Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (UPSC 2020)

Potential GDP is the highest level of output an economy can sustain over time when labour, capital and technology are used fully without fuelling inflation. It is a supply-side concept and shows the economy’s productive capacity.

• Determinants: size and quality of labour force, capital stock, technology, human capital, productivity, and institutional efficiency.
• What limits India: low female labour participation, skill mismatch, and high informality keep labour underused.
• Capital constraint: private investment remains weak, even when public capex is strong.
• Productivity constraint: low R&D spending, slow technology adoption and weak manufacturing depth reduce TFP.
• Structural bottlenecks: fragmented farms, land issues, weak contract enforcement, regulatory delays and slow labour reform reduce efficiency.

Thus, India’s potential GDP is restrained less by demand and more by supply-side weaknesses. Faster investment, skilling, better jobs and reforms in agriculture and regulation are vital to realise it.