In part 1 of this blog series, we deep-dived into the dynamics of the US-China AI rivalry, understanding how tactical truces mask deeper strategic competition and how geopolitical shifts are reshaping global technology landscapes. Building on this understanding, this part of the blog series focuses on India, a rising technological power with ambitious AI aspirations. For India's growing tech startup ecosystem, these immediate dynamics present both challenges and unprecedented opportunities. In this part, we will explore the short-to-mid-term impacts of the US-China AI rivalry on India's tech startup landscape.
Opportunities Arising from Enhanced Chip Access and Market Optimism
In a significant policy shift, the US has officially scrapped the Biden-era AI diffusion rule, which had previously categorized India in Tier 2, thereby limiting its access to advanced AI chips from companies like NVIDIA. This controversial rule had imposed country-specific caps, such as a limit of 50,000 GPUs annually for India, and restricted US companies from deploying more than 7% of their overall compute power in a single non-Tier-I country. The repeal of this rule can be considered as a big breather for India, effectively opening doors for greater and uncapped access to cutting-edge AI hardware. The direct shift from a restrictive "Tier 2" status to uncapped access immediately removes a major constraint on India's AI growth. This is a clear cause-and-effect relationship where the US policy change directly facilitates India's ability to acquire crucial hardware. The stated US intention to strengthen alliances implies a more favourable environment for US companies to invest in and partner with India's growing AI ecosystem. This creates an immediate window for Indian AI startups to secure the necessary foundational compute power, which is vital for training advanced AI models. Furthermore, it reinforces the US's recognition of India as a trusted partner, strategically differentiating it from China in the global tech rivalry.
Furthermore, these recent US-China trade talks in London, despite their limited scope, have sparked a sense of relief among global investors, leading to a surge in Indian IT stocks. The Nifty IT index, for instance, saw a significant rise post the public announcement of the deal, reflecting renewed optimism. This easing of global trade tensions, even if temporary, creates a more stable and potentially growth-oriented environment for Indian IT firms that heavily rely on US business. This positive market sentiment can translate into a more favourable short-term funding landscape and increased partnership opportunities for Indian tech startups.
Other Opportunities Stemming from this Ongoing AI Rivalry between the US and China
- Increased Demand for Diversified Solutions: In the short-medium term, global companies, which see this deal between the US and China just as a strategic de-escalation of immediate trade friction, are likely to increase their focus on de-risking their supply chains and reducing reliance on either the US or China. This can create a direct demand for Indian tech startups offering alternatives in software, AI applications, and potentially hardware components, especially in areas where export controls are tightening.
- Accelerated Domestic AI Development: The urgency of the global AI race will likely further accelerate India's domestic AI initiatives, such as the IndiaAI Mission. The availability of highly subsidized GPU compute power (₹67 per hour, significantly lower than global costs of $2.5 to $3 per hour) and access to vast anonymized datasets can benefit Indian AI startups by allowing them to develop and iterate faster without the prohibitive costs faced by many global peers. This can potentially lead to a surge in novel AI applications requiring significant computational power.
- Elevated Cybersecurity Focus: The weaponization of AI in cyber warfare, including AI-powered malware, deepfakes, and sophisticated phishing attacks, is a direct consequence of heightened geopolitical tensions. This will elevate the importance of cybersecurity. Indian startups specializing in AI-powered cybersecurity solutions are expected to see increased demand both domestically and internationally, as more businesses prioritize digital defence and resilience.
- Selective Talent Migration Opportunities: While India faces a persistent talent gap due to emigration, the intensified tech war, coupled with growing geopolitical conflicts in many parts of the world, might also lead to a "reverse brain drain". We might see an increase in interest from Indian tech professionals currently in the US or China to return home, seeking more stable or nationally aligned opportunities. Although not very likely in the short-term, but if and when this happens, it could provide a boost to the Indian tech talent pool, particularly in critical AI and semiconductor domains.
Headwinds: Navigating Infrastructure and Capital Uncertainties
Despite the recent repeal of the AI diffusion rule, which eased chip access, importing an uncapped number of GPUs may not automatically translate into sufficient compute capacity for India due to persistent infrastructure roadblocks. Currently, the total number of GPUs available in India fall significantly short of the compute power required to effectively train and deploy competitive Large Language Models (LLMs). Even with improved chip access, India's primary bottleneck for scaling AI can fundamentally remain towards foundational infrastructure (specifically, robust data centers and reliable power supply) exposing a critical vulnerability in its ambition to become a global AI leader. Without adequate, scalable data centers and a consistent, high-capacity power supply, even unlimited chip access becomes moot.
Indian startups also face a significant vulnerability due to their funding structure. A significant share of late-stage capital in Indian tech startups originates from US-based funds. This creates a risk of a capital crunch if a protectionist White House administration causes investors to feel nervous, scared, or uncertain, often leading to a decline in confidence of investors in the Indian tech startup space. While the recent US-China trade talks in London sparked optimism and led to a surge in Indian IT stocks, this relief is primarily short-term and does not negate the underlying vulnerability to shifts in US capital flows. Broader US policies, such as potential tariffs (ranging from 10% to 26%) on Indian goods under a Trump administration, alongside India's own non-tariff measures like Quality Control Orders (QCOs) and technical trade barriers, could pose substantial challenges to bilateral trade and investment. The significant reliance on US capital directly links India's startup ecosystem's financial health to US political and economic policy, even when not directly related to AI chips. This highlights the deep interconnectedness of geopolitical and economic dynamics.
Analyst’s Closing Thoughts
If we observe the US-China AI rivalry closely, India's tech startup ecosystem seems to be at a pivotal point. The easing of AI chip access now shifts the spotlight to deeper, systemic challenges like infrastructure deficits and the inherent volatility of global capital flows. Yet, the strategic narrative this unfolds is much more interesting.
India is not simply reacting to the formation of two distinct AI blocs. Rather, it is quietly, yet decisively, creating a third path. Its unique convergence of a vast, cost-effective talent pool, a strengthening indigenous compute infrastructure, and the foundational strength of its Digital Public Infrastructure (DPI) positions it as a compelling alternative to the US and China. This is not about competing head-on with the capital-intensive, top-down AI models of the West or the state-driven, centralized approaches of the East. Instead, India is cultivating a well-thought innovation model, capable of developing world-class, culturally aligned (or receptive) AI solutions at a fraction of the cost, designed for mass adoption and inclusive growth.
This distinct approach offers more than just economic advantage to India – it also presents a viable roadmap for AI development that resonates deeply with the nations seeking alternatives to the ongoing geopolitical re-alignments. By prioritizing accessibility, affordability, and local relevance, India has the potential to redefine global AI leadership, not through sheer computational strength or data availability, but through democratized innovation and widespread societal impact.
![[Part 2] The Geopolitical Chessboard: Navigating the US-China AI Rivalry and Strategic Imperatives for Indian Tech Startups](/sites/default/files/styles/960_x_600/public/media/images/ChatGPT%20Image%20Jul%203%2C%202025%2C%2005_43_59%20PM-edited.png?itok=uoJLsRFV)
