Oxford Economics Warns India: Tougher Digital Rules Could Cost Startups $9.7 Billion a Year

India’s startup-friendly approach to digital regulation could become one of its biggest economic advantages-and one of its biggest risks if policymakers get it wrong.

A new study by Oxford Economics, prepared for Digital Prosperity Asia, warns that if India gradually moves towards a more restrictive digital regulatory regime, the country could see 20% fewer new startups and lose nearly US$9.7 billion (around ₹91,500 crore) in annual venture capital funding over the next decade. 

For a country that is betting heavily on artificial intelligence, deeptech, semiconductors and digital public infrastructure to drive its next phase of economic growth, the findings carry a clear message: the design of digital regulation may prove just as important as startup funding itself.

Importantly, the report is not arguing against regulation. Instead, it concludes that digital laws must be predictable, proportionate and innovation-friendly if India wants to remain one of the world’s fastest-growing startup destinations.

India’s Digital Policy Gets a Vote of Confidence

At a time when governments worldwide are tightening rules around artificial intelligence, cybersecurity, privacy and digital platforms, Oxford Economics says India has largely struck a workable balance.

The study places India in what it describes as the “enabling” category of digital regulatory environments, alongside countries that seek to protect users without placing unnecessary burdens on innovation.

According to the report, India follows a risk-tiered approach to digital governance. Most cross-border data flows remain permitted, while restrictions are applied selectively to sensitive sectors such as finance and telecommunications. India’s cybersecurity framework is comparatively robust, including mandatory six-hour cyber incident reporting in certain cases, while its approach to AI governance remains relatively light-touch and innovation-first.

These policies give India a digital regulatory restrictiveness score of 0.34, placing it within the report’s enabling category rather than among more restrictive regulatory regimes.

For founders, investors and technology companies, that distinction could become increasingly valuable.

What Happens If India Tightens Digital Rules?

Oxford Economics modelled a scenario in which India gradually shifts towards the average regulatory restrictiveness seen in countries with tighter digital laws.

The implications are significant.

Between 2026 and 2035, India could witness:

• 20% fewer startup formations
• Around 2,130 fewer new startups every year
• 25% lower venture capital investment 
• Nearly US$9.7 billion (approximately ₹91,500 crore) less VC funding annually.

These are not forecasts of what will happen, the researchers clarify, but estimates illustrating how more restrictive digital regulation could influence startup formation and investment if current relationships between regulation and ecosystem growth continue.

For an economy relying on entrepreneurship to create jobs, commercialise new technologies and attract global investment, the numbers are difficult to ignore.

Compliance Is Eating Into Startup Budgets

The study draws on surveys of 1,550 founders, investors and incubators across India, Malaysia and South Korea, offering one of the most comprehensive snapshots yet of how digital regulation is affecting Asian startups.

Its findings suggest compliance has quietly become one of the fastest-growing operating expenses for startups.

Nearly nine out of ten startups surveyed said digital regulations create operational constraints. Almost three-quartersreported rising compliance costs, while seven in ten said regulatory obligations already consume at least 5% of their operating expenses. Among them, four in ten spend more than 15% of their operating budgets simply on staying compliant.

These are no longer one-time expenses. Almost three-quarters of startups surveyed said they have already strengthened internal compliance processes, indicating that regulatory spending is becoming a permanent cost of doing business.

For an early-stage founder operating on limited capital, every additional compliance requirement competes directly with product development, hiring and customer acquisition.

Founders Are Hiring Compliance Experts Before Engineers

The report also points to an emerging shift in startup hiring priorities.

Nearly 64% of startups said they are spending more on specialists in compliance, cybersecurity and data governance. Venture capital investors surveyed observed that startups are increasingly recruiting compliance professionals ahead of technical talent, while incubators reported growing demand for regulatory mentoring alongside traditional business support.

The pressure is most acute for startups that have yet to generate meaningful revenue, where every additional salary affects the runway available for innovation.

Instead of investing exclusively in engineers, AI researchers or product teams, many young companies are being forced to build compliance capabilities much earlier in their lifecycle.

Compliance Is Beginning to Crowd Out Innovation

The consequences extend well beyond accounting departments.

Around two-thirds of startups, investors and incubators surveyed believe companies are diverting money away from research and development to meet compliance obligations. More than half of startups said regulatory requirements have delayed product launches or increased time-to-market.

For sectors such as artificial intelligence, fintech and software-as-a-service-where speed often determines competitive advantage-even small delays can translate into lost customers, slower scaling and missed investment opportunities.

Investors Are Watching Regulation as Closely as Revenue

The report also finds that digital regulation is reshaping investment decisions.

Nearly 67% of venture capital investors believe digital regulations increase uncertainty around investment returns, while 61% of startups say regulatory uncertainty has already made fundraising more difficult. Almost one in three investors indicated they would reduce exposure to higher-risk startups if digital regulations become more restrictive.

For investors, regulatory preparedness is becoming almost as important as technology, market size or founder capability.

India’s Startup Momentum Remains Strong

Despite these concerns, the report acknowledges that India continues to build one of Asia’s fastest-growing startup ecosystems.

It describes India as a “scale-expanding startup ecosystem” supported by strong investor confidence. Venture capital deal volume increased by around 11% year-on-year in 2025, while India accounted for roughly 8% of global VC deal activity. Government programmes-including Startup India, the Fund of Funds for Startups, the Startup India Seed Fund Scheme and the recently announced ₹1 lakh crore Deep Tech Fund-continue to strengthen the country’s innovation landscape.

That momentum, however, makes future policy choices even more consequential.

As India simultaneously pursues leadership in AI, semiconductors, digital public infrastructure and advanced manufacturing, the cost of additional regulatory complexity could become much higher than it is today.

The Case for Smarter Regulation 

Oxford Economics stops short of recommending lighter regulation.

Instead, it argues for better-designed regulation.

According to the study, effective digital regulation should be:

• Risk-based rather than one-size-fits-all
• Clear and predictable
• Proportionate to business size and sector
• Flexible enough to evolve alongside technology

The report also recommends greater use of regulatory sandboxes, continuous engagement with startups and investors, and adaptive policymaking for emerging technologies such as artificial intelligence and advanced data governance.

The Next Chapter of India’s Startup Story

India has spent the past decade building one of the world’s largest startup ecosystems through policy support, abundant engineering talent, digital public infrastructure and growing investor confidence.

Oxford Economics suggests another competitive advantage may now be emerging: regulatory balance.

As governments around the world race to tighten digital rules, India faces a delicate challenge—protecting citizens’ privacy and strengthening cybersecurity without making innovation prohibitively expensive for young companies.

The study’s message is simple. India’s startups do not fear regulation. They fear uncertainty, overlapping compliance requirements and rising costs that pull scarce capital away from building products and creating jobs.

India’s next decade of startup growth may therefore depend less on how many entrepreneurs launch companies—and more on whether the country’s regulatory environment allows those companies to scale, compete and innovate on the global stage.