India’s economic trajectory in the 21st century is increasingly shaped by innovation, entrepreneurship, and the emergence of startups across diverse sectors. These engines of growth have redefined traditional development paradigms by catalyzing productivity, creating employment, and enhancing global competitiveness. However, the Indian startup ecosystem also faces substantial challenges including regulatory complexities, inadequate access to early-stage financing, infrastructural bottlenecks, limited intellectual property awareness, and skill mismatches. This paper investigates the multidimensional role played by innovation-driven entrepreneurship in India’s economic transformation while critically examining the structural and policy-level challenges that impede its sustainable evolution. Drawing upon recent data, policy analysis, and real-world case studies, the paper underscores the need for an inclusive innovation ecosystem, cross-sectoral collaboration, entrepreneurial education, and strategic policy interventions to bridge the existing gaps. As India aspires to become a $5 trillion economy, fostering innovation and entrepreneurship remains central to achieving inclusive and sustainable economic growth in the 21st century.