India is rapidly expanding its data-centre infrastructure, with states competing to gain attention of global technology companies through incentives such as subsidised land, power, stamp-duty exemptions and other concessions. What will the country actually get in return? Speaking to Sidharth Bhatia, The Wire’s founding editor and host of The Wire Talks, Sharmila Chavaly, former civil servant and Adviser at the Climate Policy Initiative, India, argues that while India needs data centres for regulatory and economic reasons, states should demand greater commitments from companies in return for resources. Chavaly pointed to models in Malaysia, the US, the UK and Tamil Nadu that seek to balance investment with environmental safeguards and benefits for local communities. “The question is not whether to build data centres, but on what terms,” she said. “We don’t have to accept any terms to attract investment but we can and should demand accountability.” Read the full transcript of the conversation below. It has been edited lightly for clarity.§Sidharth Bhatia: Hello and welcome to The Wire Talks. I am Sidharth Bhatia. A massive data centre being built by Google and the Adani Group in Visakhapatnam is facing legal challenges from environmentalists and local communities over its impact on the water supply of the area. The $16-billion project, fully backed by the government, is drawing huge amounts of water from local reservoirs in a region where water is already a scarce resource. Yet, at the same time, many Indian states are competing with each other to offer incentives – such as power and land subsidies, stamp duty exemptions and much more – to international companies to set up data centres in the country. Activists have been pointing out that these centres could cause ecological damage, create water shortage, and most of all, hardly create many jobs. So the question arises: What do Indians actually get out of it, and is it worth offering away the shop?My guest today, Sharmila Chavaly, has written about this issue. Chavaly was a civil servant for over three and a half decades, working in the Ministries of Railways and Finance and as Joint Secretary, Infrastructure, in the Department of Economic Affairs. After a tenure as Adviser at the National Institute of Smart Government, Sharmila Chavaly is currently Adviser at the Climate Policy Initiative, India chapter.Sharmila Chavaly, welcome to The Wire Talks.Sharmila Chavaly: Thank you for having me.Sidharth Bhatia: At the outset, please explain to us what exactly a data centre is and what it entails.Sharmila Chavaly: In very simple terms, a data centre is a digital warehouse. A warehouse of digital data, that’s it, nothing more than that. It is a huge warehouse which receives data that is transferred digitally to it, houses that data and makes it available for use. Today it is treated as an infrastructure asset. Initially there was a debate about whether it should be part of the real estate asset class, but now it is clearly categorised as infrastructure. It has grown because data is growing. Every day you can see how data is multiplying. So basically, think of it as a very high-tech warehouse which needs a tremendous amount of electricity and, with current technology, a tremendous amount of water to cool it because it generates a lot of heat. That’s basically what a data centre is.Sidharth Bhatia: All these points will get developed. But why are Indian states or why is the Indian government, and therefore Indian states, so keen to have data centres? Because as you pointed out, it sucks up a lot of resources: electricity as well as water, and I presume, which in most places are quite scarce. Why are we rushing to invite them?Sharmila Chavaly: There are three reasons why we need data centres in India.One is the regulatory requirement. The RBI, SEBI, all of them have mandated that data generated here, relating to their systems, must be stored in India. For instance, RBI in 2018 said all payment system data has to be stored only in India. For cross-border transactions, the foreign component can be stored abroad, but it must be deleted from foreign systems and repatriated to India within a day. SEBI also says that regulated entities must store and process all their data in India. IRDAI has the same requirement for insurance policies. All this means that, in regulatory terms, India needs data centres and we cannot afford to have our data stored in centres outside the country.The second reason is investment. When a data centre comes in, there is investment in building it. This is one of the things I have written about; we do not see that kind of spin-off in employment, except during the construction phase. But yes, we do get foreign investment. The reason our states are competing with each other is because it grabs eyeballs. When you say Google is setting up a massive hyper-scale data centre in Vizag, it grabs the headlines. But doesn’t look at the whole story; only at the initial part. Tamil Nadu is one state that has moved slightly away from this kind of model, where