India is doubling down on some of the most ambitious public investments in its recent history, but are these investments alone enough to deliver long-term, sustained growth? In the 2025-26 budget cycle, the government allocated Rs 11.21 lakh crore (US$123 bn), with an emphasis on defence manufacturing, domestic production, and large-scale infrastructure. At first glance, these signals appear encouraging. For example, the Financial Times reported that India in 2025 secured foreign direct investment of “$50.4bn from April to September, a 16 per cent increase from the same period last year and a record high”. Yet the same data show that the net figure was only 7.7 billion, meaning that although substantial foreign capital entered the economy, almost 42.7 billion flowed out through disinvestment and repatriation. This paradox of flows raises a deeper question: what determines whether these investments and development strategies translate into sustained economic growth?

Institutions are at the centre stage of today’s regional development agenda. Much of the debate today that is centred around policy making revolves around examining the association of institutional quality, or more specifically, the quality of government, with the effectiveness of public investment. Using a metaphor of a bicycle to describe regional economic development, Rodríguez-Pose (2013) argues that a “well-designed and functioning development strategy” requires effective alignment between the two rounded wheels. The front wheel represents a tailor-made development strategy, with the back wheel representing efficient formal and informal institutions. Such a situation would facilitate a region to steer forward in terms of development and, in the process, minimise frictions between development strategies and institutions. Potential frictions between the two wheels would translate into three worse-off scenarios. Firstly, most regional economic development strategies rest upon a grand strategy that is reflected in the front wheel while undermining the institutional back wheel, which takes a tiny shape. This leads to regional economic development operating in a “penny farthing” (early type of bicycle popular in the 1870s that had a large front wheel and much smaller rear wheel) equilibrium. Secondly, a form of mismatch between institutional setting and development strategy can also lead to a “square wheels situation” (where development efforts are forced forward using blunt, ill-fitting governance tools that prevent smooth progress and generate friction rather than momentum, much like trying to push a square wheel along a flat road) resulting from the implementation of poor development strategies under weak institutional settings. Thirdly, poor institutions and an absence of a real development strategy result in the worst possible scenario of no development, akin to a “bicycle frame”.

A useful illustration of this relationship comes from the EU cohesion policy. The EU has acknowledged that weaker institutions hinder economic and social cohesion, which led the EU to Draft Agenda 2000, establishing a cap cohesion investments at 4% of national GDP due to limited absorption capacity. This, in simple economic term means that initial cohesion funds can deliver baseline gains across regions, but sustained long-term development beyond a certain financial threshold depends on institutional quality.

In India, the consequences of weak institutions are not abstract. They show up daily in delayed contracts, frozen credit, stalled infrastructure projects, and prolonged disputes that quietly drain economic momentum. To illustrate this, let us unpack the case of the judiciary and other legal institutions, which together play a central role in enforcing contracts, sustaining law and order, and enabling collective economic accountability. There has been a heightened focus on case pendency in every level of the Judicial system in India, with the National Judicial Data Grid indicating that as of 2024, the pendency cases stands at 5 crore (50 million) with criminal cases constituting 77% of the pending cases (NJDG, 2024).A state wise breakdown indicates that states like Uttar Pradesh and West Bengal constitutes approximately 31% of the total case backlogs in the country. A north-south categorisation would furthermore suggest that northern states like Delhi, UP, Bihar, Rajasthan and Eastern states of West Bengal have consistently registered higher number of pendency in cases, which is in the range of 3 to 12 million pending cases as of 2024, as compared with the southern states which on average report an annual pendency of 700,000 to 1.8 million case pendency. A correlation of judges vacancy (per capita) and pendency cases, suggests a strong positive correlation wherein northern states have a optimistic disproportionate correlation estimate of 0.87 (statistically significant) between judges vacancy and case pendency, as compared to a lower magnitude of disproportionate correlation estimate of 0.54 (statistically significant) between judges vacancy and case pendency in southern states of India. This shows that, when population is accounted for, judicial vacancies disproportionately worsen backlog problems in the north, indicating that institutional capacity constraints have more severe consequences where they are already weakest. The intuition is straightforward; persistent case delays raise transaction costs, weaken contract enforcement, constrain bank lending, and slow the resolution of commercial disputes. Therefore, Investment in institutional capacity, particularly in the administrative and legal institutions, is not merely social expenditure, but growth-enhancing intervention that can have large multiplier effects.

What follows from this is not simply a call for more regionally targeted investment strategies, but for parallel investments in institutional capacity, research, and governance. Development strategies without institutional strengthening risk being a strategy built for failure. Returning to the bicycle metaphor, a sophisticated front wheel of development strategy cannot carry a region forward if the institutional back wheel is weak. Without balance, the bicycle wobbles, stalls, or collapses altogether. Seen this way, India’s market-led growth has relied too heavily on the invisible hand of markets while neglecting the visible hand that steadies and steers it. A strong, visible hand of institutions is not a constraint on markets, but the condition that allows them to function. Without a robust back wheel, the promise of forward motion remains fragile, reminding us that even Adam Smith’s invisible hand needs a firm institutional grip to keep the bicycle upright and moving.

(Arijit Dash and Saurav Roy are PhD Candidates at the University of Cambridge. The views expressed are personal. )