India Funds Its Startups. Why Won't It Buy From Them?
Grants build prototypes. Purchase orders build companies. India's largest customer still isn't buying from its startups
During the past decade, India has invested heavily in nurturing its young entrepreneurs. It established funds, grants, incubators, tax incentives, credit guarantees, challenges, and accelerators, resulting in the recognition of more than two lakh startups. However, when these startups finally develop a functioning product, they encounter a significant challenge: finding buyers for their innovations.
The Government e-Marketplace managed purchases valued at ₹5.03 lakh crore in fiscal year 2026 (FY26), with barely ₹19,000 crore (less than four percent) going to startups. Fewer than one in five of the recognized startups even have a government seller registration. This conundrum represents a central contradiction in India's startup narrative: while the state has become increasingly comfortable funding innovation, it remains deeply hesitant to purchase the resulting products.
A grant can assist a startup in creating a prototype, but only a customer can help it grow into a successful company. In sectors such as energy, healthcare, climate technology, mobility, defense, and infrastructure, the government is not only one potential customer among many, but often the only first customer large enough to create the market.
The key metric that illustrates this issue is the government's purchasing share in FY26: total GeM order value was ₹5.03 lakh crore, with micro and small enterprises accounting for ₹2.36 lakh crore (47.1% of total GeM order value), while startups received just over ₹19,000 crore, representing less than four percent of the total.
The disparity is not a sign that startups are building things the government does not need; rather, it reflects a predictable outcome of policy design. Micro and small enterprises constitute 47 percent of government procurement because a mandate exists, requiring every central ministry, department, and public sector enterprise to source at least 25 percent of annual procurement from MSEs, with carve-outs of four percent for SC/ST-owned units and three percent for women-owned units.
Startups, however, are the only priority category in Indian public procurement to receive exemptions on the buyer side, without any corresponding incentives from the purchasing side. The General Financial Rules exempt recognized startups from earnest money deposits and allow for relief on prior turnover and prior experience, but no buyer was ever given a target, budget line, or reporting obligation to actually purchase these products.
The policy shift towards easing entry for startups has not been matched with corresponding changes in the buyer's incentives. Consequently, India has assembled an elaborate public capital stack for startups, including the Fund of Funds for Startups, the Seed Fund Scheme, the Research, Development and Innovation Fund, and numerous regulatory reforms, tax exemptions, and dedicated funds within ministries and public sector enterprises.
Despite these efforts, the absence of a public demand stack on the buying side remains a critical gap.
Written by urgent.news from YourStory's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
