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The recent elimination of the Angel Tax in the Union Budget 2024 is hailed as a further bolster to India’s startup ecosystem by attracting greater domestic and foreign fund infusions. Despite the slowdown in global funding from 2021 to 2023, Indian startups achieved a 71.5 percent growth. Outpacing China in 2021, India is now second only to the US as a unicorn hub. Shifting regional and sectoral dynamics are fuelling India’s startup momentum.
Lower-tier cities and less competitive states emerging as prime startup hubs
The era when startups were confined to Tier 1 cities like Bengaluru, Mumbai, and Delhi is long gone. Over the past five years, the startup growth rate in Tier 1 cities has plunged by 25 percent, while Tier 2 cities have experienced a 15 percent upsurge. A recent study by the Asia Competitiveness Institute highlights a redistribution pattern in startup growth across the country, with many of these lower-tier destinations belonging to middle and bottom-ranked competitive states such as Bihar, Haryana, Manipur, and Assam.
Policy frameworks have been a major push factor. Startup India has created online portals for investors to connect with founders in these cities. In a survey of about 30 Tier 2 and 3 cities conducted in 2024, 67 percent of investors used government-facilitated platforms to interact with local startups.
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Exclusive state-level startup policies that provide significant incentives for founders and investors in emerging Tier 2 and 3 cities are another enabler. For instance, Startup MP has transformed Indore, Bhopal, and Jabalpur into startup hubs with initiatives like stamp duty concessions and the Madhya Pradesh Laghu Udyog Nigam venture capital fund. The Department of Promotion of Industry and Internal Trade (DPIIT) data shows that Madhya Pradesh experienced 41 percent startup growth in 2022-2023, with Jabalpur seeing a 140 percent increase in recognised startups from 2021 to 2022.
Startups also thrive in low-tier cities due to lower costs and abundant labour talent. Rentals and utilities in Tier 2 cities are typically 40-50 percent cheaper than in Tier 1 counterparts. Cities like Lucknow and Mangalore rank among the top three for employable talent in India in 2023, rapidly becoming hubs for specialised and niche skill sets. Coimbatore has emerged as a leading centre for engineering services.
Sectoral advancements in India’s peripheries
Another key pattern is the emerging sectoral specialisation of startups that varies across regions. Since 2020, startups in the construction industry have grown the most in the northeastern region at 102.6 percent on average. There has been significant emphasis on improving connectivity by expanding logistics infrastructure in the northeast.
Sharing borders with China, Bhutan, Myanmar, Bangladesh, and Nepal, the northeast region holds immense potential to enhance domestic trade and maintain international connections with East and Southeast Asia. Initiatives like the North East Venture Fund (NEVF), which has invested in 37 startups since its launch in 2017, encourage startups to pursue these goals.
Estimates from DPIIT data show that the sectoral specialisation of the least competitive states is not limited to traditional sectors like construction but extends to industries of national and strategic importance, like green technology, renewable energy, and IT services, that are emphasised in the Viksit Bharat 2047 plan.
While more competitive states like Delhi, Gujarat, Maharashtra, and Karnataka account for over fifty percent of the country’s total startups, states like Bihar, Haryana, and Assam have experienced the highest startup growth in such frontier industries from 2021 to 2023. This shift indicates the emergence of deagglomeration effects in India, with startup growth moving away from well-established startup clusters to emerging startup hubs in the middle and low-ranked competitive states.
Bihar catching up and going green
Bihar exemplifies a bottom-ranked state exhibiting catch-up in startup growth. With the nationwide trend of entrepreneurial youth returning to their home states, the startup landscape in Bihar is flourishing. For instance, the number of startups registered in Bihar increased by 54.6 percent from 2022 to 2023.
The Bihar Startup Policy, initially conceptualised in 2016 and revised in 2022, was established to provide funding and shared infrastructure from an initial corpus of Rs 500 crore. Despite common implementation challenges in state policies across India, this fund has provided interest-free seed grants to 324 startups since its inception.
In the States’ Startup Ranking 2022 by DPIIT, Bihar was recognised as an Aspiring Leader. Between 2021 and 2022, the state made significant strides among 33 states and union territories regarding government performance in fostering a conducive startup ecosystem under their 25 Action Points Framework. Notable improvements were observed in the pillars of Institutional Support, Incubation & Mentorship Support, and Access to Market.
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Leveraging its position as the third-largest producer of maize, Bihar introduced the Ethanol Production Promotion Policy 2021 to encourage investments in ethanol and CBG manufacturing plants. In 2023, the state launched the Electric Vehicle Policy to subsidise the purchase and operation of environmentally friendly private vehicles and state buses. In March 2024, a pioneering climate strategy, ‘Climate Resilient and Low Carbon Development Pathway for Bihar,’ was unveiled to implement effective climate change mitigation strategies across the state.
Such targeted policy incentives have likely created a supportive ecosystem for Green Tech startups in Bihar. From 2021-2023, Bihar experienced the highest growth of green technology startups in India.
Way forward
Although the Indian startup ecosystem is undergoing a redistributive transformation, with a rapid rise of startups in lower-tier cities and less competitive states, challenges such as unsustainable business models and mismanagement of resources persist as these ventures scale up. The recent unravelling of Byju’s serves as a cautionary tale in this regard. Addressing these scaling-up issues is crucial to ensure that startups in the emerging hubs do not get stuck in a zombie mode—surviving but unable to grow.
Ammu George is a Lecturer at Queen’s Business School, Queen’s University Belfast. Akshaya Balaji and Riddhimaa Gupta are researchers with the Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore.