India loves its leapfrogs. From being a nation of patchy landlines to becoming the world’s second-largest mobile manufacturing market, from cash-based transactions to QR codes on every chai stall, the country has repeatedly shown that it can skip steps in development. The latest feather in the cap: India’s meteoric rise on the Global Innovation Index (GII), climbing from rank 81 in 2015 to 39 in 2024.
But while innovation has raced ahead and is driven by a booming startup ecosystem, a thriving digital economy, and surging exports of IT services, regulation has often struggled to keep pace. This mismatch creates both opportunities and risks. The question is: can Indian regulators keep innovation flourishing without letting chaos or exploitation take root?
The Innovation Surge
India’s innovation push is fueled by multiple engines:
- Startups: The country is now the world’s third-largest startup hub, with over 100 unicorns across fintech, edtech, and health tech.
- Digital Exports: Software exports reached $200 billion in 2023-24, driven by AI, SaaS, and cybersecurity services.
- Public Digital Infrastructure: Systems like Aadhaar, UPI, and ONDC show how state-backed digital rails can enable private-sector innovation at scale.
This success has made India the world’s case study for rapid digital transformation. But speed has consequences.
The Regulation Gap
Unlike innovation, regulation cannot move fast and break things. It requires caution, consultation, and clarity, traits often at odds with the pace of startups.
The challenge is threefold:
- Grey Zones: New business models often don’t fit neatly into old laws. Think crypto exchanges before RBI’s circulars, or ride-sharing apps before transport licensing caught up.
- Regulatory Lag: Drafting, passing, and enforcing laws takes years, by which time technology may have already evolved.
- Overcorrection Risk: Regulators sometimes react with blanket bans, which may protect consumers but stifle innovation.
This tension is visible across sectors, from fintech to AI to telecommunications.
Institutions Under Pressure
Four institutions stand at the frontlines of India’s regulatory balancing act:
- DPIIT (Department for Promotion of Industry and Internal Trade): Tasked with nurturing startups but also handling competition and compliance norms.
- MeitY (Ministry of Electronics and IT): Managing data protection, cybersecurity, and AI ethics.
- RBI (Reserve Bank of India): Overseeing fintech, digital payments, and now, the rise of digital lending.
- TRAI (Telecom Regulatory Authority of India): Managing the bandwidth crunch of India’s 850+ million internet users, while preparing for 5G, 6G, and satellite internet.
Each is under pressure to adapt faster, collaborate more, and not kill the golden goose of innovation.
UPI – When Innovation and Regulation Aligned
The most celebrated case of Indian regulation enabling innovation is Unified Payments Interface (UPI). When UPI launched in 2016, digital payments were still fragmented between wallets, cards, and net banking. Instead of stifling competition, the RBI and NPCI (under MeitY’s policy umbrella) built UPI as an open protocol. Startups like PhonePe, Paytm, and Google Pay could innovate on top of this government-backed infrastructure, offering users seamless QR payments.
The results speak for themselves:
- UPI now processes over 18 billion transactions monthly.
- India accounts for nearly 50% of the world’s real-time payments.
- Small merchants, from vegetable vendors to auto drivers, are digitally included.
This shows that regulation, when proactive and enabling, can actually accelerate innovation instead of holding it back.
When Regulation Fails to Keep Pace
But not all sectors have been lucky.
- Crypto: The RBI’s 2018 ban on banks serving crypto exchanges (later overturned by the Supreme Court) stifled early momentum and drove innovation offshore. India is still working on a comprehensive framework, even as millions of Indians hold digital assets.
- Digital Lending: Unregulated lending apps led to predatory practices, debt traps, and even suicides. It took until 2022 for the RBI to issue strict guidelines, balancing consumer protection with fintech innovation.
- Social media & AI: Content moderation, misinformation, and data scraping are growing challenges. MeitY’s proposed Digital India Act promises to address these, but its shape remains uncertain.
Each delay shows how gaps in regulation can have real costs, both human and economic.
Why India Can’t Afford to Lag
Innovation without oversight risks creating digital monopolies, consumer harm, and global credibility issues. But over-regulation risks driving away investment and stifling experimentation.
India sits at a critical inflection point:
- According to a new report by Bessemer Venture Partners, titled ‘Click, Shop, Repeat’ – by 2030, its digital economy could be worth $1 trillion.
- Yet, unresolved regulatory gaps (in AI, digital assets, and cybersecurity) could threaten both trust and scale.
Striking this balance is not just a policy choice, it’s an economic imperative.
The Way Forward
Experts suggest India’s regulators adopt three key approaches:
- Regulatory Sandboxes – Already used by RBI and SEBI, sandboxes allow startups to test innovations under light supervision before full-scale launch.
- Adaptive Regulation – Instead of static laws, frameworks that evolve with technology (e.g., AI ethics guidelines updated annually).
- Cross-Regulator Collaboration – Innovation often cuts across domains (e.g., fintech blends finance, telecom, IT). Regulators must coordinate instead of working in silos.
Conclusion
India’s rise in global innovation rankings is proof of its entrepreneurial firepower. But if innovation continues to outpace regulation, the risks, from financial scams to data exploitation- will only grow.
The UPI success story shows that when regulators build enabling infrastructure, innovation doesn’t just thrive, it transforms the economy. The challenge now is to replicate that model across other frontier sectors.
The real test for India is not whether it can innovate, but whether it can govern innovation wisely, ensuring growth that’s not just fast, but also fair.
