Experts see next wave of data centre expansion in smaller towns of India

Bengaluru: Their role in accessing submarine cable connectivity may have given Mumbai and Chennai a stronghold on data centres, but industry insiders are convinced that their scope for growth in tier-I cities are fast saturating and the new ground for expansion will be in the tier-II and III cities.

This will be driven as much by cost competitiveness of realty in these towns, as by the growing regional consumption of data, riding on 5G internet penetration, lower latency for Internet of things (IoT), cloud, and AI services.

“We expect the data centre market to saturate in tier-I cities in the next couple of years due to soaring land prices and rising operational costs, leading to a major shift in demand towards tier-II and tier-III cities. As a result, smaller towns are likely to drive the next wave of growth for the data centre industry,” pointed out Shrinivas Rao, FRICS, CEO, Vestian.

“There is no land availability in the industrial area in Bengaluru urban. Current interest by companies is for developing DCs beyond Bengaluru. The state government is recommending locations to them such as Mummigatti Phase 2 near Dharwad, Mysuru, Tumakuru,” a Karnataka government source pointed out.

Cost competitiveness comes from reduced rates in land, power, labour, and lower operational expenses, while operators still have proximity to end-users, experts explained. Supportive government initiatives also play a role.

Still, this cost comparison is difficult to quantify as builds and use differ.

Rao explained that while DCs require large land parcels, real estate typically accounts for only 20-25 per cent of the total setup cost. So, measurable savings are not always yielded though there are long-term cost advantages.

As mentioned earlier, beyond the cost competitiveness, is a growing market. “To meet this demand, there’s a growing need for edge data centers - localised facilities that bring computing and storage closer to end-users. A key function of these centres is regional data filtration and management,” stated Amit Sarin, Managing Director, Anant Raj Limited. Anant Raj is establishing data centres in Manesar, Panchkula, and Rai.

Having said this, one of the challenges of moving to smaller towns is also the volume of demand. Sarin emphasised that one major hurdle is demand, as high data demand typically aligns with areas of higher population density concentrated in tier-I cities.

Operators and experts listed obstacles such as limited availability of skilled professionals, subpar infrastructure, and last-mile fibre connectivity.

Vinish Bawa, Partner and Leader Telecom, PwC India, added, “Currently, data center players are finding it difficult to sell capacity due to lack of services or business viability. Tier-II and III data centres take considerably more time to sell as compared to tier-I cities even with significantly lower capacities.”

Bawa pointed to a larger phenomenon upcoming for the market, saying, “There is a potential delta between demand and supply across major markets and we foresee a consolidation activity to maintain business variability of multiple players in the market. Due to the similar nature of service offerings and standard out of the box services, it’s becoming a price war. Organisations that are able to differentiate the services from customer point of view are expected to survive and scale long term as India will be a hub for major regions going forward.”

As of the first quarter 2025, there is approximately 10.2 MW of IT operational capacity across tier-II and tier-III cities, mainly in GIFT City, Ahmedabad, Patna, and Bhubaneswar. The data centre stock is expected to reach over 150 MW of IT capacity by 2030 across major tier-II and tier-III cities, stated Srihari Srinivasan, Director and Lead Data Centre Services, Savills India.

Cities seeing high demand are Ahmedabad, Visakhapatnam, Lucknow, Patna, Jaipur, Bhubaneswar, Coimbatore, Kochi, Vizag, Madurai, Raipur and Hubli, as per analysts.