Tier 2 & Tier 3 cities set to see data centre capacities triple or quadruple in the next five years: Kalyan Muppaneni, CEO, Pi Datacenters

In a recent conversation with Express Computer, Kalyan Muppaneni, Founder, Chairman, and CEO of Pi Datacenters, shares his vision for establishing data centres in Tier 2 cities. He underscores the distinct advantages these regions offer, such as cost efficiency, improved access to renewable energy, and strong government support, all of which are propelling the expansion of digital infrastructure across India. Muppaneni also stresses the urgent need to address the gap between India’s data consumption and data centre capacity. He outlines Pi Datacenters’ commitment to promoting growth in edge computing as well and its contribution to the Make in India initiative, positioning the company as a key player in driving the future of digital infrastructure in the country.

How has your vision for developing Data Centers in Tier 2 cities evolved, and what additional advantages have you identified compared to Tier 1 cities?

When I embarked on establishing a data centre in late 2014, it was driven by the vision of India emerging as a leading digital nation. Around 2010–2012, there was much discussion about India’s shift from a service-based economy to a digital one. However, upon closer examination, I realised that the country’s digital infrastructure was not equipped to scale and meet future demands. Data centres are the core of any robust digital infrastructure, and while fibre networks were being laid across India, the development of data centres lagged behind.

Back then, ISPs such as Airtel, Reliance, and Tata provided data centre services, but it wasn’t their primary focus. I recognised a clear gap in the market and saw an opportunity to enter this space. However, establishing data centres in major cities like Mumbai and Chennai was not financially feasible due to the high infrastructure costs, power, land, and complex regulatory approvals. Additionally, the global funds now investing in data centres showed little interest in India then.

That’s when I realised the potential of Tier 2 cities as an ideal solution. With established fibre connectivity and strong support from local governments, the cost structure became much more favourable for building infrastructure in these areas. We collaborated with the Andhra Pradesh government, which provided quick approvals and attractive incentives. This significantly reduced the challenges we would have faced in a Tier 1 city, such as high capital costs and lengthy approval processes.

I have always believed that Tier 2 cities should grow parallel to Tier 1 cities. In the past year, there has been a noticeable shift in attention toward Tier 2 and 3 cities, which were largely overlooked a decade ago. Although it was initially challenging to convey the benefits of investing in a Tier 2 city, we successfully built a large, Tier 4 Uptime-certified data centre, demonstrating that these cities have the potential and capacity to become prime locations for hosting data centre clients.

We have become a clear example of success in a Tier 2 city, setting a trend that other major players are now following. Had India embraced this approach earlier, the digital economy in Tier 2 cities could have seen much greater growth. However, it’s never too late, and our forward-thinking mindset has been key to our achievements.

We are honoured to be recognised by MeitY as the only data centre in the country hosting an entire state’s data infrastructure. For the past eight years, Pi Datacenters has been the backbone of Andhra Pradesh’s state data centre, ensuring zero downtime while serving 50+ million citizens around the clock. This recognition underscores our commitment to unparalleled uptime and service quality, setting a new benchmark in third-party data centre operations.

India currently consumes 20% of the world’s data but only accounts for 3% of global data centre capacity. What are the key challenges and opportunities you see in bridging this significant gap? How are Pi Datacenters contributing to increasing data centre capacity in India, and what steps are needed from the industry and government to address this disparity effectively?

India’s data centre industry is trailing 10 to 15 years behind more developed markets like the US. The country’s data centre industry is comparatively smaller in size and capacity. Although state governments have begun taking initiatives to address this, significant progress is still needed. India has the potential to not only meet its domestic demand but also serve neighbouring markets across the Asia-Pacific, Europe, and the Middle East. If India had taken more proactive measures 10 to 15 years ago, we might not be dealing with this gap today. Although states like Maharashtra, Uttar Pradesh, Tamil Nadu, and Telangana have implemented data centre policies, significant progress is still being made in the country.

