Economic expansion without institutional transformation risks reinforcing inequality and weakening the long-term foundations of India’s development
Institutions do not merely underpin economic development; they determine who benefits from it. India’s development story is often framed through growth, but its central challenge lies in institutional gaps that constrain the delivery of outcomes, bringing the institutions–development nexus into sharp focus. The consequences of institutional quality are not abstract; they are lived, negotiated, and felt in everyday experience. Institutional quality is reflected not only in aggregate indicators but also in observable outcomes across governance and service delivery. Persistent issues such as shortfalls in regulatory enforcement, administrative irregularities, and accountability gaps indicate that institutional frictions are embedded within routine state–citizen interactions, influencing both economic efficiency and the translation of growth into welfare.
The neoclassical growth framework posits that economic growth is driven by improvements in labour, capital, and technology. However, a critical element shaping the environment within which these factors operate is typically treated as exogenous: institutions. Broadly defined, institutions comprise the formal and informal rules governing political, social, and economic interactions. Effective institutions reduce uncertainty, enhance efficiency, and ensure a level playing field. They encompass not only organisations, but also the regulatory frameworks and procedures that structure economic activity.
As India advances towards its Viksit Bharat 2047 ambition, institutional design and performance will be as critical as capital accumulation, technological adoption, and external economic engagement. Despite strong growth credentials, institutional challenges such as bureaucratic issues, weak service delivery, inadequate state capacity, regulatory uncertainty, administrative inefficiencies, and structural constraints linked to India’s complex federal system continue to persist, with unfavourable economic ramifications. For instance, delays in project approvals and land acquisition increase transaction costs and slow capital formation, while judicial backlogs weaken contract enforcement and heighten uncertainty.
The neoclassical growth framework posits that economic growth is driven by improvements in labour, capital, and technology.
Differences in the quality and inclusivity of growth across countries point to the role of institutional evolution in shaping outcomes. A key dimension in understanding contemporary institutional performance lies in its historical foundations, particularly colonial legacies. In this context, it is important to assess the extent to which such historical imprints continue to influence India’s institutional performance, and whether ongoing reforms are sufficient to enable a shift towards more efficient, accountable, and broad-based growth.
Empirically, real per capita income and institutional quality exhibit a strong positive correlation across countries. The growth–institutions nexus can be viewed through two complementary lenses: a) institutions are endogenous, where economic expansion itself drives improvements in governance and regulatory capacity, thereby improving institutional quality; and b) institutions are exogenous, where deeper structural forces such as economic geography and historical legacies have shaped and continue to shape how institutions function, how efficient they are, and whose interests they ultimately serve.
Figure 1: Grouped Per Capita Income Averages (in constant $) for 19 Developing Countries with Extractive and Inclusive Settler Legacies
Source: Author’s own. Created using Matplotlib. Data from the World Bank.
Historical legacies, particularly the colonial past, remain central to understanding institutional outcomes. As shown by Nobel laureates Daron Acemoglu, Simon Johnson, and James Robinson, European colonisers shaped institutions based on settler mortality rates. Where mortality was low (for instance, Malaysia or Argentina), colonisers settled in larger numbers and had incentives to establish inclusive institutions such as secure property rights, the rule of law, and accountable governance, as these directly supported long-term economic activity. In contrast, where mortality was high (such as India or Nigeria), settlement was difficult, and colonial administrations were structured around extraction. This led to the creation of institutions characterised by weak property rights, limited political participation, and low accountability, designed primarily to transfer resources to the colonial power rather than to build local capacity or enable broad-based development.
Economies that inherited inclusive institutions have broadly achieved more sustained and equitable development, while those shaped by extractive systems continue to face structural inefficiencies, weak distributional outcomes, and persistent development gaps despite periods of growth.
These early institutional choices have had long-lasting effects. Economies that inherited inclusive institutions have broadly achieved more sustained and equitable development, while those shaped by extractive systems continue to face structural inefficiencies, weak distributional outcomes, and persistent development gaps despite periods of growth.
Figure 1 highlights a clear divergence in growth trajectories among developing economies despite similar starting points. The resulting per capita income wedge has persisted over time. This divergence becomes even more pronounced when comparing developing and advanced economies, where differences in institutional quality are significantly larger. Empirical evidence reinforces this pattern: institutional quality not only drives higher economic growth but also stabilises it. For instance, Botswana’s strong fiscal institutions have supported sustained, stable growth and helped it avoid the resource curse. A clear catch-up dynamic emerges: countries starting from weaker institutional baselines exhibit a stronger growth response to improvements in institutional quality. Given this, it becomes essential to assess where India stands within this growth–institutions nexus.
