Paper: GS – III, Subject: Economy, Topic: Economic survey & Budget, Issue: India’s potential growth rate.
Context:
The latest Economic Survey, spearheaded by Chief Economic Advisor (CEA) V. Anantha Nageswaran, has officially upgraded India’s “potential” economic growth rate from 6.5% to 7%. This signals a structural shift in the economy’s ability to grow sustainably without overheating.
Key Takeaways:
What is “Potential Growth Rate”?
It is crucial to distinguish this from the annual GDP growth rate.
- Annual GDP Growth: The actual speed at which the economy grows in a specific year.
- Potential Growth: The “speed limit” of the economy. It is the maximum rate at which an economy can grow without triggering high inflation.
- If actual growth > potential growth: Inflation rises (Supply cannot keep up with Demand).
- If actual growth < potential growth: Resources are underutilized (unemployment, idle factories).
The “Why”: Drivers of the Upgrade:
The Survey attributes this increase to the cumulative impact of policy reforms over the last three years. The upgrade is driven by improvements in three fundamental components
A. Capital Stock (Physical Assets):
- What it is: Infrastructure like roads, bridges, and machinery.
- The Catalyst: Reforms such as Production-Linked Incentive (PLI) schemes, FDI liberalisation, and logistics reforms. These have boosted the country’s supply-side capacity.
- Projection: Growth in capital stock is expected to rise to 7.6% in the FY26-FY30 period.
B. Labour Input (Workforce):
- What it is: Not just the number of workers, but their skills and capacity.
- The Catalyst:
- Labour law consolidation and reduced regulatory compliance.
- State-level reforms lowering market friction.
- Sustained investments in education, skilling, and apprenticeships improving employability.
C. Total Factor Productivity (TFP):
- What it is: The efficiency with which Labour and Capital are combined.
- The Catalyst: Digital public infrastructure and efficiency reforms.
- Projection: TFP growth is estimated to rise to 1.90% (FY26-FY30) from earlier lows.
Caveats and Risks:
- Geopolitical Conflicts: The survey acknowledges that geopolitical tensions and their associated economic consequences could hinder India’s ability to achieve its potential.
Raising potential growth to 7% reflects reform-driven optimism. Manufacturing, labour efficiency, and human capital are key, but sustained reforms and global stability remain crucial for realizing this growth.
Source: (The Indian Express)
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