This paper investigates the role of Digital Public Infrastructure (DPI) in overcoming state capacity deficits to facilitate rapid structural transformation in India and the broader Global South. While political representation has been decentralized to local municipal and village councils, these administrative bodies structurally lack the technical and fiscal capacity to manage the complex, industrial-scale regulatory clearances required for mass labor absorption. Consequently, the transaction costs of regulatory compliance act as a severe administrative tax, generating deadweight loss and stalling the reallocation of surplus labor from low-productivity agriculture to formal manufacturing and services.

The analysis examines how transitioning from a permission-based bureaucracy—reliant on discretionary, ex-post audits—to an ex-ante, protocol-driven digital architecture provides a critical "institutional bypass." By embedding regulatory rules into standardized digital public infrastructure, the framework automates compliance and effectively removes human intermediation from the regulatory pipeline. The paper assesses the impact of reducing this administrative friction on Total Factor Productivity (TFP) and formal employment elasticity. Findings indicate that deploying algorithmic governance mechanisms, particularly in labor-dense but capacity-constrained regions, is essential for reducing the transaction costs of capital deployment and integrating 1.6 billion people in India—and potentially 5 billion across developing economies—into the formal global economy.