India’s colonial past was marked by the systematic restructuring of its economy into a supplier for the settler’s homeland, accompanied by deindustrialisation, resource transfers, and a sustained wealth drain. These features point to the presence of extractive institutions, reinforced through rigid colonial land systems and limited investment in public infrastructure. A study on colonial legacy in India suggests that regions under direct colonial administration were left with fewer basic amenities, such as schools and health centres, while areas governed by landlord-based tenure systems continue to exhibit lower agricultural investment and productivity. Night-light data from recent years continue to offer empirical evidence of the long-run effects of colonial governance structures. Districts that were subjected to direct British rule exhibit systematically lower levels of public investment in infrastructure and social services, along with weaker development outcomes, compared to regions that experienced indirect rule through princely states.
Several features of present-day institutions reflect their extractive colonial origins, including hierarchical bureaucratic systems, rent-seeking tendencies, legal frameworks historically geared towards control rather than efficiency, landlord-based land arrangements, complex regulatory structures, and behavioural norms that tolerate inefficiencies within parts of the public sector.
Arguably, there is a clear linkage between colonial governance structures and contemporary institutional outcomes in India. These historical legacies continue to shape institutional design, effectiveness, and incentive structures. Several features of present-day institutions reflect their extractive colonial origins, including hierarchical bureaucratic systems, rent-seeking tendencies, legal frameworks historically geared towards control rather than efficiency, landlord-based land arrangements, complex regulatory structures, and behavioural norms that tolerate inefficiencies within parts of the public sector. These institutional inheritances have had enduring economic consequences: they are reflected in rising inequality, lower productivity, and slower capital formation. For the average citizen, these realities are evident in persistent corruption, judicial delays, infrastructure and land-related bottlenecks, service delivery gaps, and inefficiencies within the public sector.
While India remains one of the fastest-growing major economies, driven largely by consumption-led growth, a per capita perspective presents a more nuanced picture. India continues to rank among the lowest within the G20 in per capita income (172/200), underscoring the gap between aggregate growth and broad-based prosperity.
Institutional reform therefore emerges as a key lever to improve both the quality and inclusivity of growth. Experiences from countries with similar extractive colonial legacies, such as Botswana (125/200), Chile (90/200), and Vietnam (147/200), demonstrate that deliberate institutional reform can alter long-run development trajectories. Reforms anchored in strong property rights, meritocratic bureaucracies, credible anti-corruption frameworks, efficient judicial systems, and rules-based policymaking have enabled these economies to achieve more broad-based and sustained growth, allowing them to move beyond their extractive pasts.
As India advances towards its Viksit Bharat goal, the quality of the policy environment, implementation, and governance will matter far more than time-bound headline growth. Institutional design and, more importantly, institutional effectiveness must therefore take centre stage.
Several important institutional initiatives have been undertaken, including Digital India, the GST Council, Digital Public Infrastructure, and Mission Karmayogi, aimed at strengthening state capacity and improving service delivery. These efforts reflect a growing recognition of the central role institutions play in shaping economic outcomes. The key challenge, however, lies in ensuring that these reforms translate into consistent on-ground effectiveness, thereby bridging the gap between institutional design and actual performance.
As India advances towards its Viksit Bharat goal, the quality of the policy environment, implementation, and governance will matter far more than time-bound headline growth. Institutional design and, more importantly, institutional effectiveness must therefore take centre stage. While India has built a substantial institutional architecture, several elements remain rooted in extractive colonial legacies that continue to shape performance and delivery outcomes. Addressing these requires targeted interventions in state capacity, incentive alignment, and public sector labour market reforms. India’s demographic strength, resource endowments, and policy momentum have already delivered robust growth and resilience. The next phase of development will depend on strengthening the structural underpinnings of this growth. Improving institutional performance is essential to ensure that growth is broad-based, development outcomes are enhanced, and equity is meaningfully advanced.
Manish Vaidya is a Research Assistant at the Observer Research Foundation.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Manish Vaidya is a Research Assistant with ORF’s Centre for New Economic Diplomacy. His work centres on research and active engagement in applied economics, with a ...
Read More +
PREV
