales to Indian clients, however, must be processed via local resellers and are subject to domestic taxation. The budget also includes a 15% cost-plus safe harbor provision for Indian data center operators serving affiliated foreign entities.
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This announcement coincides with major U.S. cloud companies like Amazon, Google, and Microsoft rapidly expanding their global data center infrastructure to meet the rising demand for AI workloads. India is becoming a highly appealing destination for such investments, offering a substantial talent pool and increasing demand for cloud services. It is positioning itself as a significant alternative to existing compute infrastructure hubs in the U.S., Europe, and parts of Asia.
In October, Google committed $15 billion to develop an AI hub and expand data center infrastructure in India, marking its most substantial investment there, following a $10 billion pledge in 2020. Microsoft announced plans in December to invest $17.5 billion by 2029 to enhance its AI and cloud presence, funding new data centers, infrastructure, and training initiatives. Amazon also increased its investment in December, stating an additional $35 billion would be allocated to India by 2030, bringing its total planned commitment to approximately $75 billion for expanding its retail and cloud operations.
India’s domestic data center industry is also scaling up to address global requirements. In November, Digital Connexion, a joint venture involving Reliance Industries, Brookfield Asset Management, and Digital Realty Trust, announced an $11 billion investment by 2030 to establish a 1-gigawatt, AI-centric data center campus in Andhra Pradesh. This 400-acre project in Visakhapatnam is one of India’s largest, highlighting increasing interest from both local and international investors in developing AI-ready infrastructure. Additionally, Adani Group stated in December its intention to invest up to $5 billion with Google in its AI data center project in India.
Expanding data center capacity in India faces significant hurdles. Inconsistent power supply, elevated electricity expenses, and water shortages present major limitations for energy-intensive AI workloads. These issues could impede construction timelines and increase operational costs for cloud providers.
Rohit Kumar, founding partner at The Quantum Hub, a public policy and tech consulting firm in New Delhi, noted that the data center announcements indicate their recognition as a strategic business sector, not merely back-end infrastructure. This initiative is expected to draw further private investment and enhance India’s role as a regional data and compute hub, although practical challenges like power availability, land acquisition, and state clearances persist.
Sagar Vishnoi, co-founder and director of Future Shift Labs, a Noida-based think tank, projected India’s data center power capacity to exceed 2 gigawatts by 2026, up from over 1 gigawatt currently. He anticipates a more than fivefold expansion to over 8 gigawatts by 2030, fueled by over $30 billion in capital investments. Vishnoi observed that while the budget demonstrates a clear commitment to advancing digital infrastructure and cloud computing, permitting foreign cloud companies to operate tax-free until 2047 represents a “strategic bet on global Big Tech,” even as India has the potential to foster its own technology leaders in the coming decades.
Vishnoi also suggested that directing services to Indian users through reseller entities might force smaller domestic businesses to contend with narrow profit margins, rather than benefiting from similar upstream incentives.
The federal budget also increased incentives to enhance India’s involvement in electronics and semiconductor manufacturing. The nation aims to progress beyond mere assembly to secure greater value within global supply chains. The finance minister stated that a second phase of the India Semiconductor Mission would be initiated. This phase will concentrate on manufacturing equipment and materials, fostering full-stack domestic chip intellectual property, and reinforcing supply chains, alongside supporting industry-led research and training centers to cultivate a skilled workforce.
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The Indian government has increased the allocation for the Electronics Component Manufacturing Scheme to ₹400 billion (approximately $4.36 billion), up from ₹229.19 billion (about $2.50 billion). This decision follows the program’s success since its launch in April 2025, having attracted investment commitments exceeding double its initial goal, according to Sitharaman.
This scheme provides incentives linked to increased production and investment, partially reimbursing costs for companies producing essential components like printed circuit boards, camera modules, connectors, and other parts for smartphones, servers, and data center hardware. By tying payments to actual output instead of initial subsidies, the program aims to integrate global suppliers more deeply into India’s electronics supply chain and lessen dependence on imported components, addressing a frequent critique of the nation’s manufacturing strategy.
In addition to boosting funds for the electronics components scheme, the federal budget introduced a five-year tax exemption, effective April, for foreign firms providing equipment and tooling to electronics toll manufacturers in bonded zones. This adjustment is expected to benefit companies such as Apple, which heavily utilizes contract manufacturing in India and had reportedly previously sought clarity from New Delhi regarding the tax implications for high-end iPhone production equipment supplied to its partners.
The budget also aimed to mitigate critical mineral vulnerabilities, as India faces challenges with diminishing global supplies of rare earth materials essential for electric vehicles, electronics, and defense systems. The finance minister announced federal support for mineral-rich states like Odisha, Kerala, Andhra Pradesh, and Tamil Nadu to establish specialized rare-earth corridors. These corridors will foster mining, processing, research, and manufacturing. This initiative complements a seven-year incentive program approved in late 2025, designed to increase domestic production of rare-earth magnets amidst tighter supply access from China, the dominant global producer.
In addition to AI infrastructure and electronics manufacturing, the Indian government also sought to enhance cross-border e-commerce, enabling smaller businesses to access international markets. The finance minister confirmed the removal of the current ₹1 million (approximately $11,000) value cap per consignment for courier exports. This change is anticipated to assist small manufacturers, artisans, and startups selling products globally via online platforms. Sitharaman also stated that the federal government would use technology to streamline the management of rejected and returned shipments, resolving a persistent challenge for exporters.
These recent measures collectively underscore India’s aspiration to become a lasting hub for global technology infrastructure, encompassing cloud computing, electronics manufacturing, and critical minerals. The strategy seeks to leverage the escalating demand for AI and evolving global supply chains. However, its ultimate success will depend on effective implementation, including ensuring dependable power and water for data centers and providing consistent support for domestic innovation. Global companies and investors will assess whether India can transform these policy incentives into sustained leadership in the AI era.