India’s data centre industry faces three key challenges that must be addressed. First, power availability remains a critical concern, with energy costs accounting for 60-70% of data centre operations. Although India generates substantial green energy, ensuring uninterrupted 24/7 access to green energy is essential to reduce these costs. Second, the government should prioritise developing 80% of future data centres in Tier 2 and Tier 3 cities. Incentives such as tax breaks, capital expenditure subsidy, open access, quick approvals, and promoting the use of “Made in India” equipment could drive this expansion. Lastly, global investors seek policy stability and consistency. Once implemented, policies must remain reliable to foster confidence and attract long-term investments.

If India overcomes these challenges, it has the potential to attract substantial investments and emerge as a significant player in the global data centre market. Just as initiatives in the semiconductor sector are driving growth, India must develop its infrastructure, including data centres, to support this momentum. Tier 2 and Tier 3 cities can play a pivotal role in this effort, contributing significantly to the nation’s economic future.

Given the growing demand for edge computing and real-time data processing, how is Pi Datacenters positioning itself to cater to the needs of edge data centres in Tier 2 cities?

Building data centres in Tier 2 cities is more affordable for specific workloads, especially as AI requires ten times more power than typical cloud applications. In Tier 2 cities, access to quality power avoids overloading the infrastructure, unlike in Tier 1 cities, where industries and households place significant strain on power lines, by establishing data centres in Tier 2 or Tier 3 cities like Vijayawada, Vizag, Lucknow, Jaipur, or Kochi, etc. The expenses can be cut by 20-25%, translating into millions in yearly savings for larger-scale projects. 

This strategy also generates quality employment opportunities in AI, cloud computing, AI/ML, and other technical fields, offering salaries that are 30% lower than those in Tier 1 cities. Fueled by the growing demand for 5G and AI, Edge data centres serve as extensions of major data centres. India’s extensive network of Tier 2 and Tier 3 cities supports this expansion, leveraging existing infrastructure.

Pi is dedicated to establishing primary data centres in key cities while also deploying demand-driven micro and edge data centres. By 2027, Pi aims to have major data centres in at least three other major cities and 10 Tier 2/3 cities.

With the growing demand for edge infrastructure, particularly driven by the expansion of 5G and IoT, how do you plan to support the Make in India initiative by expanding its edge infrastructure in Tier 2 and Tier 3 cities?

 Make in India is a broad initiative that encompasses various sectors. I believe the infrastructure, equipment, and servers essential for data centres should be produced in India.

India has recently made significant strides with the Production Linked Incentive (PLI) scheme, mainly to boost domestic manufacturing. For example, as the founder of Exatron Server Manufacturing in Karnataka, we actively contribute to this initiative by producing ‘Make in India’ servers.

Equipment required to operate data centres, including cooling systems and mechanical and electrical (M&E) equipment, can now be manufactured in India. Significant advancements have been made, particularly in areas like diesel generators (DGs) and uninterruptible power supplies (UPSs), within the M&E sector. However, the computing space, such as servers, is still in the early stages of development. Over the past few years, there has been promising progress, and within the next five years, a substantial portion of compute hardware, including network and storage systems, is expected to be produced by Indian manufacturers.

Foreign players and multinational corporations have already begun manufacturing in India. However, I anticipate that more Indian-origin companies will increasingly start producing within the country. The Make in India initiative, encompassing sectors related to data centres, will be further bolstered by these domestic companies, helping to operate data centres more efficiently.

Are there any plans or ongoing projects at Pi Datacenters to implement liquid cooling systems, and have you explored using the hot water from these systems for other industries, such as hospitals or district heating? How do you see these initiatives contributing to sustainability and operational efficiency?

Water cooling has become one of the leading methods for cooling data centres, and the technology has advanced significantly. Today, even when water is used, it’s typically done through closed-loop systems, ensuring the water is recycled and minimising wastage. In modern installations, water recycling is standard practice, unlike 10 to 15 years ago when water wastage was more common. Now, closed-loop systems ensure that nearly all water is reused, with only a minimal amount lost during operation. I believe this approach will be universally adopted in any water-cooled data centre installation.

