India's data centre industry is pushing for comprehensive support in Budget 2026, seeking renewable energy incentives, funding assistance, and multi-year bankable government contracts as the sector experiences unprecedented growth driven by artificial intelligence demands. The budget, scheduled for presentation on February 1, is expected to prioritize AI and data centres as the government aims to attract substantial global investment.

Major Investment Commitments Drive Industry Growth

The past year has witnessed record-breaking investments from global technology giants, highlighting India's strategic importance in the AI ecosystem. Despite generating nearly 20% of the world's data, India currently hosts only about 3% of global data centre capacity, creating massive investment opportunities.

Industry Seeks Policy and Financial Support

Sunil Gupta, Co-Founder, CEO & MD of Yotta Data Services and chairman of ASSOCHAM National Data Centre Council, emphasized that AI compute demand has already exceeded initial projections despite the IndiaAI Mission establishing a strong policy foundation. "Expanding both the scale and scope of IndiaAI compute funding will be important to ensure timely access to infrastructure," he stated.

The industry is specifically requesting:

• Bankable, multi-year contracts and public sector workloads
• Accelerated depreciation benefits
• Access to sovereign green bonds
• Incentives linked to renewable energy usage

Infrastructure Costs and Energy Challenges

AI-driven demand has significantly altered data centre economics, with power and electrical infrastructure representing the largest capital expenditure block. According to Greyhound Research, these costs account for 35-45% of total investment, while cooling and thermal management consume 15-20%, potentially rising to 25% for AI-heavy builds.

Sanchit Vir Gogia, CEO and Chief Analyst at Greyhound Research, stressed the importance of targeted support: "Predictable multi-year power economics, streamlined open access, and rationalised levies matter more than generic incentives. Support for advanced cooling and efficiency upgrades matters more than broad slogans."

Double Taxation Concerns for Global Providers

The industry faces significant regulatory challenges regarding foreign cloud service providers. Nasscom highlighted concerns that current arrangements between local data centre operators and global CSPs may create Permanent Establishment issues, potentially leading to double taxation and compliance uncertainty.

"Any further attribution of income to foreign CSPs would result in double taxation and significant compliance uncertainty. This risk has a bearing on investments by several global cloud providers and data centre investors," Nasscom stated in its pre-budget submission.

Strategic Infrastructure Recognition Needed

Industry leaders view Budget 2026 as a crucial opportunity for government support of sovereign-grade data centre infrastructure. AS Rajgopal, MD and CEO of Nxtgen Cloud Technologies, emphasized that "The Budget can play a catalytic role by recognising data centres as strategic national infrastructure underpinning India's digital and AI-led growth."

Vishnu S, Head of Product and Marketing at E2E Networks, noted that growing cloud adoption, expansion of global capability centres, and 5G rollout will make robust data centre infrastructure increasingly critical for India's digital transformation.

Industry stakeholders and various chambers of commerce have called upon the government to place manufacturing-led growth and scaling up of Micro, Small, and Medium Enterprises (MSMEs) at the center of its economic strategy for Budget 2026-27. With domestic demand showing signs of revival, the focus has shifted toward comprehensive support measures that can enable MSMEs to expand capacity, integrate into global value chains, and generate employment at scale.

Industry Demands for MSME Support

The PHD Chamber of Commerce and Industry (PHDCCI) has emphasized the critical need to scale up MSMEs to facilitate their transition into global value chains. The chamber highlighted that high input costs, long maturation periods, and global competition continue to restrict domestic manufacturing capacity, necessitating renewed focus on capital support and tax rationalization.

Paresh Parekh, partner and National Leader for Tax at EY India, noted that enhanced MSME support, promotion of digital payments, and targeted fiscal relief through lower personal taxes could strengthen disposable incomes and consumer sentiment, directly stimulating retail demand.

Structural Tax Challenges

Inverted GST structures remain a significant concern for the manufacturing sector. These structures, where inputs and services are taxed at higher rates than finished goods, continue to result in substantial credit accumulation, particularly affecting sectors with heavy spending on advertising, services, and capital goods. The Federation of Indian Micro and Small & Medium Enterprises (FISME) has highlighted that tax issues continue to discourage entrepreneurship, formalization, and scaling up of MSMEs.

Government Support Measures

The government has recently implemented several initiatives to strengthen MSME exports and ease operational challenges. A ₹25,060-crore Export Promotion Mission was rolled out in December, designed to provide affordable trade finance, export credit support, and market diversification opportunities for MSME exporters facing steep tariffs of up to 50% from the US.

Under the mission's Niryat Protsahan component, the government launched an interest subvention scheme offering approximately 2.75% interest support on pre and post-shipment rupee export credit for MSME exporters, with additional incentives proposed for under-represented markets.

Authorities also withdrew multiple quality control orders (QCOs) covering key chemicals, petrochemicals, polymers, synthetic fibers, yarns, and other intermediate inputs used extensively in textiles, plastics, packaging, automotive components, and downstream manufacturing industries. This move aims to ease regulatory burdens on MSMEs and the broader manufacturing sector.

Persistent Challenges

Despite recent government initiatives, structural challenges continue to impact MSME growth. The Indian Small Business & Franchise Association (ISFA) has identified persistent issues including limited access to affordable credit, regulatory compliance hurdles, and high operating costs that hinder scalability and formalization.

FISME's budget submission emphasizes that while recent demand-boosting measures such as higher income-tax exemptions and GST simplification are expected to trigger a new growth cycle, the key challenge remains ensuring that increased demand is met by domestic production, particularly by MSMEs, to generate local employment and distribute economic gains more equitably.

Manufacturing-Focused Recommendations

PHDCCI has suggested comprehensive measures including rationalization of customs duties on critical raw materials, extension of concessional tax regimes for new manufacturing units, and stronger credit guarantee mechanisms and industrial infrastructure for MSMEs. The chamber emphasized that as manufacturing remains central to job creation, export growth, and supply chain resilience, Budget 2026-27 presents an opportunity to strengthen India's manufacturing capabilities by shifting from disjointed incentives toward a comprehensive framework that lowers risk, attracts private capital, and enables firms to scale efficiently.