As the global race to build AI infrastructure accelerates, India has offered foreign cloud providers zero taxes through 2047 on services sold outside the country if they run those workloads from Indian data centers — a bid to attract the next wave of AI computing investment, even as power shortages and water stress threaten expansion in the South Asian nation.

On Sunday, India’s finance minister Nirmala Sitharaman announced (PDF) the proposal in the country’s annual budget, offering a tax holiday — effectively zero taxes — on revenues from cloud services sold outside India if those services are run from data centers in the country. Sales to Indian customers would have to be routed through locally incorporated resellers and taxed domestically, she told parliament. The budget also proposes a 15% cost-plus safe harbour for Indian data-center operators providing services to related foreign entities.

The announcement comes as U.S. cloud giants including Amazon, Google, and Microsoft race to add data-center capacity worldwide to support the surge in artificial-intelligence workloads, with India emerging as an increasingly attractive location for new investment. The country offers a large pool of engineering talent and growing demand for cloud services, and has positioned itself as a key alternative to the U.S., Europe, and parts of Asia for expanding compute infrastructure.

In October, Google said it would invest $15 billion to build an AI hub and expand data-center infrastructure in India, its largest commitment in the country to date, following a $10 billion commitment in 2020. Microsoft followed in December with plans to invest $17.5 billion by 2029 to expand its AI and cloud footprint, funding new data centers, infrastructure, and training programs. Amazon has also stepped up its spending in December, saying it would invest an additional $35 billion in India by 2030, taking its total planned commitment to about $75 billion as it expands its retail and cloud operations.

India’s domestic data-center sector is also ramping up to meet global demand. In November, Digital Connexion, a joint venture backed by Reliance Industries, Brookfield Asset Management, and Digital Realty Trust, said it would invest $11 billion by 2030 to develop a 1-gigawatt, AI-focused data center campus in the southern state of Andhra Pradesh. The project, spanning about 400 acres in Visakhapatnam, is among the largest announced in India and underscores growing interest from both domestic and global investors in building AI-ready infrastructure in the country. Separately, Adani Group said in December it plans to invest up to $5 billion alongside Google in its AI data center project in the country.

However, scaling up data center capacity in India may prove difficult, as patchy power availability, high electricity costs, and water scarcity pose key constraints for energy-intensive AI workloads. Those challenges could slow construction and raise operating costs 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,” said Rohit Kumar, founding partner of New Delhi-based The Quantum Hub, a public policy and tech consulting firm. The push is likely to attract more private investment and strengthen India’s position as a regional data and compute hub, though execution challenges around power availability, land access, and state-level clearances remain, he added.

Sagar Vishnoi, co-founder and director of Noida-based think tank Future Shift Labs, said India’s data-center power capacity is projected to surpass 2 gigawatts by 2026, up from just over 1 gigawatt currently, and could expand more than fivefold to exceed 8 gigawatts by 2030, driven by capital investments of more than $30 billion. While the budget signals clear intent to accelerate digital infrastructure and cloud computing, Vishnoi said allowing foreign cloud firms to earn profits tax-free until 2047 reflects a “strategic bet on global Big Tech,” even as India could produce its own technology champions over the next two decades.

He added that routing services to Indian users through reseller entities could leave smaller domestic players competing for thin margins, rather than receiving comparable upstream incentives.

The federal budget also stepped up incentives to deepen India’s role in electronics and semiconductor manufacturing, as the country seeks to move beyond assembly and capture more value in global supply chains. The federal government would launch a second phase of the India Semiconductor Mission, the finance minister said, focused on producing equipment and materials, developing full-stack domestic chip intellectual property, and strengthening supply chains, while backing industry-led research and training centers to build a skilled workforce.

Additionally, the Indian government has raised the outlay for the Electronics Components Manufacturing Scheme to ₹400 billion (around $4.36 billion), from ₹229.19 billion (about $2.50 billion), after the program — launched in April 2025 — attracted investment commitments at more than double its original target, Sitharaman said.

This scheme offers incentives tied to incremental production and investment, reimbursing a portion of costs for companies that manufacture key components such as printed circuit boards, camera modules, connectors, and other parts used in smartphones, servers, and data-center hardware. By linking payouts to actual output rather than upfront subsidies, the program is designed to draw global suppliers deeper into India’s electronics supply chain and reduce reliance on imported components — a long-standing criticism of the country’s manufacturing push.

Alongside increasing the spending allocation for the electronics components scheme, the federal budget also proposed a five-year tax exemption starting in April for foreign companies supplying equipment and tooling to electronics toll manufacturers operating in bonded zones. The change is likely to benefit companies including Apple, which relies heavily on contract manufacturing in India and has previously been reported to have sought clarity from New Delhi on the tax treatment of high-end iPhone production equipment supplied to its partners.

The budget also sought to address vulnerabilities in critical minerals, as India grapples with tightening global supplies of rare earth materials used in electric vehicles, electronics devices, and defense systems. The finance minister said the federal government would support mineral-rich states including Odisha, Kerala, Andhra Pradesh, and Tamil Nadu in establishing dedicated rare-earth corridors to promote mining, processing, research, and manufacturing. The move builds on a seven-year incentive program approved in late 2025 to boost domestic production of rare-earth magnets, as access to supplies from China — which dominates global output — has become more constrained.

Beyond AI infrastructure and electronics manufacturing, the Indian government also moved to boost cross-border e-commerce, aiming to help smaller businesses tap global demand. The finance minister said the existing ₹1 million (around $11,000) value cap per consignment on courier exports would be removed, a move expected to benefit small manufacturers, artisans, and startups selling overseas through online platforms. The federal government would streamline the handling of rejected and returned shipments using technology, addressing a long-standing bottleneck for exporters, Sitharaman said.

Overall, the latest measures emphasize India’s ambition to position itself as a long-term hub for global technology infrastructure, spanning cloud computing, electronics manufacturing, and critical minerals. The strategy aims to capitalize on surging AI demand and shifting supply chains. Nonetheless, its success will hinge on execution — from reliable power and water for data centers to sustained support for domestic innovation — as global companies and investors weigh whether India can translate policy incentives into durable leadership in the AI era.