In the accelerating global competition to establish AI infrastructure, India has proposed a significant incentive for foreign cloud providers: a complete tax exemption until 2047 on services sold internationally, provided those workloads are processed from data centers within India. This move is designed to attract the next wave of investment in AI computing, even as the nation contends with power shortages and water scarcity that could challenge expansion.

Finance Minister Nirmala Sitharaman presented this proposal in the annual budget, outlining a tax holiday that effectively means zero taxes on revenue from cloud services sold abroad when operated from Indian data centers. For sales to domestic customers, services must be channeled through locally incorporated resellers and will be subject to Indian taxes. The budget also includes a proposed 15% cost-plus safe harbour for Indian data-center operators providing services to related foreign entities.

This announcement arrives as major U.S. cloud companies—Amazon, Google, and Microsoft—are rapidly expanding their global data-center capacity to meet the soaring demand for artificial-intelligence processing. India is becoming an increasingly appealing destination for such investments, offering a substantial engineering talent pool, growing local demand for cloud services, and positioning itself as a strategic alternative to established hubs in the U.S., Europe, and parts of Asia.

Recent commitments underscore this trend. In October, Google announced a $15 billion investment to establish an AI hub and expand its data-center infrastructure in India, marking its largest commitment in the country to date, following a $10 billion pledge in 2020. Microsoft followed in December with plans to invest $17.5 billion by 2029 to grow its AI and cloud presence, funding new data centers, infrastructure, and training initiatives. Also in December, Amazon committed an additional $35 billion in India by 2030, bringing its total planned investment to approximately $75 billion as it expands both retail and cloud operations.

India’s domestic data-center sector is similarly scaling up. In November, Digital Connexion—a joint venture supported by Reliance Industries, Brookfield Asset Management, and Digital Realty Trust—stated it would invest $11 billion by 2030 to develop a 1-gigawatt, AI-focused data center campus in Andhra Pradesh. This project, covering about 400 acres in Visakhapatnam, ranks among the largest announced in India and highlights the growing interest from both local and international investors in building AI-ready infrastructure. Separately, the Adani Group revealed plans in December to invest up to $5 billion alongside Google in an AI data center project within the country.

However, scaling data center capacity in India faces considerable hurdles. Unreliable power supply, high electricity costs, and water shortages present major constraints for the energy-intensive demands of AI workloads, potentially slowing construction and increasing operational expenses for cloud providers.

“The announcements on data centers signal that they are being treated as a strategic business sector rather than just back-end infrastructure,” observed Rohit Kumar, founding partner of The Quantum Hub, a public policy and tech consulting firm based in New Delhi. He noted that this push will likely attract more private investment and bolster India’s role as a regional data and computing hub, though challenges in power availability, land access, and state-level clearances persist.

Sagar Vishnoi, co-founder and director of the Noida-based think tank Future Shift Labs, pointed out that India’s data-center power capacity is projected to exceed 2 gigawatts by 2026, rising from just over 1 gigawatt currently, and could expand more than fivefold to surpass 8 gigawatts by 2030, driven by capital investments exceeding $30 billion.

While the budget demonstrates a clear intent to accelerate digital infrastructure, Vishnoi remarked that allowing foreign cloud firms to earn tax-free profits until 2047 represents a “strategic bet on global Big Tech,” even as India may cultivate its own technology leaders over the coming decades. He added that routing services to Indian users through reseller entities might leave smaller domestic players competing for narrow margins without receiving comparable upstream incentives.

The federal budget also introduced enhanced incentives to deepen India’s involvement in electronics and semiconductor manufacturing, as the country aims to advance beyond assembly and capture greater value in global supply chains. Finance Minister Sitharaman announced the launch of a second phase of the India Semiconductor Mission, focusing on producing equipment and materials, developing full-stack domestic chip intellectual property, and strengthening supply chains, while supporting industry-led research and training centers to build a skilled workforce.

Additionally, the government has increased the allocation for the Electronics Components Manufacturing Scheme to ₹400 billion (approximately $4.36 billion), up from ₹229.19 billion (about $2.50 billion). This follows the program’s launch in April 2025, which attracted investment commitments more than double its original target. The scheme provides incentives linked to incremental production and investment, reimbursing a portion of costs for companies manufacturing key components such as printed circuit boards, camera modules, connectors, and other parts used in smartphones, servers, and data-center hardware. By tying payouts to actual output rather than upfront subsidies, the program aims to integrate global suppliers more deeply into India’s electronics supply chain and reduce dependence on imported components—a persistent critique of the country’s manufacturing efforts.

Alongside the increased funding for the electronics components scheme, the budget proposed a five-year tax exemption beginning in April for foreign companies supplying equipment and tooling to electronics toll manufacturers operating in bonded zones. This adjustment is expected to benefit firms like Apple, which depends heavily on contract manufacturing in India and has previously sought clarity from the government regarding the tax treatment of high-end iPhone production equipment supplied to its partners.

The budget also addressed vulnerabilities in critical minerals, as India navigates tightening global supplies of rare earth materials essential for electric vehicles, electronics, and defense systems. The finance minister stated that the federal government will assist mineral-rich states—including Odisha, Kerala, Andhra Pradesh, and Tamil Nadu—in establishing dedicated rare-earth corridors to promote mining, processing, research, and manufacturing. This initiative builds on a seven-year incentive program approved in late 2025 to boost domestic production of rare-earth magnets, amid growing constraints on access to supplies from China, which dominates global output.

Beyond AI infrastructure and electronics manufacturing, the Indian government took steps to stimulate cross-border e-commerce, aiming to help smaller businesses access global demand. The finance minister announced the removal of the existing ₹1 million (around $11,000) value cap per consignment on courier exports, a change expected to aid small manufacturers, artisans, and startups selling overseas via online platforms. The federal government will also streamline the handling of rejected and returned shipments using technology, addressing a long-standing bottleneck for exporters.

Collectively, these measures underscore India’s ambition to establish itself as a long-term hub for global technology infrastructure, encompassing cloud computing, electronics manufacturing, and critical minerals. The strategy seeks to capitalize on rising AI demand and shifting supply chains. Nevertheless, its success will depend on execution—from ensuring reliable power and water for data centers to providing sustained support for domestic innovation—as global companies and investors assess whether India can transform policy incentives into enduring leadership in the AI era.