India’s startup growth stifled by RBI’s ‘oppressive’ regulations, says Mohandas Pai

Pai criticised the Reserve Bank of India (RBI) for its stringent regulations, which he believes deter foreign capital and hinder growth. “Today we have a very oppressive regime in RBI. RBI goes after foreign capital, asks for unnecessary documentation, and is a big barrier for things coming in,” he said in an interview with CNBC-TV18.

Despite having the third-largest startup ecosystem in the world, India’s startups struggle to achieve scale. While over 1,67,000 startups are registered, only 22,000 have received funding, and most remain small due to a lack of capital. “We have all this, but they are very small companies, and they all suffer from a lack of capital,” Pai stated.

Comparing India’s progress with China, Pai highlighted the vast disparity in investment levels. China has allocated $150 billion to AI and $50-60 billion to the EV industry over the past decade, whereas India’s total investment in startups and venture funding from 2014 to 2024 stands at only $160 billion—75% of which is from overseas capital. “China invested $860 billion in startups from 2014 to 2024, India invested $160 billion,” he pointed out.

Pai also emphasised that the Indian government’s funding for innovation is insufficient. Despite spending ₹9 lakh crore annually on subsidies, only a fraction—around ₹1,000-1,500 crore—is directed toward startups. While government-backed funds, such as the ₹10,000 crore AI Fund and the ₹50,000 crore R&D fund for universities, have been announced, Pai questioned the actual disbursement of these funds. “They announce programmes, but it’s all stuck in bureaucracy,” he lamented.

According to Pai, long-term capital is crucial, and insurance and pension funds should play a larger role. He criticised Indian institutions like LIC for not investing in startups, whereas international pension funds from Canada and other countries actively invest in India.

Pai also called for a long-term strategic vision similar to China’s, which sets goals for 25-50 years. He urged policymakers to improve the ease of doing business and eliminate outdated regulations that hinder innovation. “We cannot build a $10 trillion innovation economy based on regulation for a $2 trillion economy,” he said.

Pai also urged the government to engage constructively with the startup community and address their concerns. He emphasised the need for collaborative efforts between startups and regulators to create a more conducive environment for growth. “Support us, work with us, solve our problems. We don’t want one more minister pointing fingers at us. We are working hard building this country,” he asserted.

Below is the verbatim transcript of the interview.

Q: We have seen some strong reactions. Many startup founders have been emotional, they have come up with strong reactions on the comments made by Piyush Goyal. What is your thought? As someone who has looked at the startup story of India very closely over the past few decades, do you believe that somewhere we need to be more focused in terms of growing as a technology nation and innovation nation?

Pai: We are growing as a technology nation, an innovation nation. Let it be clear—we have 1,67,000 registered startups, 22,000 of which are funded, making us the third-largest ecosystem in the world. What has been achieved in the last 11–12 years is truly extraordinary.

I’ve been investing in startups since 2012 through all my friends’ funds. We’ve invested in more than 500 startups, including about 50 or 60 deep tech startups. We see a lot of startups in Bangalore. Around 700 startups come to Bangalore for capital every month. We have more than 4,500 deep tech startups in India, as per Tracxn, and Tracxn has the largest startup database in India—possibly in the world. We have all this, but they are very small companies, and they all suffer from a lack of capital.

The minister was right in saying that we don’t have large deep tech startups. Look at what China has done. But he forgets to add that China has invested $150 billion in AI over the last five to seven years. China has invested $50–60 billion in the EV industry over the last 10 years, including in battery technology. China has made huge investments in robotics and other areas. And China is a $19 trillion economy—we are a $4 trillion economy. From 2014 to 2024, China invested $860 billion in startups and venture capital, while India invested $160 billion—of which about 75% is overseas capital. So, these are the problems.

Today, we have a very oppressive regime in the RBI. The RBI goes after foreign capital, asks for unnecessary documentation, and acts as a big barrier. They’re going after the venture capital industry because of unnecessary regulations. We have a system where funds like LIC and others don’t invest. There is a problem in this country. The minister is right, but being the minister, he must understand the problems. We have met him many times before—I’ve met him personally—and sometimes he has said that he’s almost given up, because the finance ministry doesn’t listen. It took eight to nine years to get rid of the very, very wrong and oppressive angel tax.

Q: But what we would also like to ask you, and essentially what you’re pointing out, that all these schemes for funding startups that have been announced till now, including a recent scheme by the Ministry of Defence to really support deep tech in defence, do you feel that all these funds so far are very small compared to the needs of the industry? Of course, China, the amount of capital available from the government to startups is huge, is great in comparison. But what more can India do to make sure that there is more capital available? You’re doing more in terms of skilling your workforce for innovation for the future?

Pai: Let me give some data. The union government and state government spend ₹9 lakh crores a year as subsidy for the so-called poor people. Yes, poor people require the subsidy, nobody is grudging that. But how much does the government spend on innovation all across India? How much do they spend on startups? ₹1,000 crores, ₹1,500 crores, that’s peanuts. For a country of this size – $4 trillion, do we have enough money going into startups and for jobs creation? We have a ₹10,000 crore AI Fund, which has been announced by the government one and a half years back. How much has been invested? We have some Frontier Tech Fund, or something, the government has announced how much has been invested? The government should give us data, how much has been invested. We had a ₹10,000 crore fund started in 2015, we worked on it, it’s been exhausted and done very well. Now they announced another ₹10,000 crore fund. In the earlier NDA manifesto, they said they’re going to announce a ₹50,000 crore fund, we have not seen that. They said they going to have a ₹50,000 crore fund for R&D in Indian universities. We have not seen much money go into that. There’s been a lot of talk, but not much money has gone.

