Richa Roy and Arundhati Katju's column: How justified is it to exempt foreign data centers to get ahead in AI?

India is moving towards becoming an AI infrastructure hub. One of the ways this is to make it easier for foreign companies to set up data centers in India. Data centers are computer systems facilities that are used to store data and support everything from cloud storage to AI. In this year's budget, foreign companies have been given a 21-year tax exemption for setting up data centers in India. In addition to this tax exemption of the Centre, the state governments have also given various incentives to foreign data centers. But in the US, proposals for large investments in data centers of these companies have been withdrawn due to local opposition. The question then arises, is hosting foreign data centers the right strategy for India to enter the AI economy? First of all, let us see that there is no condition for technology transfer for foreign companies taking this tax exemption, nor are there any provisions for AI manufacturing and increasing technological capacity in India. Under the existing Indo-US trade framework, India has pledged to buy up to $500 billion worth of American goods and services, including technology. It will also lift import restrictions on U.S. information and communications technology equipment. In such a situation, it is very likely that companies running data centers in India will import equipment from the US instead of developing domestic capacity. It is also worth noting that Indian companies running data centers do not get the benefit of this tax exemption, as it is only for foreign companies. In such a situation, without technology transfer, data centers become mere warehouses, not engines of innovation. This tax exemption requires that the Ministry of Electronics and Information Technology come out with a scheme for data centers. This should include the provision of knowledge transfer and direct incentives for Indian companies. Without them, India will be limited to providing infrastructure, AI capabilities will not be able to develop. Secondly, data centers consume a lot of power and need a lot of water for cooling. There is a need for regulatory provisions for these in a country like India, where heatwaves and water crises are already affecting normal life. It is generally argued that India needs to build infrastructure and these environmental concerns are the luxury of the West. But this argument ignores the threat of water crisis in India. India is home to 18% of the world's population, but water resources are only 4%. India's existing 50 data centres are already in areas where there is a severe shortage of water. There are also geopolitical risks of keeping foreign data in India. In the US-Iran war, Iran attacked AWS data centers in the UAE and Bahrain. The list of targets released by Iran also included data centers of major US tech companies and was classified as 'enemy technology infrastructure'. The principle of data sovereignty also states that digital data is subject to the laws or jurisdiction of the same country where it is physically generated and stored. There is also a provision in the budget that a foreign company should operate through such 'specified data centers', which are Indian-owned. (These are the authors' own views)