Potential GDP refers to the maximum sustainable output an economy can produce without generating inflationary pressure, when all resources are fully and efficiently employed.
Determinants of Potential GDP
Labour Force & Human Capital – Size, skill, and productivity of the workforce.
Capital Formation – Investment in infrastructure, machinery, and technology.
Technology & Innovation – R&D and digital transformation driving productivity.
Institutional Quality – Governance, regulatory efficiency, and property rights.
Total Factor Productivity (TFP) – Efficiency in using labour and capital together.
Prevailing Inflation Rate – Persistent inflation distorts real GDP from its potential level.
Global Conditions – Protectionism, trade restrictions, and geopolitical tensions. Eg- Tariff Wars
Factors Inhibiting India from Realizing Potential GDP
Low Female Labour Force Participation – FLFPR only 41.7% (PLFS) against global average of 48%
Slow Capital Formation – GFCF at ~29.6% of GDP (2024) vs 34% in 2023.
Skill Mismatch & Education Gaps – Only 4.7% of workforce formally skilled (NSDC).
Infrastructure Bottlenecks – Logistics cost ~13% of GDP vs 8% in USA
Weak Productivity Growth – Low TFP and informal sector dominance. (83% informal sector)
Regulatory Cholesterol – Delays, compliance burden, weak contract enforcement.
Way Forward
Enhance Human Capital – Invest in education, healthcare, and skill development
Accelerate Investment & Infrastructure Growth through faster project execution under PPP.
Create safe workplaces, flexible jobs, and childcare support to tap women’s economic potential.
Increase R&D spending to 2.5% of GDP (currently <1% of GDP) for productivity gains.
To realize its potential GDP and Viksit Bharat 2047, India must shift from factor accumulation to productivity-driven growth