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

Meaning

• Potential GDP (or potential output) is a trend path set by productive capacity. The output gap is actual GDP minus potential: negative in a slump, positive when the economy overheats.
• It is estimated, not observed — filters, production functions, and survey slack. Policy still needs the idea: stimulus that only fills a gap is not the same as reform that raises the ceiling.

Determinants

• Labour: working-age population, participation (especially women), skills, and health. A demographic bulge raises potential only if people work and are productive.
• Capital stock: machines, structures, infrastructure, and housing. Investment as gross fixed capital formation is how the ceiling moves.
• Total factor productivity: organisation, technology, cities, and institutions that let the same labour and capital yield more.
• Land and natural capital, energy reliability, and the financial system’s ability to allocate saving to investment.
• Openness to ideas and competition, and a stable macro regime (inflation, fiscal, external) so firms invest for the long run.

What inhibits India from realising it

• Low female labour-force participation and still-weak job creation in manufacturing waste the demographic gift.
• Infrastructure and logistics gaps, power quality, and delayed projects raise the capital cost of every extra unit of output.
• Factor-market frictions: land acquisition, labour dualism, and stalled factor reforms keep resources in low-productivity uses.
• Balance-sheet stress in banks and corporates (the twin-balance-sheet years) and later NBFC stress cut credit to new capital.
• Human capital: learning poverty, health, and nutrition cap TFP even when diplomas multiply.
• Regulatory and judicial delay, policy uncertainty, and a large informal sector with thin productivity.
• Agriculture’s disguised unemployment and water-energy distortions lock labour below its potential product.
• Demand slumps (including the 2019–20 slowdown and then COVID) can leave actual GDP far below an unchanged potential, and scarring can then pull potential itself down.