<h2>Executive Summary</h2><ul><li><p>The four long-term drivers of growth and prosperity are inputs and productivity, trade openness, institutions and the ideas that shape institutions.</p></li><li><p>India’s scaling constraint is mainly institutional, not demand-led. Across sectors, growth-supportive capital, consumers, aspirations and adoption are largely in place.</p></li><li><p>The real barrier is repeatability. Scaling is shaped by a lack of stability around regulation, contract enforceability and the compliance burden.</p></li><li><p>Once demand and capital are in place, institutions are the key differentiators. Inclusive systems breed growth while extractive systems concentrate gains and raise uncertainty.</p></li><li><p>Markets require three foundations to function efficiently: clearly defined property rights, afree price system and a profit and loss system. Weak foundations breed market failure</p></li></ul>.<p>Despite India’s strong growth momentum, improving access to capital and deepening consumer markets, scaling remains uneven across sectors. Yet demand is not usually the binding constraint. At a recent India CFO Forum session in Delhi, Dr Parth Shah, Founder-President of the Centre for Civil Society (CCS), Dean and Co-Founder at the Indian School of Public Policy and Founder of the National Independent Schools Alliance (NISA), outlined why India’s most persistent scaling-related constraints are institutional. He argued that the decisive barrier lies in the predictability of rules, the enforceability of contracts and the burden of compliance. These institutional frictions determine whether scaling becomes capability-led and repeatable or whether it remains dependent on navigating uncertainty.</p><h2>Why Some Countries Grow Rich and Others Don’t</h2><p>One of the oldest and most important questions in economics is why some countries become rich while others remain poor. Adam Smith framed this question in The Wealth of Nations, and it remains central to development economics today. Over time, four broad sets of explanations have emerged, each highlighting different drivers of prosperity but together providing a structured lens for understanding why institutional quality is often the binding constraint:</p><ul><li><p><strong>Inputs, Investment and Productivity:</strong> Nobel laureate Robert Solow explained prosperity through factor accumulation, where output depends on capital, labour and technology. Thisframework shaped much of twentieth-century development thinking and a heavy policy focuson investment and resource accumulation.</p></li><li><p><strong>Trade and Openness:</strong> Jagdish Bhagwati argued that countries that integrate into global markets and maintain open borders enjoy scale, competition and technology diffusion.</p></li><li><p><strong>Institutions:</strong> Daron Acemoglu placed institutions – particularly property rights, contract enforcement and the rule of law – at the centre of long-run prosperity. He found a clear difference between inclusive institutions that enable broad participation, fair transactions and strong investment; and extractive ones that concentrate gains among narrow elites, distort incentives and limit society-wide prosperity even when growth occurs. Colonial legacies are often used to illustrate this framework: Countries that inherited or built more inclusive institutions after independence tended to grow faster and more sustainably. Countries that remained stuck with extractive structures often stagnated or regressed over time.</p></li><li><p><strong>Ideas Shaping Institutions:</strong> Building on this, Joel Mokyr argued that institutions are shaped by ideas. The values a society legitimises influence what behaviours are rewarded, which enterprises gain status and whether experimentation and innovation get supported. In this view, long-run prosperity depends not only on formal systems, but also on what sort of ideas societies honour. Where profit-making and wealth creation are seen as legitimate and honourable, entrepreneurship strengthens. Where they are treated as morally suspect, incentives weaken and innovation slows.</p></li></ul><h2>What a Market System Requires</h2><p>A market is not just a space where transactions occur, but an entire system that rests on three basic foundations, which determine how efficiently they function:</p><ul><li><p><strong>Clearly defined property rights:</strong> Participants must know what belongs to whom and ownership must transfer cleanly after exchange. Where property rights are unclear, uncertainty rises and markets cannot coordinate efficiently.</p></li><li><p><strong>A free price system:</strong> Prices must be able to fluctuate to align supply and demand. When price ceilings or price floors restrict adjustment, distortions emerge and the market fails to perform its coordinating role.</p></li><li><p><strong>A profit and loss system:</strong> Firms that serve customers well should earn profits. Firms that donot should make losses and exit. This discipline is central to innovation and productivity.