The study, carried out by a non-profit research organisation RAND also said India should continue to develop and implement a student financial-aid system and gradually tie eligibility with accreditation and quality measures.
"Policymakers in India should continue to develop and implement an accreditation system that can, over time, become a key measure of quality," said the study.
"Starting small and gradually phasing in more concrete links between funding and quality will be important to ensure a successful transition for India's higher education system," it said.
The study said that the University Grants Commission (UGC) recently made accreditation mandatory for the institutes it regulated. It added voluntary accreditation with ties to incentives is more effective in obtaining institutional cooperation and compliance.
"India should develop and implement a system to collect and report data on institutional quality that could be used to gauge progress toward national goals," the report said.
"India's higher education system is in transition," said Rafiq Dossani, a senior policy researcher at RAND and a co-author of the report.
"Instituting policies that link funding to quality will help guide the country's newly autonomous institutions as they aim to improve overall education quality," he said.
The study comes at a time when India is experiencing rapid growth in higher education enrolment.
India's higher education system is one of the world's largest, enrolling 22 million students in more than 46,000 institutions.
"Our review of international literature indicates that countries striving for this type of decentralised system often rely on policies that link quality and funding," said Lindsay Daugherty, co-author of the report and an associate policy researcher at RAND.