Mumbai: India’s data centre industry is expanding beyond the established hubs of Mumbai, Chennai and Hyderabad, with state incentives and rising demand for artificial intelligence (AI) infrastructure driving rapid growth in smaller edge data centres.
Attracted by capital subsidies, cheaper land and tax incentives, operators are setting up facilities in cities such as Bhubaneswar, Patna, Jaipur and Kolkata.
A July 2025 report by Icra Ltd said India’s edge data centre capacity is expected to grow at a compounded annual rate of 52%, from 60MW in 2024 to 210MW by the end of 2027, driven by AI adoption, digital services and state-level policy support.
However, industry experts caution that sustaining this expansion of edge data centres will require more than just subsidies. Reliable power, fibre connectivity and skilled talent are proving just as critical.
Unlike large hyperscale facilities in metro cities, edge data centres are smaller facilities located closer to users to reduce latency, making them particularly useful for applications such as financial services.
Telangana became the first state to unveil a dedicated data centre policy in 2016. Since then, 16 other states have followed, the latest being West Bengal (in 2021), Odisha (2022), Rajasthan (2025) and Gujarat this month.
A distinct trend has been the push for investments in smaller towns. On 9 July, Gujarat announced a 2.5% capital subsidy for data centres in the Dholera region, along with financial support for power, stamp duty exemptions and reimbursement of state taxes.
Karnataka offers a 7% capital subsidy of up to ₹10 crore for data centres outside the Bengaluru Urban district. Uttar Pradesh offers up to 50% land subsidy for data centres in its southern and eastern regions.
Several data centre operators have already committed investments in these emerging locations.
For instance, private data centre firm CtrlS Datacenters, which recently raised ₹4,000 crore from the Canadian state pension fund’s investment arm, is building a 10MW data centre in Patna.
Sridhar Pinnapureddy, the company’s founder and chief executive, said it plans to have edge data centres in 21 locations over the coming years.
“As AI adoption and digital services continue to expand beyond the metropolitan hubs, small data centre infrastructure in tier-II cities and beyond will play an increasingly important role in enabling low-latency services, data localization, and AI workloads that need to be closer to users,” Pinnapureddy said.
Nxtra, a Bharti Airtel subsidiary, has been one of the top investors in small data centres across the country. Last August, chief executive Ashish Arora told Mint that the company had 150 edge data centres in 65 locations, with plans to add 10 more by 2027 “as mobile internet accelerated the need for low-latency data.” Nxtra has set-up a 1.8MW data centre in Bhubaneswar.
A Nxtra representative declined to comment for this story, citing its pre-earnings silent period.
Other than Nxtra and CtrlS, KKR-backed STTelemedia Global Data Centres (STT-GDC) has set up a 6MW data centre in Jaipur and NTT has established a 25MW data centre in Kolkata.
Analysts welcomed the trend but also pointed to teething challenges along the way to build a substantial data centre business in smaller towns.
Amit Khanna, a partner at consultancy firm Grant Thornton Bharat, pointed to three reasons for tier-II and III cities being attractive for data centres.
“One is the incentives and policy push from states. Another is that operating costs are lower, land is cheaper, and talent is available. The third is access to reliable power and favourable weather conditions, both of which are important for efficiency,” Khanna said.
Vinish Bawa, a partner at PwC India, added that state incentives are helping expand the data centre investment map.
“State incentives improve project viability through land, power, stamp duty and infrastructure support, encouraging operators to evaluate new locations. What we are seeing is diversification rather than migration, with established metros continuing to attract hyperscale investments while select emerging cities begin to build complementary digital infrastructure,” he said.
Power load availability is the next factor. Ashish Banerjee, senior principal analyst at Gartner, said, “It is about setting up a data centre without putting additional stress on the local power grid. Traditional data centre hubs like Mumbai and Chennai already have stressed power grids because of existing industries. Adding AI-driven data centres, which are extremely power hungry, only increases that pressure.”
The tier-II shift will be crucial in the long run, Sudhanshu Chawla, a partner at BCG India said. “If India is to become the AI infrastructure capital of the world, new hubs are compulsorily needed,” he added.
This, though, poses a few challenges too.
“While some emerging cities have the potential to become sustainable data centre hubs, incentives alone will not achieve that. Long-term success will depend on reliable and scalable power, high-capacity fibre networks, water availability, resilient transmission infrastructure, and a supportive ecosystem of cloud providers, enterprises and skilled talent. The established metros will continue to dominate in the near term, but a handful of well-prepared emerging cities could evolve into strong regional hubs if the above factors are achieved,” PwC’s Bawa said.
Gartner’s Banerjee added that despite state government intentions, edge data centres went off to a slow start until AI accelerated their necessity—proof that only on-paper policy may not be enough to build scale for these facilities.
“Outside cities, much of the land is agricultural, so converting it for a data centre requires approvals and could face pushback from local communities,” Banerjee said. ‘Many such facilities are also in the outskirts of cities—imagine setting up a data centre in a rural area. How attractive is it going to be for employees to relocate there? They would rather be in the centre of the city. Getting the right skills and talent to maintain and support those data centres is a big challenge.”
Bawa added that a lack of infrastructure readiness in various aspects could also delay the possible expansion of such small facilities.
“Incentives can improve project economics, but they cannot compensate for gaps in core infrastructure. The success of emerging locations will depend on how quickly they can build a complete digital infrastructure ecosystem, rather than offering incentives alone,” he said.