</p></li></ul><h2>Why Markets Fail</h2><p>Market failures often occur not because markets are inherently inefficient, but because one or more of these foundations are missing. Environmental problems illustrate this clearly. Air, forests and waterbodies are collectively owned. Nobody owns them in a defined way and therefore nobody has a direct incentive to maintain them. One pathway to solving such problems is to define property rights more clearly. These do not have to be individual property rights; they can also be community-based or commons-based. Ownership, though, must be defined in a way that creates accountability and stewardship. The banking industry illustrates a different sort of market failure. Under the logic of ‘too big to fail’, banks retain profits privately, but losses are socialised through taxpayer-funded bailouts. This places banking outside the normal profit and loss discipline of markets. When this discipline weakens, regulation expands to compensate. </p><h2>Regulation as a Scaling Constraint</h2><p>Regulation is necessary to ensure public good, particularly in areas such as safety, consumer protection, environmental management and financial stability. However, regulation becomes a barrier to scale when it is excessive, fragmented, unpredictable or weakly enforced. The costs it entails arenot only financial. Complexity increases compliance overhead, raises uncertainty and creates anenvironment where businesses are never fully sure whether they are compliant. This reduces risk appetite and discourages long-horizon investment.</p><h2>A 3-Pronged Reforms Agenda</h2><p>India’s reforms agenda is increasingly focused on decriminalisation, deregulation and digitisation. Decriminalisation reduces fear and uncertainty by reclassifying violations previously treated as criminal offences as civil ones, punishable by penalties instead of imprisonment. Digitisation reduces transaction costs by lowering the burden of documentation and enabling process standardisation. For instance, national single-window systems and know-your-approvals frameworks can reduce friction by telling businesses what approvals they need based on their profile and location. The proposed ‘One Nation One Business Identity’ aims to reduce the multiple identities businesses manage across laws and regulators, enabling simpler coordination across departments. Similarly, a business DigiLocker would allow documents to be stored once and accessed by multiple agencies without repeated uploads. Finally, regulatory predictability can be strengthened through fixed notification cycles and lighter-tech norms. India’s food safety authorities, for instance, plan to issue regulatory notifications once a year, enabling better planning and reducing monitoring costs. The RBI is considering a similar approach for financial services. Recognising that applying bank-level regulation to low-risk fintech firms creates roadblocks, it is seeking to calibrate regulatory intensity to the riskiness of activities.</p><h2>Scaling as an Institutional Project</h2><p>Viksit Bharat 2047 is not just a growth-rate ambition, but an institutional one. India’s long-term prosperity depends on whether markets function predictably, contracts are enforced efficiently and regulation supports innovation without undermining public good. Where demand exists and capital is available, institutions become the decisive constraint. Strengthening institutions therefore becomes one of the highest-leverage pathways for enabling Indian firms to scale faster, more sustainably and with lower friction.</p>
<h2>Executive Summary</h2><ul><li><p>The four long-term drivers of growth and prosperity are inputs and productivity, trade openness, institutions and the ideas that shape institutions.</p></li><li><p>India’s scaling constraint is mainly institutional, not demand-led. Across sectors, growth-supportive capital, consumers, aspirations and adoption are largely in place.</p></li><li><p>The real barrier is repeatability. Scaling is shaped by a lack of stability around regulation, contract enforceability and the compliance burden.</p></li><li><p>Once demand and capital are in place, institutions are the key differentiators. Inclusive systems breed growth while extractive systems concentrate gains and raise uncertainty.</p></li><li><p>Markets require three foundations to function efficiently: clearly defined property rights, afree price system and a profit and loss system. Weak foundations breed market failure</p></li></ul>.<p>Despite India’s strong growth momentum, improving access to capital and deepening consumer markets, scaling remains uneven across sectors. Yet demand is not usually the binding constraint. At a recent India CFO Forum session in Delhi, Dr Parth Shah, Founder-President of the Centre for Civil Society (CCS), Dean and Co-Founder at the Indian School of Public Policy and Founder of the National Independent Schools Alliance (NISA), outlined why India’s most persistent scaling-related constraints are institutional. He argued that the decisive barrier lies in the predictability of rules, the enforceability of contracts and the burden of compliance. These institutional frictions determine whether scaling becomes capability-led and repeatable or whether it remains dependent on navigating uncertainty.</p><h2>Why Some Countries Grow Rich and Others Don’t</h2><p>One of the oldest and most important questions in economics is why some countries become rich while others remain poor. Adam Smith framed this question in The Wealth of Nations, and it remains central to development economics today. Over time, four broad sets of explanations have emerged, each highlighting different drivers of prosperity but together providing a structured lens for understanding why institutional quality is often the binding constraint:</p><ul><li><p><strong>Inputs, Investment and Productivity:</strong> Nobel laureate Robert Solow explained prosperity through factor accumulation, where output depends on capital, labour and technology. Thisframework shaped much of twentieth-century development thinking and a heavy policy focuson investment and resource accumulation.</p></li><li><p><strong>Trade and Openness:</strong> Jagdish Bhagwati argued that countries that integrate into global markets and maintain open borders enjoy scale, competition and technology diffusion.