everyone is just fighting for the investment and it ends at that. We can come to that perhaps a little later.Sidharth Bhatia: I understand. $16 billion is quite a figure. You get bragging rights to say, “$16 billion investment”, whatever the inside story is. But of that $16 billion, how much of it actually trickles down to the state and therefore to the people?Sharmila Chavaly: This is the whole point I am making. No one is looking at that angle. All we are looking at is: how can I incentivise a data centre to be set up in my state, and what do I do for that? We are not looking at what commitments we can extract in return. Because when we give a tax holiday for 20 or 30 years, when we give them grid connection priority, etc., we need to also look at certain commitments from them. As I have written in my article, in some countries they are looking at a payment equal to the tax forgone. In some places they are saying: this is the amount you have to pay towards community services – social services, education, etc. In India, we are not looking at that. Perhaps it is still early in the conversation for us to set a specific figure. But unless we talk about it, we don’t know what we need to bargain for and there is no dearth of hyper-scalers looking to come to India. We are possibly one of the largest generators and users of data in the world. They do want to be here.Sidharth Bhatia: If there is a mandate that data has to be kept in the country, let’s say, my shopping preferences, what I check out in terms of real estate, what I browse in general. All of that is being captured by various platforms and kept in India. What use will that data be put to?Sharmila Chavaly: It depends. If you are a private data centre owner, the data you are storing could be used for advertising revenue, for instance.Sidharth Bhatia: One second, I understand that. But if it’s my data, will it be circulated only within the country because of the mandate or will it also be made available to parties outside?Sharmila Chavaly: I get your point. No, the data mandated to be stored here is for use within the country. For instance, payment data, where the RBI says all payment system data has to be stored in India, that is for use by the regulator. It is not for sale to someone else outside.Similarly, insurance policies and claims must be held in data centres located here. That is for the use of the insurance agencies. It is not like that, and I am giving a slightly extreme example: Google picking up passenger data from Indian Railways and using it to map passenger preferences for food and so on and then tailoring search algorithms accordingly. That is not what we are talking about. The government data that is mandated to be held here is to be used by the regulators.Sidharth Bhatia: So can I be absolutely sure that none of this data will find its way elsewhere?Sharmila Chavaly: I am not a cybersecurity expert, and we have all seen leakages reported in the press. I would hope so because your data and my data is all there on the web and it is very personal. But there are real risks.Sidharth Bhatia: Because if I am scrolling on Facebook, so does Facebook have a clear mandate to store all of it here, or will it send it to Facebook headquarters where it can be used for all kinds of things?Sharmila Chavaly: There is a slight but important difference here, and this is the angle of what I would call sovereignty as a service. About six or seven years ago, the US passed its CLOUD Act. The CLOUD Act requires American entities, wherever they are operating in the world, to hand over data to the US government, even without a subpoena, if it is asked for. That is a real threat for people like us who are sitting in India. Because if your data is stored on Facebook or Meta, all American-owned companies and the US government requires it, I assume they will have to hand it over.You will remember that famous Senate hearing, the one where a senator said “I am from Singapore”, the TikTok hearing. This was precisely the question they asked the TikTok CEO: what happens to the data, does it go back to China? The US CLOUD Act raises the same issue in reverse for us. Sidharth Bhatia: And that can lead to, apart from the commercial value, like if I am asked about my Facebook account and if I tell them that I don’t have any account. They can easily check that.Sharmila Chavaly: I am also told that they can access erased WhatsApp conversations. I don’t know the details, but yes, perhaps.Sidharth Bhatia: Coming back to the data centres. You have explained why states are offering these incentives. But your entire point in the article I read was that states are not getting enough out of this arrangement. You need to give data centres all kinds of facilities but what are you getting in return? Please explain why this is a serious issue.Sharmila Chavaly: There are three or four things we have to look at.One is natural resources. The moment you are trying to attract investment into your state and you are doing so by incentivising their arrival, offering sops, subsidies