Investments by data centre operators and developers are expected to reach $70 billion by FY35, according to a PwC India report. As policymakers push incentives to expand capacity, a key question remains: can sustainability keep pace with growth?
Data centres rank among the most power- and water-intensive assets in the digital economy, even as India faces energy transition and water stress. Yet ESG commitments in the sector often stop at policy statements, with limited measurable outcomes.
Check all the latest developments related to Budget 2026 here
In the age of AI chatbots, sustainability is no longer optional. These ‘data factories’ power services ranging from video streaming and UPI transactions to generative AI workloads. AI currently accounts for 15–20% of India’s data centre capacity and is projected to rise to 40–50% by 2030, said Anjani Kumar, Partner at Deloitte India.
“This results in a structural change in the functioning of AI Data Centres – making them run on higher thermal loads, requiring more power, and more efficient cooling services,” he said.
India’s data centre market is currently in a nascent stage compared with the US and China. “India has significant headroom to build sustainable data centres from the outset, instead of retrofitting later at much higher costs,” said Kumar.
Capital investment in power, cooling systems, real estate and network fibre for data centres is set to rise sharply over the next decade. The key budget expectations for data centres revolve around two key metrics: power consumption and water usage, with calls for targeted incentives tied to sustainability performance.
ET OnlinePower & water consumption patterns of data centres
Giving critical infrastructure status to data centres
One key demand from industry experts is to grant critical infrastructure status to data centres, enabling a national framework governing both capital expansion and sustainability.
Vineet Mittal, Chairman of Avaada Group, said incentives promoting renewable energy consumption, long-term electricity duty exemptions, capital support and energy-efficiency benchmarks—reflected in numerous state policies are creating a strong economic case for low-carbon data centres.
“As the Budget approaches, recognising data centres as strategic national infrastructure, along with clearer guidance on data sovereignty and localisation, can further accelerate domestic capacity creation with trust, security and sustainability,” Mittal told ET Online.
Also read: Should Budget 2026 put India’s data centre backbone at the centre of its AI ambitions?
Cooling systems: high capex, limited incentives
Cooling remains one of the biggest sustainability pain points. A typical 1 MW data facility consumes nearly 68,500 litres of water/day using current cooling technologies. In metros such as Mumbai, demand already exceeds supply by nearly 700 MLD, underscoring the risk of scaling water-intensive facilities.
To address this, Deloitte India calls for 25-35% grant-eligible green capex support for technologies like heat-recovery, economisers, closed-loop cooling, on-site battery storage or modular UPS in Tier-III/IV data centres meeting defined Power Usage Effectiveness (PUE) and water-use targets.
“Water stress is a more local risk. Water requirements scale quickly with capacity under water-dependent cooling, and Tier-1 hubs face acute scarcity signals,” said Kumar. “Water must also be solved as a location-specific design and approvals strategy, with a bias to non-potable sources, reuse, and low-WUE cooling approaches.”
Deloitte’s Budget 2026 Playbook also recommends a 40% grant under Community Assistance Program to businesses adopting such technologies.
High-efficiency chillers and advanced cooling systems significantly reduce water usage but come with higher upfront costs. Industry executives argue that customs duty waivers on such equipment for certified green data centres could ease adoption.
“The government can move the market through standard-setting and procurement design,” said Kumar. “Linking incentives to audited PUE and WUE metrics will shift operator behaviour faster than voluntary pledges.”
Also read: Union Budget 2026 presents a chance to build India’s digital backbone for Viksit Bharat
Power Policy: The biggest lever
Global electricity consumption by data centres is projected to double to 945 TWh by 2030, according to Deloitte, making power policy the most impactful sustainability lever.
Sunny Tathale, Chief Project Officer at Adani ConneX, said the single most impactful policy intervention to accelerate green data centre adoption in India would be in the area of power policy, as electricity accounts for the largest share of a data centre’s environmental footprint. Decarbonising the power supply delivers immediate and measurable sustainability gains at scale, he noted.
