India Becomes the World’s 4th Largest Economy

Syllabus: GS3/Indian Economy

Context

• Recently, NITI Aayog CEO B.V.R. Subrahmanyam informed that India has surpassed Japan to become the world’s fourth-largest economy (nominal GDP), and poised to displace Germany in the next 2.5 to 3 years.

India’s Economic Growth

• India’s nominal GDP has now reached $4.19 trillion, overtaking Japan’s estimated $4.18 trillion.

• The IMF’s World Economic Outlook report predicts that India aims to continue to be the fastest-growing major economy, with a projected growth rate of 6.2% in 2025 and 6.3% in 2026. 
  • Over the past decade, India has doubled its GDP from $2.1 trillion in 2015 to its current level.

Becoming the Third-Largest Economy

• The IMF projects that India will become the third-largest economy by 2028, with an expected GDP of $5.5 trillion by overtaking Germany.
  • Germany’s projected GDP growth: 0% (2025), and 0.9% (2026) (due to ongoing global trade tensions).

Key Determinants of India’s Economic Growth

• Expanding Domestic Consumption: India’s economic growth is largely fueled by private consumption, particularly in rural areas.
  • Also, the urbanization and lifestyle shifts have led to an increase in consumption-led growth. India’s urban population is expected to touch 600 million by 2030.
  • The demographic dividend is a unique edge—India’s median age is just 29 years, offering a productive workforce for the coming decades.
• Infrastructure Development & Digital Transformation: India has invested heavily in modernizing infrastructure, including transportation, energy, and digital connectivity.
  • For example: India’s Digital Public Infrastructure (DPI), emergence of India as a global startup hub & boost in the IT sector enhancing innovative driven growth.
• Manufacturing & Services Sector Growth: India’s manufacturing sector has seen significant growth due to initiatives like Make in India and Production-Linked Incentive (PLI) schemes.
  • Additionally, the services sector, particularly IT and financial services, continues to be a major contributor to GDP.
• External and Global Realignment: Strategic initiatives like “China Plus One” and Supply Chain Resilience Initiative (SCRI) are leading to increased FDI inflows into India.
  • Global firms are diversifying their manufacturing bases, turning to India as an alternative to China amid geopolitical tensions For example: Apple has investors in India for manufacturing units. 
• Reform-Driven Growth: Introduction of Goods and Services Tax (GST) has created a unified domestic market, Insolvency and Bankruptcy Code (IBC) has improved the ease of doing business, Corporate tax cuts & initiatives like PM Gati Shakti, National Infrastructure Pipeline (NIP), and Atmanirbhar Bharat  are boosting capital formation. 

Challenges and Concerns

• Global Geopolitical Uncertainty: India’s economy is deeply connected to global trade, and geopolitical tensions — including conflicts, trade restrictions, and supply chain disruptions — pose risks to its growth.
  • The Economic Survey 2025 highlights that ongoing conflicts and trade policy risks could create vulnerabilities for India’s economic stability.
• Inflation and Price Volatility: While inflationary pressures have eased, services inflation remains persistent.
  • The rising cost of essential commodities, including fuel and food, continues to be a concern for policymakers.
• Employment and Workforce Challenges: India’s workforce faces disruptions due to automation and AI.
  • The need for upskilling and reskilling is critical to ensure that workers remain competitive in a rapidly evolving job market.
• Trade Deficit and Export Challenges: India’s current account deficit has been reduced to 1% of GDP, but weak global demand has impacted exports.
  • The government is focusing on diversifying trade partnerships to mitigate risks associated with declining exports.
• Infrastructure and Investment Needs: India’s Capital Expenditure (Capex) to GDP ratio has surged to 3.3%, reflecting strong investment in infrastructure.
  • However, sustained investment is required to modernize transportation, energy, and digital connectivity.

Way Forward

• Diversify its trade partnerships to reduce dependency on volatile global markets.
• Strengthen domestic manufacturing through various initiatives and schemes.
• Invest in digital transformation to enhance financial inclusion and governance.
• Focus on sustainable economic policies that balance growth with environmental concerns.

Source: News on AIR