Can India regulate AI without slowing innovation? New study raises concerns

As India races to establish itself as a global AI and startup hub, a new research report has warned that increasingly restrictive digital regulations could slow the creation of new ventures, discourage investors, and divert startup capital away from innovation towards compliance.

According to the study published by Oxford Economics, if India were to shift from its current relatively enabling regulatory framework towards a significantly more restrictive one over the next decade, startup formation could decline by 20%, equivalent to around 2,130 fewer startups annually. Venture capital investment could fall by 25%, or roughly ₹91,500 crore a year, while startup-supported employment could shrink by 245,000 jobs by 2035. The projections are based on scenario modelling rather than predictions.

The report comes at a crucial juncture, with India expanding governance frameworks around artificial intelligence, cybersecurity and data protection while simultaneously promoting initiatives such as Startup India and the IndiaAI Mission. It argues that the debate is no longer whether digital technologies should be regulated, but how those regulations are designed.

The study surveyed 550 ecosystem participants, including startups, venture capital firms and incubators, to understand how digital regulations are affecting business decisions. Nearly 88% of startups said compliance requirements create operational constraints, while 72% said spending is increasingly being diverted from research and product development towards compliance activities. Another 68% reported greater uncertainty over future investment returns.

The report identifies AI governance, cybersecurity and data regulation as increasingly overlapping policy areas. It cautions that multiple compliance obligations across different regulators could create duplication and increase costs, particularly for early-stage companies with limited financial and legal resources.

Investor behaviour is already changing. More than one-third of venture capital firms surveyed said regulatory considerations are now a primary driver of investment decisions, while four out of five said they would become even more cautious if regulations tighten, demanding greater compliance documentation and conducting more regulatory due diligence before backing startups.

Industry executives interviewed for the report said compliance is rapidly becoming part of investment readiness.

Ashish Wadhwani, co-founder and managing partner at IvyCap Ventures, said startups that fail to demonstrate adequate compliance may struggle to secure funding. "If the startup's business model does not have sufficiently robust measures for complying with digital regulations, then we may not invest," he said.

Similarly, Nishant Krishna, founder of cybersecurity startup Visiminds Technologies, said startups increasingly face a difficult trade-off between investing in product development and building compliance capabilities.

However, the report stops short of arguing for lighter regulation. Instead, it recommends risk-based AI regulation, better coordination across regulatory agencies and more consultative policymaking to reduce duplication while maintaining trust and security.

It also argues that India's relatively innovation-friendly approach to AI governance has been a competitive advantage. A modest move towards an even more enabling regulatory environment could increase startup formation by 7%, raise annual venture capital funding by 9% (around ₹30,400 crore) and support 80,000 additional startup jobs by 2035, according to the study's modelling.

The findings come as India strengthens its AI governance architecture through initiatives such as the AI Governance and Economic Group under MeitY, while simultaneously pushing to become one of the world's largest AI and deep-tech ecosystems. The report suggests that striking the right balance between innovation and regulation will determine whether India can sustain its startup growth trajectory over the next deca