India Is Growing at 7.8%. The Real Question Is What We Are Preventing

India’s economy grew 7.8 per cent in the April–June quarter on the National Statistics Office’s estimate, and the number is impressive. What it means is harder to say. Fast growth might be evidence of good policy. It might equally mean India has so much room for catch-up that it grows quickly in spite of the institutions in its way. Firms have existing technologies to adopt, workers have more productive jobs to move into, cities have room to get denser. A country that far behind the frontier can post a very good number and still leave most of the ground unclaimed.

So ask a different question. How much economic activity is India preventing?

Nobody can honestly say India “should” be growing at 9 per cent, or 10, or 12. That economy does not exist and cannot be measured, and false precision does not become economics by appearing in a spreadsheet. Price theory asks something answerable instead. Which exchanges would willing parties be making today, if the law did not make them impossible or too expensive?

The wall in the rulebook

Start with land. Before Mumbai loosened its floor-area restrictions in 2018, roughly 40 per cent of permit applications were approved at the maximum permitted ratio of 2.7, the ceiling exactly and not a foot below. When eligible parcels were allowed more, applications promptly bunched at the new limits. Builders bunched at 2.7 because that was where the rule stopped them, not because 2.7 was what Mumbai needed.

We know roughly what the wall held back. In a 2026 working paper, Geetika Nagpal and Sahil Gandhi find that developers on treated parcels raised their use of permitted floor space by 17 per cent. Housing units rose by 58 per cent. Prices per square foot fell by 24 per cent, and lower-income buyers moved into the new supply. Indians did not suddenly want homes in 2018. The demand had been there all along. A rule had made the supply illegal.

If an apartment would sell for more than the cost of producing it, counting the costs imposed on outsiders, building it makes somebody better off at nobody’s expense. Prohibit it and GDP records nothing. We see the apartments that exist. We do not see the apartments never built, the workers never hired to build them, the shops that never opened underneath them. A prohibition’s cost stays invisible because the prohibited transaction never happens. Mumbai is unusual only in briefly showing us the other side of the ledger.

The margins you cannot see

Trade policy runs the same trick. A tariff protecting an Indian manufacturer buys something you can photograph: the factory and the workers on the floor. Harder to see is the Indian manufacturer down the road paying more for imported components. Impossible to see is the exporter who never becomes competitive because his inputs cost too much. Protect one Indian producer and you may simply be taxing another.

India’s own policy concedes the point. In 2024 the government cut the basic customs duty on mobile phones, circuit board assemblies and chargers to 15 per cent, to make Indian manufacturing more competitive. That is an admission that an import is often an input into Indian production rather than a substitute for it.

Nor does “the importer pays the tariff” tell you who ends up poorer. The burden lands wherever the market puts it, on consumers, downstream firms, workers, sometimes the foreign supplier. The man who writes the cheque and the man made poorer are rarely the same man.

Labour regulation opens another unseen margin. The four labour codes that took effect in November 2025 raised the threshold at which a firm must seek the government’s permission to retrench from 100 workers to 300. The restriction is lighter. It has not gone. Nobody supposes entrepreneurs are freezing payrolls at 299. It means an employer weighing expansion has to price, into today’s hiring decision, part of the cost of being less free to shrink tomorrow. Make firing expensive and you have made hiring expensive.

Contract enforcement works the same way. If recovering money after a breach is slow and uncertain, that expected cost is built into the price of every loan and supply agreement, and raised far enough it kills the deal. With roughly 4.76 crore cases pending across Indian courts, that is not a hypothetical cost. Parties should have broad freedom to choose their arbitral institutions and rules in advance, with courts concentrating on enforcing legitimate awards and policing fraud. A legal system exists to make promises credible enough that strangers will deal with one another, not to maximise the volume of litigation.

Named beneficiaries, nameless victims

Expensive restrictions survive for a reason. Their beneficiaries can be named and their victims cannot. The producer sheltered by a tariff knows who he is, and so does the worker sheltered by dismissal rules. The losers are scattered: the consumer paying more, the entrepreneur whose business never became viable, the worker whose job never existed. Most of them have no idea they have lost anything. That is a political fact as much as a measurement one. A small group with a large, visible stake in a rule has every reason to defend it; millions each carrying a small, invisible cost have almost none.

None of this means every regulation should go. Buildings impose costs on their neighbours, and contracts do get used for fraud. But the comparison has to be between imperfect institutional arrangements, with the costs of regulation counted on the regulator’s side of the ledger, and not between an imperfect market and an imaginary flawless government.

The objective is not GDP either. If Indians freely choose more leisure over more income, slower growth leaves them better off by the only standard that counts, their own. Economic freedom earns its place on other grounds. Adults should be free to use their labour and property, to trade, build, hire and contract with willing partners, unless somebody gives a good reason to stop them. Faster growth is a likely consequence of that freedom rather than its justification.

That leaves the 7.8 per cent. Perhaps India has found the formula. Or perhaps it has an exceptionally large stock of catch-up left and is still charging heavy tolls on the very transactions through which catch-up happens. The growth number cannot tell those two stories apart, because it counts only the economy that exists. What would Indians have built if we had not stopped them?