Digital regulations are emerging as a bigger concern for startups and venture capital, with many fearing that they may affect investment and innovation, according to a report. A more restrictive digital regulatory environment could lead to a 25 per cent reduction in venture capital (VC) investment, representing a loss of approximately Rs 91,500 crore each year, according to a report by Oxford Economics for Digital Prosperity Asia.
According to the report, Digital Regulations and Startup Ecosystem in India, a restrictive regulatory environment would affect startup formation, leading to a 20 per cent decline in startup formation between 2026 and 2035. This would also result in 245,000 fewer startup jobs in 2035.
The report found that 88 per cent of startups said digital regulations impose operational constraints, while 72 per cent of startups and venture capital (VC) firms said resources are being diverted away from research and innovation towards compliance-related activities.
Nearly seven in 10 startups (68 per cent) reported increased uncertainty around future returns as a result of digital regulations. Also, 58 per cent of startups reported increased spending on specialised expertise in compliance, cybersecurity and data governance.
The report draws on a survey of 550 ecosystem participants, including 350 startups, 100 venture capital firms and 100 incubators, along with expert interviews.
It added that cross-cutting regulations can create overlapping obligations across AI, data governance and cybersecurity, increasing compliance complexity and regulatory fragmentation.
Conversely, the report said an enabling regulatory approach could boost startup formation by 7 per cent, increase venture capital investment by 9 per cent, and support an additional 80,000 startup jobs in 2035.
“In an emerging market like India, maintaining proportionate, principles-based regulatory frameworks can support startup scaling, attract investment, accelerate technology diffusion, and strengthen the country’s innovation ecosystem,” said Bali Kaur Sodhi, lead economist at Oxford Economics.
The report noted that while India currently benefits from a broadly enabling digital regulatory environment, the challenge is not whether to regulate digital technologies, but how to design frameworks that build trust and manage risk while enabling innovation, investment, competitiveness and long-term economic growth.