Safeguards For Data Centres Necessary To Ensure Rapid Expansion Does Not Aggravate Water Scarcity

Chennai: India must introduce stronger safeguards to ensure that the rapid expansion of data centres does not exacerbate water scarcity, strain electricity infrastructure or increase dependence on coal, even as the government offers substantial incentives, including a 21-year tax holiday to attract investments.

Water consumption by data centres is projected to more than double from 150 billion litres in 2025 to 358 billion litres by 2030. Their share of India’s electricity consumption could also rise from around 1% currently to 5-6% by 2034, said Shalini Dawar, digital infrastructure leader and technology services partner at E.Y. Parthenon.

India’s data centre industry currently has around 1.7-2 gigawatts of operational capacity, which could expand to 8-10 gigawatts by 2032. While $10-30 billion has already been invested, another $150 billion could be required over the next five to six years to meet anticipated demand.

“The country is still an underserved market,” Dawar said, pointing to growing digital consumption, OTT platforms and demand from cloud and neocloud providers as key drivers of expansion.

However, the additional capacity will require substantial investment in electricity transmission infrastructure and substations. Although power generation is not expected to become a bottleneck in the next five to six years, grid-stressed clusters such as Mumbai, Chennai, Hyderabad and the National Capital Region could face tariff pressures.

Coal accounts for around 70% of India’s electricity generation, raising concerns that additional data centre demand could prolong dependence on fossil fuels. Most operators currently source around 20-40% of their power from renewables and aim to increase this to 80-90% by 2030.

Dawar said this target was achievable if battery storage and backup power infrastructure improved. Demand from global technology companies, which increasingly prioritise environmental, social and governance standards, could also encourage operators to increase renewable energy use. However, there is currently no strict government mandate requiring a specific renewable energy share.

Water conservation poses another major challenge. A 100-megawatt data centre using evaporative cooling can consume around 800,000 litres of water daily. Dawar called for greater adoption of alternative cooling technologies, including liquid cooling, alongside water treatment, recycling and recovery systems.

She said the government should introduce clear guidelines requiring operators to assess local water availability, particularly in water-stressed regions. Water-impact assessments should also inform decisions on project approvals and incentives.

India’s dependence on imported equipment, including chillers, transformers, chips and cooling systems, could put pressure on the trade deficit as capacity expands. Dawar said developing domestic manufacturing capabilities would help reduce imports and create new business opportunities.

Data centre projects typically take seven to eight years to recover their investment. Although demand currently exceeds supply, uncertainty over future AI adoption could create risks if companies build capacity without adequate customer commitments. Phased construction and financial discipline can help limit the possibility of excess capacity.

The government offers land subsidies, stamp-duty concessions, electricity-duty exemptions and a tax holiday extending to 2047. Dawar said incentives should ideally be linked to measurable milestones, such as capacity becoming operational, with benefits adjusted if projects are delayed or abandoned.

With substantial public incentives supporting a capital-intensive industry, India needs to balance investment attraction with safeguards for water, power and the environment.