How India Became the Third-largest Startup Economy in the World

In the last decade, India’s startup ecosystem has grown from 452 startups in 2016 (1) to over 84,012 recognised startups in 2022 (2). These startups offer solutions and services in 56 diverse industrial sectors, including IT, finance, supply chain, life sciences and healthcare, education, agriculture, and professional and commercial services. Since 2014, these startups have raised over USD 130 billion (3) in investor funding. 

India’s rise to the third-largest startup ecosystem in the world can be attributed to various factors, such as the digital infrastructure, which includes more than 800 million Internet users (4), 5G, and extensive rural broadband connectivity. The digital landscape also provides e-commerce and fintech platforms like Amazon, Myntra, Nykaa, Razorpay, Paytm, and Dunzo, transforming its socio-economic status. India’s tech-savvy population and affordable smartphones and data plans have further fuelled the growth of startups in the country. 

Boosting the startup ecosystem through government initiatives

The Government of India (GoI) has supported the startup ecosystem through various initiatives, schemes, and policies. The government’s flagship – Startup India initiative, which was launched on 16th January 2016, comprises 19 action items that include the funds of funds scheme (FFS), regulatory reforms, incubation centres, international market access, the startup India online hub, the seed fund scheme and national startup awards (NSA). Under this, it has also eased several processes like registration of businesses, procurement of licenses, self-certifications under labour and environment laws, and support for intellectual property protection. 

The GoI has also been boosting the spirit of entrepreneurship and innovation among the youth through initiatives such as India Digital India, Skill India, Stand-up India, Make in India, and Mudra Yojana.

Harnessing a large pool of talent

India has a demographic dividend, implying that there’s an educated workforce with skills relevant to today’s technologically advanced and digital economy. The 40,000 (5) colleges and universities that offer courses in engineering and information technology produce 1.5 million graduates annually, knowing disciplines such as artificial intelligence (AI), machine learning (ML), data science, the Internet of things (IoT), STEM, and more. Out of these, more than 7.68 lakhs skilled individuals are part of Indian startups, who, in the next few years, will have the ability to contribute 4-5 percent to India’s GDP (6), especially as the job creation growth rate stands at 24 percent annually between 2022-27. 

Also, Indian youth are interested in technological innovation, research, and disruptive solutions, which contribute to a gig economy. The gig economy is estimated to increase to 23.5 million freelancers and young contractual workers by 2030 (7), as per a Niti Aayog report. 

Attracting investor interest

In recent years, Indian startups have attracted increasing interest and investments from domestic and foreign sources. The startups have raised USD 13.2 billion in 2019, USD 10.9 billion in 2020, USD 35.2 billion in 2021, and USD 24 billion in 2022 (8) in a series of funding rounds and through initial public offerings (IPOs). Venture capitalists like Sequoia Capital, Tiger Global Management, Blume Ventures, Accel, and more have also funded 108 unicorns with a total valuation of USD 332.7 billion (9) in sectors like e-commerce, fintech, and data management and analytics, supply chain & logistics, gaming, and edtech. 

Enabling the emergence of startups in tier 2 and tier 3 cities

The wide-ranging local problems, entrepreneurial talent, lowered business costs, improved infrastructure, and a rise in private consumption have led to 50 percent of the total Indian startups being set up in tier 2 and tier 3 cities (10) to find solutions and grow in untapped local markets. These startups are applying technologies like AI, ML, and data science. They have been a driving force for socioeconomic development in these regions. Tier 2 cities like Jaipur, Ahmedabad, Indore, and Surat have recorded an economic growth rate of 40 percent (11) and are slowly becoming startup hubs. 

Growing startup incubators

The number of startup accelerators and incubators has grown fifteen times between 2000 and 2020 to 326 incubators (12). The incubators are strategically spread out across the country, with most of them in Southern India. Notably, 60 percent of the incubators are in non-metro cities, particularly in tier 2 and tier 3 cities, and have been helping them secure investments, develop viable products, connect with industry professionals, and offer the necessary support. 

These factors, combined with the evolving culture of remote and hybrid working, tax incentives and exemptions, technological advancements, and the large and growing Indian economy, have offered startups a vast potential to incubate and grow, enabling India to become the third largest startup ecosystem in the world.