How did Himachal Pradesh evolve to become one of India’s wealthiest states, with low poverty levels and above-average literacy? The prospect appeared unlikely when 30 princely Hill states merged to form a state characterized by subsistence farming and India’s lowest literacy rate. It now has a developed banking sector and India’s highest levels of telecommunications penetration. We dissect the key elements in this long-term transformation: far-sighted planning; maintaining policy stability despite political change; and aligning human capacity building with objectives. Above all, we look at how the state has created and deployed institutional capacity in innovative ways. We extrapolate lessons from this particular case to consider the centrality of institutional reform in a successful transition.