Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (150 words)
Potential GDP (gross domestic product) is the maximum level of output or real GDP that an economy can sustain without generating inflationary pressures. It is determined by the productive capacity of an economy, which is influenced by a range of factors such as the size and skill level of the labor force, the level of capital stock, the state of technology, and the level of natural resources.
Determinants of potential GDP:
- Labor force: A larger and more skilled labor force can increase the productive capacity of an economy.
- Capital stock: The availability of physical capital, such as machines and equipment, can also increase the productive capacity of an economy.
- Technology: The adoption of new and more efficient technologies can increase the productive capacity of an economy.
- Natural resources: The availability of natural resources, such as land and minerals, can also contribute to the productive capacity of an economy.
Factors inhibiting India from realizing its potential GDP:
- Infrastructural bottlenecks: India has struggled with inadequate infrastructure in areas such as roads, ports, and electricity, which can limit the productive capacity of the economy.
- Low investment: India has a low savings rate, which has contributed to low levels of investment and has hindered the growth of the capital stock.
- Poor education and health outcomes: India has relatively low levels of education and health outcomes compared to other countries at similar levels of development, which can limit the productive capacity of the labor force.
- Political instability and regulatory uncertainty: Political instability and unclear regulations can discourage investment and limit the productive capacity of the economy.
- Agricultural growth: Agricultural growth in India has been slow, which has limited the overall growth of the economy.