“A focus on hybrid renewable models — combining solar, wind and storage — along with consistent green power accounting can help operators commit to long-term sustainability targets,” Tathale told ET Online.
Industry experts have urged the Centre to allow accelerated depreciation and GST input-tax credit for certified green data centres that commit to at least 50% renewable procurement within five years, with benefits phased out if targets are missed.
Pi Data Centres, which partners with global cloud majors, runs 30% of its operational capacity on renewable energy. “Scaling this further will depend on advancements in energy storage technologies and a reduction in associated costs, which remain key constraints today. As these challenges are addressed, we expect a steady increase in renewable penetration,” Kalyan Muppaneni, Founder and CEO, told ET Online.
“Green data centres are economically viable in India. Higher upfront capex can typically be recovered within five years, though ensuring 24/7 green power remains a challenge,” he added.
Inter-state power transmission
Data centre operations demand efficient power transmission for both conventional and renewable electricity.
“Power availability is the binding constraint in most Tier-1 markets,” said Kumar, noting that India’s power mix remains non-renewable, which directly translates incremental AI load into higher emissions unless procurement and grid pathways are strengthened.
Industry players are seeking lower thresholds for waiving interstate transmission charges (ISTS), faster approvals for Battery Energy Storage Systems (BESS), and priority right-of-way for renewable transmission infrastructure.
Sunil Gupta, Co-founder and CEO of Hiranandani Group’s data centre business Yotta, said current ISTS waivers apply only for consumption above 50 MW, a high bar for many operators. “The industry has long demanded that if the government can waive off those charges for a lesser power requirement, that can be helpful for the businesses since the data centre industry is already capital intensive,” he said.
Gupta also highlighted the lack of uniform rules on green power banking, with some states disallowing storage of surplus renewable energy. A central policy framework, he said, would provide much-needed certainty.
In the recent pre-Budget meeting with Finance Minister Nirmala Sitharaman, Gupta said, the industry players had suggested the introduction of green bonds through which companies can procure funding at a lower interest rate as compared to the regular commercial banking rate.
Also read: Budget 2026-27: In the AI race, India can’t afford to jog
ESG disclosures: An option or a mandate
Experts argue that sustainability incentives must be tied to mandatory, auditable disclosures. Budget expectations include public PUE disclosure, quarterly KPI dashboards, and compliance with Bureau of Energy Efficiency (BEE) guidelines for data centres. “This converts reporting from a narrative exercise into an operating discipline,” said Kumar.
“The Centre must make disclosures comparable and enforceable,” he said, calling for mandatory reporting of PUE, WUE, location-based emissions and renewable procurement quality, backed by third-party assurance.
Akshima Tejas Ghate, Managing Director at Rocky Mountain Institute – India, said the Budget could incentivise:
- 24×7 clean power procurement
- High-efficiency servers and advanced cooling
- Demand-side flexibility so data centres support grid stability
Sunbul Shafaque, Architect and Sustainability Professional at IGBC AP, added that on-site audits every two to three years should be mandated to ensure compliance continuity.
Establishment of dedicated data centre parks
The Adani ConneX CPO highlighted that sustainability would benefit from city- and cluster-level planning – such as integrating treated wastewater supply, power evacuation, and grid upgrades in designated data centre zones.
“Sustainability constraints can quickly turn into execution bottlenecks,” Kumar warned, noting risks such as delayed commissioning and approval friction in water-stressed metros that can force demand to shift to other countries.
Budget 2026 could pre-empt these challenges by shifting from ad-hoc approvals to Data Centre Economic Zones with enforceable sustainability standards.
The Union Budget must address the above headwinds and build a national policy for data centres that can accelerate India’s growth in the AI sector, without leaving a dark patch on the environment.
As Sitharaman prepares to present the Budget on February 1, the industry awaits clarity on whether India’s push to become a global AI hub will be matched by policies that keep its digital growth environmentally sustainable.