Artificial intelligence may dominate the global regulatory conversation, but for Indian startups, the biggest compliance headache is data governance. A new report by Oxford Economics for Digital Prosperity Asia has found that concerns around data governance and digital trust regulations far outweigh worries about AI, underscoring how digital regulations are reshaping India’s startup ecosystem.
The study, based on a survey of 550 ecosystem participants, comprising 350 startups, 100 venture capital (VC) firms and 100 incubators, shows that 44% of respondents identified data governance and digital trust regulations as their primary regulatory concern. This was nearly double the share citing regulations (23%), followed by (20%) and platform rules (13%).
The findings suggest that while India has largely adopted a risk-based, innovation-friendly approach to regulating emerging technologies, compliance requirements related to data governance continue to impose significant operational and financial burdens on startups.
Nearly 88% of surveyed said digital regulations have created operational constraints, with more than one-third describing the impact as major or severe. Compliance costs have also risen sharply, with 75% of startups reporting higher spending on regulatory obligations. More than half now allocate over 5% of their operating expenses to compliance, and many have been forced to invest in specialised legal, cybersecurity and data governance expertise.
The report notes that regulatory costs are extending beyond compliance budgets to influence business strategy itself. Around 72% of startups and investors said resources are increasingly being diverted from research and product development towards meeting regulatory requirements. Nearly two-thirds reported delays in product launches and longer innovation cycles as compliance becomes an integral part of
“The policy challenge is not less regulation, but better-designed regulation,” the report said, arguing that regulations should remain principles-based, proportionate and developed through continuous consultation with industry stakeholders.
Investor sentiment is also reportedly being affected. About 68% of startups and venture capital firms said digital regulations have increased uncertainty around investment returns, making fundraising more difficult.
If regulations become more restrictive, the share of startups expecting investment growth would fall from 43% to just 20%, according to the survey. Venture capital firms similarly indicated they would become more cautious by strengthening due diligence, demanding greater compliance readiness and reducing exposure to higher-risk ventures.
The impact extends to talent as well. More than half of startups reported rising costs of hiring professionals with expertise in compliance, cybersecurity and data governance. Around 63% said regulations had reduced their ability to hire foreign talent or outsource work internationally, while many also faced challenges attracting skilled domestic professionals.
Despite these challenges, the report acknowledges that digital regulations have helped build trust in some areas. Around 42% of startups said regulations had increased customer confidence in their products and services, with cybersecurity-related regulations delivering the strongest gains in trust. However, the benefits remain uneven and are outweighed by the immediate compliance costs for many early-stage firms.
The report argues that India’s current regulatory framework remains broadly supportive compared with more restrictive jurisdictions, particularly through its principles-based approach to AI governance. However, it cautions against expanding fragmented or overlapping compliance requirements, especially in data governance, where sector-specific data localisation rules continue to increase regulatory complexity.
Oxford Economics estimates that if India’s digital regulatory environment becomes substantially more restrictive, the country could witness 2,130 fewer startup formations annually between 2026 and 2035, alongside a 25% decline in venture capital investment equivalent to ₹91,500 crore each year.
Conversely, adopting a more enabling regulatory approach, particularly through assurance-based data governance rather than extensive localisation requirements, could generate 700 additional startups annually, attract an additional ₹30,400 crore in VC funding each year, and support an additional 80,000 startup jobs by 2035.
The report concludes that the future of India’s startup ecosystem will depend not on the volume of regulation but on its design. Regulations that are coherent, proportionate and coordinated across government agencies, it says, can strengthen trust without sacrificing innovation, allowing startups to scale while remaining competitive in an increasingly digital economy.