India's Potential Growth Rate: The 6.5% Puzzle and the Role of Private Investment
UPSC Relevance
Prelims: Indian Economy (Concepts of National Income - GDP, GVA; Investment - Gross Fixed Capital Formation (GFCF); Economic Growth - Potential Growth Rate, Incremental Capital-Output Ratio (ICOR)).
Mains:
General Studies Paper 3 (Economy): Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Investment models. Understanding the determinants of potential growth is crucial for analyzing the long-term health of the economy.
Key Highlights from the News
Although India's Q1 2025-26 GDP growth was 7.8%, the article argues that the country's actual long-term growth potential (potential growth rate) is still 6.5%.
Key reasons behind this conclusion:
In the years after COVID, Q1 growth was always higher than average. Compared to that, 7.8% is not a big jump.
The country's investment rate (Gross Fixed Capital Formation Rate - GFCFR) has remained steady at around 34% for the past three years.
The potential growth rate is calculated using the formula: Potential Growth Rate = GFCFR / ICOR.
Current key challenges:
Investment by the private corporate sector is declining.
In recent years, the country's investment has primarily relied on public sector investment. However, its growth momentum is also slowing down.
The contribution of net exports turned negative.
The article concludes that if the country's growth potential is to be raised from 6.5%, increasing private investment is essential.
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