AI isn’t the biggest regulatory worry for Indian startups, data governance is: Survey

AI may dominate global regulatory discussions, but the biggest compliance headache for Indian startups is data management. A new report from Oxford Economics for Digital Prosperity Asia has found that concerns about data governance and digital trust regulations far outweigh concerns about AI, underlining how digital regulations are reshaping India’s startup ecosystem.

Based on a survey of 550 ecosystem participants comprising 350 startups, 100 venture capital (VC) firms, and 100 incubation companies, the study shows that 44% of respondents identified data governance and digital trust regulations as their primary regulatory concern. This was almost twice the share indicating AI regulations (23%); followed by cybersecurity (20%) and platform rules (13%).

The findings show that although India has largely adopted a risk-based, innovation-friendly approach to regulating emerging technologies, compliance requirements around data management continue to impose significant operational and financial burdens on startups.

Nearly 88% of surveyed start-ups said digital regulations create operational constraints; More than a third described the impact as major or severe. Compliance costs have also increased sharply; 75% of startups reported spending more on regulatory obligations. More than half now spend more than 5% of their business expenses on compliance, and many have had to invest in specialized legal, cybersecurity and data management expertise.

The report notes that regulatory costs go beyond compliance budgets and impact business strategy. Nearly 72% of startups and investors said resources are increasingly being diverted from research and product development to meeting regulatory requirements. Nearly two-thirds reported delays in product launches and longer innovation cycles as compliance became an integral part of business operations.

The report said, “The policy issue is not less regulation, but better designed regulation,” and argued that regulations should remain principle-based, proportionate, and be developed through constant consultation with industry stakeholders.

Investor sentiment is also reportedly affected. Nearly 68% of startups and venture capital firms said digital regulations increase uncertainty about investment returns and make it harder to raise funding.

If regulations become more restrictive, the share of startups expecting investment growth will drop from 43% to just 20%, according to the survey. Venture capital firms have similarly indicated they will be more cautious by strengthening due diligence, requiring greater compliance preparation, and reducing exposure to high-risk ventures.

This effect also extends to talent. More than half of startups reported rising costs to hire professionals with expertise in compliance, cybersecurity and data management. Nearly 63% said regulations had reduced their ability to hire foreign talent or outsource internationally, while many faced difficulties attracting skilled domestic professionals.

Despite these challenges, the report acknowledges that digital regulations are helping to build trust in some areas. Nearly 42% of startups said regulations increase customer confidence in their products and services, and regulations around cybersecurity deliver the strongest gains in trust. However, the benefits remain uneven and are outweighed by immediate compliance costs for many early-stage firms.

The report suggests that India’s existing regulatory framework remains broadly supportive compared to more restrictive jurisdictions, particularly through its principles-based approach to AI governance. But he warns against expanding fragmented or overlapping compliance requirements, especially in data governance, where industry-specific data localization rules continue to increase regulatory complexity.

Oxford Economics estimates that if India’s digital regulatory environment becomes significantly more restrictive, the country could see 2,130 fewer startups created annually between 2026 and 2035, along with a 25% decline in venture capital investments. ₹91,500 crore every year.

In contrast, adopting a more effective regulatory approach, particularly through assurance-based data management, rather than comprehensive localization requirements, could generate 700 additional startups per year and attract additional investment. ₹30,400 crore in VC funding will be provided every year, supporting an additional 80,000 startup jobs by 2035.

The report concludes that the future of India’s startup ecosystem will depend on the design of regulations, not the volume. Consistent, proportionate and coordinated regulation across government agencies can strengthen trust without compromising innovation and allow startups to scale while remaining competitive in an increasingly digital economy, he says.