</p></li><li><p><strong>Institutions:</strong> Daron Acemoglu placed institutions – particularly property rights, contract enforcement and the rule of law – at the centre of long-run prosperity. He found a clear difference between inclusive institutions that enable broad participation, fair transactions and strong investment; and extractive ones that concentrate gains among narrow elites, distort incentives and limit society-wide prosperity even when growth occurs. Colonial legacies are often used to illustrate this framework: Countries that inherited or built more inclusive institutions after independence tended to grow faster and more sustainably. Countries that remained stuck with extractive structures often stagnated or regressed over time.</p></li><li><p><strong>Ideas Shaping Institutions:</strong> Building on this, Joel Mokyr argued that institutions are shaped by ideas. The values a society legitimises influence what behaviours are rewarded, which enterprises gain status and whether experimentation and innovation get supported. In this view, long-run prosperity depends not only on formal systems, but also on what sort of ideas societies honour. Where profit-making and wealth creation are seen as legitimate and honourable, entrepreneurship strengthens. Where they are treated as morally suspect, incentives weaken and innovation slows.</p></li></ul><h2>What a Market System Requires</h2><p>A market is not just a space where transactions occur, but an entire system that rests on three basic foundations, which determine how efficiently they function:</p><ul><li><p><strong>Clearly defined property rights:</strong> Participants must know what belongs to whom and ownership must transfer cleanly after exchange. Where property rights are unclear, uncertainty rises and markets cannot coordinate efficiently.</p></li><li><p><strong>A free price system:</strong> Prices must be able to fluctuate to align supply and demand. When price ceilings or price floors restrict adjustment, distortions emerge and the market fails to perform its coordinating role.</p></li><li><p><strong>A profit and loss system:</strong> Firms that serve customers well should earn profits. Firms that donot should make losses and exit. This discipline is central to innovation and productivity.</p></li></ul><h2>Why Markets Fail</h2><p>Market failures often occur not because markets are inherently inefficient, but because one or more of these foundations are missing. Environmental problems illustrate this clearly. Air, forests and waterbodies are collectively owned. Nobody owns them in a defined way and therefore nobody has a direct incentive to maintain them. One pathway to solving such problems is to define property rights more clearly. These do not have to be individual property rights; they can also be community-based or commons-based. Ownership, though, must be defined in a way that creates accountability and stewardship. The banking industry illustrates a different sort of market failure. Under the logic of ‘too big to fail’, banks retain profits privately, but losses are socialised through taxpayer-funded bailouts. This places banking outside the normal profit and loss discipline of markets. When this discipline weakens, regulation expands to compensate. </p><h2>Regulation as a Scaling Constraint</h2><p>Regulation is necessary to ensure public good, particularly in areas such as safety, consumer protection, environmental management and financial stability. However, regulation becomes a barrier to scale when it is excessive, fragmented, unpredictable or weakly enforced. The costs it entails arenot only financial. Complexity increases compliance overhead, raises uncertainty and creates anenvironment where businesses are never fully sure whether they are compliant. This reduces risk appetite and discourages long-horizon investment.</p><h2>A 3-Pronged Reforms Agenda</h2><p>India’s reforms agenda is increasingly focused on decriminalisation, deregulation and digitisation. Decriminalisation reduces fear and uncertainty by reclassifying violations previously treated as criminal offences as civil ones, punishable by penalties instead of imprisonment. Digitisation reduces transaction costs by lowering the burden of documentation and enabling process standardisation. For instance, national single-window systems and know-your-approvals frameworks can reduce friction by telling businesses what approvals they need based on their profile and location. The proposed ‘One Nation One Business Identity’ aims to reduce the multiple identities businesses manage across laws and regulators, enabling simpler coordination across departments. Similarly, a business DigiLocker would allow documents to be stored once and accessed by multiple agencies without repeated uploads. Finally, regulatory predictability can be strengthened through fixed notification cycles and lighter-tech norms. India’s food safety authorities, for instance, plan to issue regulatory notifications once a year, enabling better planning and reducing monitoring costs. The RBI is considering a similar approach for financial services. Recognising that applying bank-level regulation to low-risk fintech firms creates roadblocks, it is seeking to calibrate regulatory intensity to the riskiness of activities.</p><h2>Scaling as an Institutional Project</h2><p>Viksit Bharat 2047 is not just a growth-rate ambition, but an institutional one. India’s long-term prosperity depends on whether markets function predictably, contracts are enforced efficiently and regulation supports innovation without undermining public good. Where demand exists and capital is available, institutions become the decisive constraint. Strengthening institutions therefore becomes one of the highest-leverage pathways for enabling Indian firms to scale faster, more sustainably and with lower friction.</p>
