2020 · GS Paper 3 · Q2 · 10 marks
Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP?
In short
Potential GDP is the highest output an economy can sustain with full use of labour, capital and technology without inflation, and India's is held back by underused labour, slowing productivity and weak private investment. Female labour force participation was only 41.7% in PLFS 2023-24.
Model answer
Ghissu Editorial · Verified 4 Oct 2026 · 264 words
Labour and capital
Output depends on the size, skill and participation of the workforce and on the machinery and infrastructure built by investment, with capital formation above 30% of GDP (Economic Survey 2025-26).
Productivity
Total factor productivity from technology and from moving workers out of farming raises output from the same inputs.
Institutions
Contract enforcement, logistics and power decide how efficiently inputs combine.
Underused labour
Female participation of 41.7% (PLFS 2023-24) and over 45% of workers in agriculture keep labour input low.
Productivity slowdown
Azim Premji University estimates labour productivity fell 0.5% in 2023-24 and would be 41% higher had pre-2018 growth continued.
Weak private investment
The twin balance sheet problem and the 2018 NBFC crisis held back private capex.
Regulatory and skill frictions
A 163rd rank on enforcing contracts (Doing Business 2020) and only about half of youth employable (India Skills Report 2024) keep firms small.
This model answer is indicative and the model can make mistakes; please verify key facts independently.
Practise this question
1Get the answer sheet
Sized for this question.
2Write your answer
Timed, by hand.
3Get it marked
Your score and what to fix.
This chapter in the exam
Growth8 questions
Asked in 6 of 14 sittings since 2013
- 2024Discuss the merits and demerits of the four 'Labour Codes' in the context of labour market reforms in India. What has been the progress so far in this regard?
- 2024What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.
All 8 questions, sorted by sub-topic, with model answers and practice.
Question from the official UPSC Civil Services (Main) Examination 2020 paper. Answer written by Ghissu's engine and checked against our editorial standards. Found an error? Tell us and we correct it within 48 hours.