Utilising hot water from data centres for hospitals or other applications poses significant challenges in India. In contrast to European countries, where cities are meticulously planned, and services are interconnected, India struggles with infrastructure limitations. For example, in Europe, any excess water or heat generated by a data centre is promptly captured and redirected to facilities like office spaces for heating. However, even in Tier 1 cities in India, we lack the infrastructure needed for such systems. Available space is scarce, and the costs associated with building the necessary infrastructure would likely outweigh the benefits, making it an impractical solution.

The only scenario in which this could be feasible in India is within a greenfield IT park, where data centres and office spaces are interconnected. However, this would only succeed if the government or a government body took the initiative to promote it. Without such support, there is little incentive for anyone to pursue this, as it would not be financially viable.

Looking ahead, what do you envision as the most significant transformation in the data centre industry over the next five years, particularly in Tier 2 cities and for edge computing?

I believe Tier 1 cities will continue to lead in installations based on current trends for the next couple of years. However, I anticipate that within the next two years, we will see significant growth in Tier 2 and Tier 3 cities. While Tier 1 cities will maintain growth over the next five years, their growth rate will likely slow down. In contrast, Tier 2 and Tier 3 cities could witness their capacities potentially tripling or even quadrupling.

Overall, I foresee substantial growth for India, with a compound annual growth rate likely exceeding 15%at the capacity level and possibly even more. AI is still in its nascent stages, and while there is already considerable demand, the next two years will be critical in determining whether AI usage increases by 4x or 10x. This will largely depend on adopting and utilising the models currently being developed. India is well-positioned, making significant investments in renewable energy. However, a significant challenge remains: renewable energy is not yet widely accessible 24/7 for data centres, a gap we must address.

Are there any specific partnerships or collaborations you’re pursuing with telecom operators or AI service providers to optimise edge data centre performance in these regions?

We consistently collaborate with ISPs in the regions where we operate to establish an ecosystem that includes a variety of service providers. This partnership with ISPs is a continuous and integral part of our strategy.

Regarding AI, there is significant activity, particularly in Tier 1 cities, with certain areas experiencing more concentrated efforts. While there is much discussion surrounding AI, one of my personal goals is to extend these AI capabilities to Tier 2 cities.

How are businesses responding to your Tier 2 city offerings? Do you see more demand from industry looking to host their edge computing workloads closer to these cities, particularly in sectors like healthcare, finance, or logistics?

The ramp-up has certainly been slow. Over the past decade, I’ve noticed that the pace of growth has been much slower in Tier 2 cities compared to Tier 1. However, we are now at a turning point where this shift resonates with everyone. We are currently in a pivotal moment, and I think the momentum will accelerate as people realise that specific applications do not need to be confined to Tier 1 cities.

Currently, numerous discussions are taking place with financial institutions, e-commerce companies, and OTT providers. Many players are interested in hosting their operations in Tier 2 cities. However, we need to enhance the attractiveness of these locations by facilitating large installations and creating an environment that supports such growth.

How long do you think it will take for India’s data centre capacity to match its data usage levels, given that it currently stands at only 3% of global capacity?

I believe achieving significant milestones in our energy transition will take approximately ten years, and this timeline seems reasonable, given the vastness of our country. India is a large and diverse nation, and scaling up our energy capacity is a complex process that requires careful planning and execution. For instance, when examining various projections within the industry, we can see expectations for reaching 2 gigawatts initially, followed by targets of 4 to 5 gigawatts. However, even with these incremental goals, it is evident that substantial time is needed to achieve them.

There are at least four or five comprehensive reports circulating within the industry that provide insights into this journey. If we analyse the findings of these reports closely, a consistent theme emerges: the timeline for reaching these ambitious energy targets aligns with the 10-year mark. Factors such as infrastructure development, technological advancements, regulatory frameworks, and the integration of renewable energy sources all contribute to this timeframe. As we move forward, it is crucial to remain patient and committed to our goals, understanding that progress will require sustained effort and investment over the coming decade.