As India’s startup ecosystem continues to expand, data governance has emerged as a bigger regulatory concern than artificial intelligence, according to a new report. The findings suggest that compliance requirements related to data protection and digital trust are placing increasing operational and financial pressure on startups.
The report, based on a survey of 550 participants, including 350 startups, 100 venture capital firms and 100 incubators, found that 44% of respondents identified data governance and digital trust regulations as their biggest regulatory challenge. In comparison, 23% pointed to AI regulations, while cybersecurity and platform rules accounted for 20% and 13%, respectively.
According to the report, 88% of startups said digital regulations have created operational constraints, with more than one-third describing the impact as major or severe. Around 75% reported higher compliance costs, and over half now spend more than 5% of their operating expenses on meeting regulatory requirements. Many have also invested in legal, cybersecurity and data governance specialists.
The growing compliance burden is also affecting innovation. About 72% of startups and investors said resources are being redirected from research and product development towards regulatory compliance. Nearly two-thirds reported delays in product launches and longer innovation cycles.
“The policy challenge is not less regulation, but better-designed regulation,” the report said, adding that regulations should remain principles-based, proportionate and developed through continuous consultation with industry stakeholders.
The survey also showed that 68% of startups and venture capital firms believe digital regulations have increased uncertainty around investment returns, making fundraising more difficult. If regulations become more restrictive, the share of startups expecting investment growth could decline from 43% to 20%.
Talent acquisition has also been affected. More than half of the startups reported rising costs of hiring compliance, cybersecurity and data governance professionals, while 63% said regulations had reduced their ability to hire international talent or outsource work overseas.
Despite these challenges, 42% of startups said digital regulations have improved customer trust, particularly through stronger cybersecurity standards. The report concluded that a balanced, well-designed regulatory framework could strengthen innovation, with enabling data governance policies potentially creating 700 additional startups, attracting ₹30,400 crore in annual venture capital funding and generating 80,000 startup jobs by 2035.
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