Q19.Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realising its potential GDP?

Potential GDP is the maximum sustainable output an economy can produce when all its resources (labor, capital, land, technology) are fully and efficiently employed without accelerating inflation. It represents the economy's productive capacity.

Key determinants include:

• Quantity and quality of labor force (education, skills, health).
• Stock of physical capital (machinery, infrastructure).
• Technological progress and innovation.
• Availability of natural resources.
• Institutional efficiency and governance.

India faces several inhibiting factors:

• Low private investment and capital formation due to policy uncertainty and crowding out.
• Human capital deficit: poor education, skill mismatch, and health challenges.
• Infrastructure bottlenecks: deficiencies in energy, transport, and digital infrastructure.
• Land and labor market rigidities: complex land acquisition and restrictive labor laws.

Addressing these structural impediments through targeted reforms is crucial for India to unlock its full economic potential and achieve higher, sustainable growth.