Indian VCs call for policies to encourage deeper pools of domestic capital ahead of Union Budget

India—the third-largest startup ecosystem—stands on the shoulders of venture capital (VC) firms that make bold investments and back passionate founders to ring in the next startup success story. 

While the country has been reeling from a funding winter, which lasted from 2023 to 2024, the VC ecosystem has corrected its course and is in a phase of disciplined maturity. Last year, Indian startups raised $11 billion—the lowest since 2020—with VCs writing fewer but larger checks, signalling a cautious and selective approach. 

In 2025, many VCs also raised new funds, albeit calling for greater participation from domestic institutional investors. “India has strong founder talent and operating depth, but long-term domestic pools like insurance and pension capital remain underrepresented at later stages. Enabling this participation through calibrated frameworks would strengthen capital continuity and reduce over-reliance on any single source of funding,” noted Navin Honagudi, Managing Partner at Elev8 Venture Partners.

Echoing a similar sentiment, Kunal Khattar, Founder at mobility-focused fund, AdvantEdge, noted that policies should be rolled out to reduce reliance on foreign VCs, and that the government should create stronger incentives for insurance and pension funds to invest in SEBI-registered Alternative Investment Funds (AIFs). 

Firms are also looking for greater predictability and longevity for tax and incentive frameworks, especially VC firms that have been investing in deeptech companies. “Startups building foundational or deeptech capabilities typically operate on 7-10 year horizons, where clarity and stability matter as much as headline incentives. Multi-year visibility on eligibility, tax treatment, and scheme continuity would encourage more patient capital and reduce friction in investment decisions,” said Manu Iyer, Co-founder and General Partner at Bluehill.VC.

Additionally, VCs are also calling for policies to encourage localisation of components and exemptions on critical raw materials for startups. 

The Union Budget should also come up with policies or capital allocation to encourage continued investment in core infrastructure, which will help startups scale up faster and in a more capital-efficient manner, Honagudi noted. 

VC firms have also noted that the Indian startup ecosystem has reached a stage where the foundations built over the last decade have given rise to consistent and predictable institutional support. The focus should be on creating an environment, where India can create globally competitive companies through patient capital and predictable policies. 

To foster global competitiveness, Khattar noted that policies can move from simple “tax holidays” to a mission-mode funding model. “The Rs 1 lakh crore Research, Development, and Innovation (RDI) Fund can also be deployed as non-dilutive, outcome-linked grants for startups achieving specific milestones in battery density, recycling, or AI-driven predictive maintenance.” 

Additionally, he also noted that for Indian startups to go global, the country needs simpler FEMA (Foreign Exchange Management Act) reporting. “Reducing the compliance burden for early-stage founders to ‘self-certify’ for the first 5–10 years would allow them to focus on product-market fit rather than administrative overhead,” Khattar said.