and advantages because state A wants to win over the investment from state B – you are immediately putting pressure on natural resources like water. It is also about land, because this is going to be a long-term lease or even an outright sale. And three, it is going to put tremendous pressure on the electricity grid, because data centres use a huge amount of power. Just today I was reading that China is pushing very hard on R&D into fusion technology, solely because the electricity demand from data centres is so enormous that they know they will eventually have to go nuclear.The second issue is: when you attract normal FDI, you are looking for employment, ancillary industries, spin-off benefits for the hinterland, a factory, a manufacturing unit. When I set up a data centre on acres and acres of land, what am I getting out of it for my state? I am giving them electricity and water. In current technology, water is the only effective cooling mechanism. Maybe there will be a breakthrough in the future, but right now it is water and electricity.The employment a data centre provides is likely not local. Even construction workers, if you need specialised ones, will come from outside. Even if you get a thousand of them, they leave once the job is done. There are no lasting, immediate benefits coming in for the local community, the areas where you are putting up these data centres. I think two days ago there was criticism about something coming up in Thane, Bombay. That is already a congested area. So you can understand the kind of pressures.Why is the state not extracting some kind of commitment from the very lucrative revenue model that a data centre operates on? Why can’t we ask for those commitments? That is the basic question I am raising. The government does not argue or fight for advantages it can get; it looks for incentives it can give. This is not a policy critique per se; it is just how we normally function when we seek investment. I think for data centres, we need to go slightly beyond that.Sidharth Bhatia: What is the nature of the agitation taking place in Visakhapatnam? I know that the protesters are also raising points and asking for environmental guarantees. What exactly is the nature of the agitation?Sharmila Chavaly: The Visakhapatnam data centre is coming up immediately abutting a wildlife and natural reserve. The fears there are that the environmental checks required before permission was granted were not followed. The court’s ruling was that the government’s argument is very specious – the government said that it had gone by environmental standards and that this was satisfactory. The high court pointed out that the environmental standards that were drawn up are essentially for manufacturing units: when you build a unit, what happens. This is a loophole they hope the government will address. Data centres are not covered under these standards. Facilities like data centres are simply not covered.So the court has said the government has to address that gap, and construction has been stopped. I am waiting for the latest developments and to see what the Andhra Pradesh government does next. The point the high court has caught is a very valid one. The environmental standards have not factored in something like a data centre, which is going to guzzle water and electricity, generate enormous heat, and sit right next to a protected area. What are the standards required for it to qualify as something that does not harm the ecology and the environment? That is the whole issue.Sidharth Bhatia: What kind of harm could there possibly be?Sharmila Chavaly: Water is the first concern. Vizag is a severely water-stressed region. We still do not know what precautions they are taking, because nothing substantive has been put out in the public domain, explaining how water usage is going to be limited. We have heard some statements, but I have not seen anything concrete. This is not just about a commitment being made; you need this kind of data to be published, monitored and confirmed. Otherwise, 20 to 30 years down the line, no one is going to know what’s happening. It is very easy to make big statements and then not have them monitored.Sidharth Bhatia: You have suggested some models from around the world that India could adopt. Tell us about, say, the Johor model.Sharmila Chavaly: Malaysia has taken a step that is, I would say, more refined than what we have done. Malaysia was also competing for data centres, but the beauty of what they have done is they created something called a Green Pathway. In the Green Pathway, the first incentive they offered was speed: normally, getting a grid connection in Malaysia takes about three years. Under the Green Pathway, the commitment is to do it in under 12 months. They have already processed 33 such centres in under 12 months, which is an immediate and powerful incentive for any investor.But with that Green Pathway, Malaysia also stepped back and imposed conditions. There are four broad tiers, Tier 1, Tier 2, Tier 3, and Tier 4, of data centres. The lower tiers – Tier 1 and Tier 2 – use such enormous quantities of water that comparisons have been drawn to filling 20 Olympic-sized swimming pools every day. Malaysia has said: we do not want those kinds of data centres. We are going up the ladder.There is something called a redundancy factor in a data centre and it’s called 2N. Because most data centres cannot afford even a nanosecond of power loss, they build redundancy lines: if one fails, you skip to line 1 or skip to line 2. Most data centres require this 2N redundancy. The higher-tier, more sophisticated data centres do not require it, and AI is also helping reduce that requirement. Malaysia is going in for these higher-tier centres.Malaysia is also insisting on a closed-loop water system. In two states, sewage water is recycled and reused, so they are not impinging on the general water supply. Most of this is happening in the state of Johor. I think 80% of Malaysia’s data centres are there. Johor is also the state that supplies water to Singapore, so it already faces pressure on its water supply. This makes it a very smart move and these commitments are coming from the investors themselves.In the US, I have written about what Illinois does. In the UK, they are having people bid for grid connections, and the option money earned is ploughed back into the community. The last statement from the US president was that he wants to set up data centres on federal land. Now I don’t know how that’s going to work out because federal land is in the state and though a lot of states are opposing this for the same water and electricity reasons. In India, central government land is owned by defence, railways, postal departments, and even that is contentious. So I don’t see how India can adopt the federal land model which is perhaps a good thing.Sidharth Bhatia: The broader point is that there are models available which harm the community at minimum, the states earn something out of it, and the class of data centres that come in has better environmental and resource systems. Are we doing that? Are the data centres coming here adopting those systems?Sharmila Chavaly: We don’t seem to have even asked them except for one state: Tamil Nadu. Tamil Nadu’s original data centre policy, which is about five or six years old, had the standard incentives: 100% electricity tax waiver for five years, concessional stamp duties, open access charges and so on. But what they have done recently is quite interesting. One of their ministers said, “We are opting out of the rat race to the bottom.” They have made a strategic case: Tamil Nadu has an industrial spine stretching between Coimbatore, Madurai, Tiruchirappalli and Tirunelveli. There is land, there is labour, there is power, and it has one of the best wind belts in India which is capable of delivering about 80% renewable power for the AI-dense server racks used in data centres.The argument is that since Chennai already has 21% of India’s data centre capacity, the real opportunity for Tamil Nadu is in distributed southern capacity, not another Mumbai-style hyperscale concentrated campus. They are looking at smaller, connected data centres distributed across the state. This is not an immediate solution, because in some areas you need scale, you need larger data centres. There are different categories, including in financial transactions where co-location is very important. We have seen that in our stock exchanges: if you co-locate, that millisecond difference translates into significant money.Tamil Nadu is not rejecting data centres. Its pitch is: Tamil Nadu is the place to be if you need strong, clean energy infrastructure, and it is competing on execution speed and renewable reliability, not on who can give away the most. It is an interesting model, but I don’t think it will be the complete solution either. Eventually you are going to need some kind of hybrid between massive hyperscale data centres and the Tamil Nadu distributed model.Sidharth Bhatia: How many have come to Tamil Nadu?Sharmila Chavaly: I don’t have the numbers for that. It’s a recent statement, the CIA wrote about it about a month or two ago. We need to see what the results are. But it’s also a conscious acknowledgement by a state saying that we don’t want to get involved in this race to the bottom and bring in a strategic approach to this issue, which is what Malaysia is doing.Sidharth Bhatia: How many data centres will India get eventually? What do reports say?Sharmila Chavaly: Can’t say, we are in the midst of competing at the moment. What I read in the papers is that the large players all want to be in India. Even if they have a data centre elsewhere, they will eventually have one here because of the size of the market, the size of the population, the amount of data we generate. Even with something like a food delivery app, Indians have, since COVID, become quite dependent and become addicted to this. That is a lot of data, and a lot of money, which is sitting outside the country and which needs to be gathered for ploughing back in India.Sidharth Bhatia: So going