Funding crunch, talent deficit real threats to India’s global AI leadership goal

Last week, a report by industry body National Association of Software and Services Companies (Nasscom) said that while more and more AI startups are seeking funds from venture capital investors, they are still very small in scale. In the first six months of this calendar year, 87% of the $122 million invested by VCs in AI startups went into early-stage investments.

Indian ventures, according to the report, raised less than $16 million in late funding in the first six months of this year. In comparison, during the same period, at least 21 AI startups in the US have raised $100 million or more each to scale up development. This is in addition to AI behemoths Anthropic and OpenAI raising billion-dollar rounds. A total of $4.9 billion was raised by the American startups seeking large funds for AI training and scaling, making India’s large investments insignificant, if not inconsequential.

To be sure, India has unveiled the $1.2-billion AI Mission and an $11.5-billion research development and innovation (RDI) schemes to encourage AI startups, is far from satisfactory. AI startups, as a result, are left battling familiar hurdles that have held back India’s bid for global technology leadership—inadequate funds to invest in research, no foundational technology ownership, and a lack of skilled engineers.

Industry stakeholders caution that India could end up repeating old mistakes with AI as well. In the 1990s, while US tech firms such as Microsoft built the core software platforms, Indian ventures focused on providing software services to enterprises digitizing their services. While this industry is today worth nearly $300 billion, it is dependent on the software makers for core licences. Even in terms of valuation, the entire IT services industry of India is worth less than 8% of Microsoft alone.

“A key issue here is that most of India’s startups are today building simple layers of automation on top of foundational work done by others. There’s very little effort at the end of the day that is going into building products that would underpin simpler applications in future—this is the same approach that India has taken many times in the past," said Kashyap Kompella, AI analyst and consultant.

Kompella’s assessment aligned with Nasscom’s report, which said that India accounted for nearly one-fifth of the world’s generative AI startups—second only to the US. Large-scale funding, however, is less than 0.3% of the cumulative funding that American AI ventures raised.

Nasscom’s report further highlighted that 96% of overall private funding was directed at late-stage startups—showing intent in other nations to boost foundational work. India, however, has not reported even a single late-stage funding round in the past 18 months. Even as VCs speak about focusing on deep-tech sectors, Nasscom’s funding data shows a different picture—in 2023, AI startups raised $320 million. In 2024, this had dropped to $190 million.

“This is the clearest signal of a major market correction. It reflects a strong investor aversion to the high-risk, capital-intensive nature of scaling generative AI companies, especially those involved in foundational model development. This stands in sharp contrast to the global landscape, where late-stage and growth-stage funding for model makers continues to drive multi-billion-dollar rounds," Nasscom’s report said.

“There is a fundamental difference of approach as well, between India’s AI engineers and those in the US. The American market fundamentally rewards engineers for building their own product—and not creating simple applications that do not add to a nation’s ability to influence global technology. So far, India’s AI story has also gone similarly—and the factors affecting this are the same as the ones that have seen us lose the electronics manufacturing wave to China not more than just two decades ago," said Jibu Elias, responsible computing lead for India at Mozilla Foundation.

Nasscom’s report also noted a similar shift. “Investors are wary of committing large sums when there is significant doubt about a startup’s ability to hire a strong engineering team needed to execute a complex, deep-tech vision. Indian generative AI startups’ growth is severely constrained by a foundational resource crisis, where a critical lack of production-ready talent and the prohibitive cost of essential computing power form primary barriers to innovation," it further added.

Stakeholders have highlighted that India’s government-backed AI push still remains low in capital availability. The India AI Mission is a package worth $1.2 billion with a five-year outlay target. In comparison, the US is currently pursuing a $500-billion investment to build AI for the world. In June, a Bank of America reported that China’s government-backed AI funding totalled to $56 billion. Prior to this, in February, France president Emmanuel Macron announced a $112-billion government push into AI.

Abhishek Singh, chief executive of India AI Mission, told Mint in an interview last week that despite comparatively limited capital, India’s approach to building a government-backed repository of graphic processing unit chips—the single-most crucial part of AI’s infrastructure requirement—may allow startups to build foundational AI at a fraction of the cost. This, in turn, is one of the ways in which India is looking to circumvent the lack of funding at scale to ramp up AI projects.