The rise of data centers in India's tier 2 and 3 cities

First, we shape the cities—then they shape us! India's fast-paced data centre industry is rapidly evolving, transcending traditional digital metropolises, as smaller cities take centre stage in the sector's expansion, driving the digital future.

India's commitment to nurturing a robust digital infrastructure ecosystem has been underpinned by visionary policies, strategic investments, and the ingenuity of our technologists.

This confluence has positioned India as a preferred destination for global technology investments and a hub for digital transformation across industries.

Tier-2 and Tier-3 cities of India are increasingly becoming attractive to the data centre industry. 

Investing in the development of data centres in these Tier-2 and Tier-3 cities not only contributes to balanced regional development and supports government initiatives aimed at digitizing the Indian economy but also addresses the nation's growing digital needs by decentralizing the industry to better serve a distributed user base.

The emergence of new business use cases, underpinned by technologies such as 5G, IoT, Blockchain, Content Delivery Networks (CDNs), real-time video streaming and analytics, interactive online gaming, connected factories, smart cities, smart homes, autonomous vehicles, remote online healthcare, online shopping, and multi-party video conferencing, underscores the need for Edge datacenters and computing capabilities. Tier-2 and Tier-3 cities have a major role to play here. 

What really is driving the data centre growth in these smaller cities?   
The primary catalyst for the growth of data centres in these smaller cities is the local demand to interconnect within the same city.  This demand significantly reduces network dependency, thereby enhancing the overall performance and reliability of services. Additionally, the necessity for reliable power, robust internet connectivity, and transportation networks further incentivizes investments. 

In the era of hyper-connectivity, businesses and individuals are generating vast amounts of data. With the digitalization of various sectors, including health, retail, education, gaming, social media, and on-demand entertainment, the demand for data storage and processing capabilities has surged. This surge in data consumption necessitates the establishment of more efficient data centres to manage the load effectively. The explosion of data consumption in rural/semi-urban India requires more data storage and processing capabilities closer to the users to minimize latency and enhance real-time responsiveness. 

Furthermore, the local government's workloads are increasingly aligned with data sovereignty and security regulations, while also benefiting from the reduced operational costs and power consumption associated with data centers. 

The Over-the-Top (OTT) and Content Delivery Network (CDN) industries, in particular, are driving the demand for Edge data centres. This demand is fuelled by the need to deliver high-quality content and services to an expanding and diverse audience, especially as high-speed internet becomes ubiquitous. As a result, OTT, gaming, CDN, and Tier-2/3 Internet Service Providers (ISPs) are at the forefront of the Edge data centre market, as they rely on fast response times and minimal latency to improve application performance.

These cities are poised to meet the burgeoning demand for real-time data processing capabilities, essential for applications such as autonomous vehicles, smart cities, and Internet of Things (IoT) devices. The reduction in latency is poised to facilitate the expansion of technology-driven enterprises within these cities. At the same time, niche sectors, including gaming, augmented reality, and e-commerce, are expected to deepen their penetration into the national market, thereby becoming significant contributors to revenue generation.

The large enterprises that have a presence in these cities and prefer to host their data locally, if given a choice, to enhance their data governance and control are also key drivers of growth.  

Several states are offering incentives and supportive policies for the data centre industry, which is anticipated to lower operational expenses for businesses. The provision of special economic zone incentives by certain State governments is particularly encouraging for companies looking to establish datacenters in new locations. 

For example, in Hyderabad, when CtrlS started, the total capacity in the city was 1.5 MW and thanks to the supportive policies of the State government, there are massive campuses that sprung up with a combined capacity of almost 2 GW. CtrlS is now planning to establish a campus capable of accommodating a 600 MW project in a city, which had single percent market share five years ago. Similarly, Kolkata has seen data centre projects of over 100 MW in 2024, a marked increase from its previous capacity of around 3 MW, attributed to the progressive policies of the West Bengal government. 

At the central level, policies such as the National Data Centre Policy and initiatives under the Digital India program are designed to create an enabling environment for data centre development nationwide. The government has introduced incentives such as tax benefits, subsidies on land, and streamlined access to electricity to motivate companies to establish data centres in smaller cities. 

Several states are adopting proactive measures to foster a conducive business environment. For instance, the potential of Gujarat as a leading datacenter hub is significant, characterized by its favorable geographic location, ample power supply, skilled workforce, and supportive industrial policies. Gujarat is attracting investments from major data centre operators who are planning to develop large-scale data centre parks within the State. 

These drivers underscore the potential and value of data centres in India's tier 2 and tier 3 cities, highlighting their role in supporting the nation's digital transformation and economic development. As these cities evolve into data centre hubs, they will enable the decentralization of India's digital landscape and shape India's economic future.