back to your starting point that the basic question is: do we need data centres?Sharmila Chavaly: We definitely need data centres for our government-mandated data. Beyond that, we would also need them for speed. If a US company is operating in India, its algorithms need low latency too. Right now, data transfer speed depends on the optical fibre, so if there is distance lag, there is latency. So companies would need to be based here to outcompete rivals in the same field. India will not lose out by demanding some kind of payback from them, because they will anyway want to be here. The fear that we will lose out to Malaysia or Vietnam if we ask for commitments. I don’t think that fear is well-founded.Sidharth Bhatia: So basically what you are saying, Sharmila, is that we don’t have to be frantic about it. We can take our time and also demand certain concessions, because they will still come here regardless. Is that correct?Sharmila Chavaly: Yes, that is my reading of it. Yes, you would like the investment to come in. But the whole point is that the manufacturing upside is very thin, very lean. The large, expensive equipment, GPUs, servers, will immediately not be manufactured in India. They will be imported. The ecosystem jobs argument is weaker than what we have seen with traditional manufacturing FDI. Whatever money comes in, there will also be a certain amount flowing back out. So we don’t need to be frantic and say we are losing out on something. We are not losing out, it will come to us in the larger context. But let’s do it on our own terms. That’s my whole point.Sidharth Bhatia: One last thing, will there not be some income for Indian organisations during the construction phase itself?Sharmila Chavaly: Oh yes, absolutely. Construction in any case leads to a lot of jobs. When construction is ongoing, a lot of people will be employed. The Google centre, for instance, is talking about 1,000 to 2,000 people. But a lot of it will be specialised, this is not like old warehouses that are essentially sheds. There will also be some locally manufactured items that are sourced but they will be more of the lower ends like power equipment, cabling, racks, cooling systems. Not all of it will be imported. There will be some manufacturing upside, some jobs, some specialised technician roles. Those are the pluses we get. But outside that particular data centre, how much we benefit from it in the broader sense is a moot point.Sidharth Bhatia: So going back to your article in basis points size, how would you sum this up? We need them, but we don’t have to be chasing them so desperately, is that what you are saying?Sharmila Chavaly: There is no harm in chasing them to attract them here. But the whole point is that we are competing on the wrong axis. That’s my point. Offering ever larger subsidies, whether it is power tariff waivers, stamp duty exemptions, land discounts, even the right to bypass the grid entirely, which has happened in Andhra Pradesh, without demanding anything meaningful in return. The data centres get their incentives. The state and the community do get temporary construction jobs and a resource bill. The question is not very rhetorical. We are just saying we need slightly more than this. Let’s ask for it. That’s the whole point.Sidharth Bhatia: Perhaps when this realisation sinks in, we will ask for it. Because often when it comes to normal bread-and-butter investments of a factory or an office, we do ask a lot of questions. Here it seems to be the welcome mat without any kind of caveat.Sharmila Chavaly: Just one point here. One of the things the government has said on this is: India generates 20% of the world’s data but has only 4% of the global data centres. I don’t know the basis for those figures, so I won’t comment further on them. But my whole point is: we do not have to have 20% of the data centres just because we generate 20% of the data. But there’s an opportunity. The question is not whether to build data centres, but on what terms. We don’t have to accept any terms to attract investment but we can and should demand accountability. Other countries have shown this is possible. Tamil Nadu as a state has shown that you can step back from the rat race and still remain a viable destination for the right kind of investment. That’s the angle we should look at.Sidharth Bhatia: Yes. Thank you. Thank you also for explaining this in a way that many lay persons will understand. I think this issue is going to be in the conversation much more going forward because people will start to realise that this is not as attractive a proposition as we thought it would be. Anyway, thank you, Sharmila Chavaly, for engaging on this somewhat technical conversation in a very non-technical way. Let’s see how it turns out.Sharmila Chavaly: Thank you.Sidharth Bhatia: That was Sharmila Chavaly, former civil servant and expert on infrastructure issues. We will be back again next week with another episode of The Wire Talks with another guest. Till then, from me, Sidharth Bhatia, and the rest of the team, goodbye.