With over 89% of server demand and 78% of storage revenue in western and southern India, Tier II and III cities are driving India’s next wave of cloud and AI infrastructure.
Western and southern India continued to dominate the country’s server and storage market in the third quarter (Q3) of 2025, even as Tier II and Tier III cities began to drive the next phase of digital and artificial intelligence (AI) infrastructure growth.
According to International Data Corporation’s (IDC) India data, the western and southern regions together accounted for more than 89% of India’s total server demand during the quarter.
These regions also generated 78% of national storage revenues, supported by sustained investments from hyperscale cloud players and domestic data centre operators.
However, despite this concentration, a clear shift in infrastructure deployment was observed beyond the largest metro cities. The rising adoption of cloud computing, AI, and edge workloads is pushing enterprises to expand into smaller cities, creating a more distributed digital infrastructure landscape across India.
Enterprise demand is increasingly coming from sectors such as manufacturing, banking and financial services, healthcare, e-commerce, media, education and government.
As applications become more data-intensive and latency-sensitive, companies are deploying regional and edge infrastructure closer to users to improve performance and reliability. Tier II and Tier III cities are benefiting from rising investments across these sectors.
IDC said the need for local data processing and hosting is growing as digital services scale.
Furthermore, policy support is also playing a role. Both central and state governments are encouraging data centre expansion outside Tier I cities through tax incentives, faster approvals, lower land costs and dedicated data centre zones.
The upcoming National Data Centre Policy is expected to further drive investment by improving incentives and expanding access to financing.
However, challenges remain. Smaller cities continue to face gaps in power availability and network connectivity. The local vendor ecosystem is still evolving, leading to longer procurement cycles and limited access to specialised skills. Talent shortages and lower technology awareness among local enterprises also slow adoption.
“Tier II and Tier III cities are emerging as the next growth frontier for enterprise infrastructure,” said Dileep Nadimpalli, senior research manager at IDC Asia Pacific. “Sustained growth will depend on customer education, workforce training and stronger security and compliance capabilities.”
