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

Potential GDP is the real value of goods and services that can be produced when a country's factors of production are fully employed. It is the maximum sustainable level of output that an economy can produce.

As per the Economic Survey 2015-16, the determinants of potential GDP are:

1. Physical capital (Capital stock of the economy should be fully utilised)

2. Human capital

3. Labour (Labour force should be productively employed)

4. Productivity (Factor productivity of various factors of production should be high)

5. Economy’s technological efficiency 

Potential GDP tends to grow slowly because inputs like labour and capital and the level of technology changes quite slowly over time. As per Economic Survey 2015-16, India's medium/ long term growth potential is somewhere between 8 to 10 percent.

Following are the major factors hindering India from realising its potential GDP:

Demand Side Factors.

• Less domestic demand due to low purchasing power of majority of the population

• Foreign demand is also weak due to protectionist measures taken by several countries and trade war

• The recent Covid-19 crisis will add up to the already low demand

Supply side Factors.

• Infrastructure bottlenecks

• Low manufacturing base

• Huge informal labour force which lacks productivity

• Lack of skills among the youth

• Less focus on research and development

But the recent structural reforms initiated by the Government in various fields like Agri reforms, GST, IBC2016, coal sector reforms, increase in FDI in defence manufacturing to 100% etc. will help India to achieve its potential GDP growth in the coming years.