UPSC Mains 2020 · GS III · Q2 · 10 marks · 150 words

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

हिन्दी में

संभाव्य स० घ० उ० (जी० डी० पी०) को परिभाषित कीजिए तथा उसके निर्धारकों की व्याख्या कीजिए। वे कौन-से कारक हैं, जो भारत को अपने संभाव्य स० घ० उ० (जी० डी० पी०) को साकार करने से रोकते रहे हैं?

Macroeconomic Indicators

How a topper answered the closest question

Toppers wrote this one in a test series: “What is the status of India's fiscal deficit? Discuss the factors responsible for it, its potential consequences, and suggest measures for fiscal consolidation. Also, examine the potential of capital investment in the Indian economy and the challenges faced in this regard.”

Srajit KumarAIR 277 · CSE 2024 · 331 wordsTheir whole copy

Opening

India's fiscal deficit in FY 2023-24 was 5.1% of GDP, which is required to be lower as per FRBM Act.

I. Factors for high fiscal deficit

Body

  1. High revenue expenditure on subsidies. → ₹1.64 lakh crore for fertiliser subsidy in 2024-25 provisioned.

  2. Poor financial health of states due to 'freebie' culture

  3. Less tax base: Only 4.9% Indians pay income tax.

  4. Heavy dependence on imports for energy.

II. Potential consequences

  1. Crowding out of private sector investments.

  2. Heavy interest burden on government.

  3. Reduced welfare schemes would increase inequality.

  4. Less capital expenditure would reduce infrastructure.

III. Measures for fiscal consolidation.

  1. Follow targets set by FRBM Act: (1.1) 4.5% of GDP as fiscal deficit by FY 25-26. (1.2) 60% debt-to-GDP ratio from current 81%.

  2. Check on freebie culture.

  3. Rationalisation of subsidies - irrigation, fertiliser, food etc.

  4. Check on states to ensure more focus on capital expenditure. Around ₹15 lakh crore is provisioned for capex in FY 25 budget, which is step in right direction.

Annual budget has provisioned around ₹15 lakh crore on capex by state & central govt. combined.

I. Potential of Capital Investment

  1. Increase & Ease of Doing Business by improving logistics, governance, social infrastructure. → India ranked 38/158 on Logistics Performance index.

  2. Create jobs: reducing pressure on agriculture. → 46% workforce in Agriculture (PLFS-23).

  3. Increase efficiency in export promotion, making exports competitive. → 14% of GDP is spent on logistics.

  4. Social infrastructure: would make growth inclusive. → Build schools, hospitals etc.

  5. Sustainable growth by investments in green technology.

II. Challenges faced by India

  1. Private sector investment is still lacking.

  2. Freebie culture: reduces focus on capital investments.

  3. High subsidies: reduces incentives for efficiency. → High irrigation subsidy leads to more water intensive crops.

  4. Low per capita income: reduces the demand created. → $2400 per capita is lowest in top 10 economies.

Close

Focus on social, environment & economic investments would make development more inclusive.

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Source: UPSC, Civil Services (Main) Examination 2020, General Studies Paper III, Q2. The paper on upsc.gov.in. Themes and links to toppers’ answers are by UPSC Grade, not by UPSC.