I worked with startup for the last 13 years, and I know deep tech startup they take a lot of time to raise money. Money is not available because people are not willing to take long-term risk in this country, because it’s too small. Yes, our defence startup system has done well. They should do something bigger. They’ve done well. I think it’s a very good start. But I think we need, at least, all across India, ₹8,000-10,000 crores, at least, to be spent on deep tech startups every year for the next five years, we need money for R&D, for our universities. We need CSIR and DRDO to release a lot of technology like ISRO is doing to all the startup so we can work together. We need a collaborative effort. You can’t fight a battle with both hands tied behind your back.

And what India has achieved in startup despite all this is extraordinary. Look at what happened in the UPI area. All the startups have come. They worked together with the government, government put the programme, and now we are the global leader in payments. So, we need something like that to happen.

Look at EVs, how much money has India invested in R&D in EVs, ask the minister, how much has he invested? Very small amount. They all come up on their own. Now the companies are coming up, picking up. They’re doing well. And I think we need much more capital. We need much more grants. We have to focus on innovation. Innovation requires money. It requires blue sky research. It requires universities to come forward. It requires PhDs in computer science. Remember that Open AI took about 11-12, years and spend a lot of money to start with ChatGPT. They have spent a lot of money. We don’t have that kind of money. And the focus in the government is just not there- they announce programmes, but it’s all stuck in bureaucracy.

Q: In terms of lowering regulatory barriers for startups, when it comes to China, they set a goal for 25 years, 50 years, and we’ve seen the kind of engagement that Xi Jinping has been doing with tech CEOs from around the world in Beijing. How do we need to replicate this in India and also bring down regulatory barriers? You said that to remove angel tax it’s taken eight or nine years. What would be the next big ask from the industry in terms of lowering barriers for startups?

Pai: RBI is one of the biggest barriers for startups and flow of capital. They’re very oppressive. They treat you shabbily. When you go and meet them, they don’t give time. When they give time, they look down upon you. They threaten you. They say that we are going to push regulations, penalise you for nothing. There is a big issue going with the partly paid up units of venture funds, and they want to penalise the entire industry for a mistake that they have done. Who is listening to them? When we go meet them, they listen, look down upon us and say, this is what it is. They are an instrument of the union government, and they must be responsible. We can’t grow a $10 trillion economy with regulations for a $2 trillion economy. Even SEBI has brought in a lot of regulations for AIFs, which must be done away with, because AIF investors are sophisticated investors. They brought in a lot of regulations, and some of them are overreach.

Today we don’t get long term capital. How much money have insurance companies invested? Peanuts. LIC and all the insurance company have a ₹18 lakh crore balance sheet. All around the world insurance companies invest for the long term and make a lot of money. We have insurance companies and pension funds from Canada come here and invest a lot of money. They’re making money. Why can’t they invest? Because the regulations don’t allow. So, we have got oppressive regulation by RBI, which is the control regime. The IRDAI does not liberalise the regulations, and government and the tax authorities go after you. If angels invest money, they get notices. So, angels are getting scared. If your angel from overseas get a notice saying give me this, give me that, they threaten you, give me three years balance sheet. Who are they to ask for all that? The amount of harassment is very, very high. All that must go. We cannot build $10 trillion innovation economy based on regulation for a $2 trillion economy based on controls.

Q: Piyush Goyal made the point that we are only focused on food delivery startups, ice cream startups are being made in the country, and many of these are employing unemployed youth in the country, and they are being used as cheap labour. He made that point, and somewhere, probably this is a concern for the government, that we do not have a skilled workforce ready for the future. We’re not as technology ready as China would be, for that matter. Having said that there are varying views coming in. There are startup founders who are defending the kind of job creation that has happened, there are others who are saying that this is a clarion call and should be seen as a challenge by the industry. What do startup founders now need to do? Of course, they will go wherever there is a business case. But if you had to give some advice, or if there was a point where you think the startups in the country need to think for the future, and probably take an example from China, what would that be?

Pai: Saying that you’re taking cheap labour and all- but they’re all getting jobs. They’re filling their belly. I like that Zepto CEO who stood up and said, I am giving jobs to 1.5 lakh people. If he had not given jobs, where will they be? On the street? Is minister Piyush Goyal will to give jobs? Whose job is this, to train people, whose job is to skill people? It is the government’s job, it is the public investment that’s required. The IT industry has skilled 6 million people over the last 20 years, I was part of that. We skilled them. We spent $3-4 billion a year, we created our own thing and created a world building industry. What did government do to skill all of them? The education system is broken. They have got half trained people who come out of colleges, we hired them, we trained them, we spent money on them, we paid them salaries and we built this great industry. We did it. What did government do? Yes, they gave us a tax break, which was very good. Now for all the skilling, they have to spend money. It is only now that they have an internship programme. Even though it is a half-baked scheme, but it is still better than nothing that they have. I think the food delivery companies are doing a great job. Like Zepto said, all the great AI technology has come from people like Amazon. Amazon set up AWS, they did the cloud technology. They have been in the AI. All the AI companies have come from the startups, from the social media. They have done it because they got a huge set of data.

So, I think don’t belittle us. Support us, work with us, solve our problems. We don’t want one more minister pointing fingers at us. We are working hard to build this country. I have been working on this for 12 years. I put almost all my money into startups, I am funding them for 12 years, we are helping them. Now to hear a minister talk like this is really hurting all of us. I think he must call all of us, listen to our problems and solve them, and stop the oppressive regulations of RBI and others, which is really a barrier.