Subject: Economy

Answer:

Potential GDP represents the maximum sustainable output an economy can produce utilizing its resources at normal capacity without triggering inflation. It serves as a crucial benchmark for policymakers to assess economic performance and formulate growth strategies.

Determinants of Potential GDP

Physical Capital Formation

• Infrastructure Development: The expansion of India's National Highway network from 91,287 km in 2014 to 146,195 km in 2025 demonstrates capital formation.
• Savings and Investment: India's gross domestic savings rate of 29.3% (2023) enables capital accumulation for productive investments.

Human Capital

• Education and Skills: Measured through the Human Development Index, India's improvement to 0.685 in 2023 reflects enhanced human capital formation.
• Labor Force Quality: Investment in skill development through initiatives like Skill India Mission augments workforce productivity.

Technological Progress

• Innovation Capacity: Development of digital infrastructure through Digital India initiative.
• Research and Development: Investment in scientific research and technological advancement.

Factors Inhibiting India's Potential GDP

Structural Constraints

• Infrastructure Bottlenecks: Despite improvements, inadequate physical infrastructure limits productive capacity.
• Resource Underutilization: Inefficient allocation and use of resources reduce potential output.

Social and Demographic Challenges

• Income Inequality: As per the HDI Report 2025, inequality reduces India's HDI by 30.7%.
• Gender Gap: Limited female labor force participation restricts economic potential.

Institutional Factors

• Regulatory Environment: Complex regulations and bureaucratic procedures hamper business operations.
• Market Inefficiencies: Imperfect market structures and information asymmetries affect resource allocation.

The gap between actual and potential GDP can be bridged through focused interventions in physical infrastructure, human capital development, and institutional reforms. IMF's projection of 6.2% growth for 2025 suggests room for improvement in realizing India's full economic potential through comprehensive policy measures and structural reforms.