GS Question

Potential GDP, also known as potential output, refers to the maximum level of real GDP an economy can produce without causing inflation. It represents the economy's sustainable long-term growth potential when all resources are fully utilized.

Determinants of potential GDP include:

1. Capital: The level of physical infrastructure, such as factories, machines, and equipment, impacts potential GDP. Higher capital investment leads to increased productivity and output.

2. Labor: The size and quality of the labor force are critical determinants. Factors like population growth, education, skills, and labor market flexibility affect potential GDP.

3. Technology: Technological advancements enhance productivity and innovation, leading to higher potential GDP. Investments in research and development, intellectual property rights, and technological diffusion contribute to this determinant.

4. Natural resources: The availability and efficient utilization of natural resources influence potential GDP. Factors like energy reserves, land, water, and minerals can affect a nation's economic output.

5. Efficiency: Productivity gains and efficiency improvements through factors like better resource allocation, logistics, governance, and a conducive business environment enhance potential GDP.

In the case of India, several factors have inhibited it from realizing its potential GDP:

1. Infrastructure Deficiencies: Inadequate transport, power, and digital infrastructure limit productivity and inhibit economic expansion.

2. Education and Skill Gaps: A significant proportion of the population lacks quality education and required skills, leading to a mismatch between labor supply and market demand.

3. Informal Economy: India has a large informal sector that operates outside the regulated framework, limiting productivity, tax revenues, and inclusive growth potential.

4. Labor Market Challenges: Rigid labor laws, restrictive regulations, and limited job opportunities contribute to unemployment and underemployment, hindering potential GDP.

5. Governance and Institutional Issues: Corruption, bureaucratic hurdles, and weak institutions can impede efficient resource allocation, investment, and economic growth.

6. Inequality: High income and wealth inequality can hinder the consumption and investment capacity of a significant portion of the population, limiting aggregate demand and potential GDP.

Addressing these inhibiting factors requires comprehensive reforms in infrastructure development, education, labor market flexibility, governance, and socio-economic policies to unlock India's full potential GDP.