GS3 PYQ (Mains Answer Writing): Gross Domestic Product | Indian Economy for UPSC CSE PDF Download

Define potential GDP and its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (UPSC MAINS GS3 )

India has a potential GDP growth rate of 6-7 per cent. The long-term growth prospective or potential for India is one of the highest in the Asia Pacific region. Concept of potential GDP and its determinants. Potential gross domestic product (GDP) is the level of output that an economy can produce at a constant inflation rate.
However, the cost of rising inflation could make an economy temporarily produce more than its potential level of output. The capital stock, the potential labor force depending on demographic factors and participation rates, the non-accelerating inflation rate of unemployment, and the level of labor efficiency determine this potential output which is important to calculate the output gap.
Factors inhibiting the potential GDP of India from realizing its potential. 

• Fiscal policy and structural determinants of the economy. fiscal policies followed by the country directly impact the potential GDP as these determine the flow of capital and technology. 
• High employment generation in the economy will show that potential GDP to be high but it will not be achieved due to low productivity from employment generation. 
• Currency depreciation is another issue. GDP is calculated using American dollars after converting it from Indian rupees. The depreciation of Indian rupees vis a vis American dollars will reduce GDP value. 
• The inflow of foreign capital may decrease over some time due to various factors. This will result in the economy not being able to emulate the potential numbers. 
• The infrastructure growth in the domestic economy may not be in predicted lines. This will hamper the final contribution to GDP output. 
• Lots of practical reforms have taken place and they are broadly facilitating the macro growth and should ultimately also translate into a better corporate earnings environment. larger headline reforms like the Goods and Services Tax that have mixed results but a lot of micro-level reforms like the ease of doing business has improved the situation dramatically, This has a direct impact on potential GDP.

Topics Covered - Potential GDP and Its Determinants