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Is India the world’s fourth largest economy?
What It Really Means for the Economy and Citizens?
Context: India is set to overtake Japan as the world’s fourth-largest economy in 2025, according to recent projections by the International Monetary Fund (IMF).
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- With an estimated GDP of $4.19 trillion, India will trail only the United States, China, and Germany.
- By 2028, India could climb to the third position, with government sources hailing this as a result of strong leadership and a step toward achieving the ambitious ‘Viksit Bharat 2047’ vision.
- While this milestone has generated significant media and political attention, the celebration of India’s economic size demands deeper scrutiny.
Many Faces of GDP: Why Bigger Doesn’t Always Mean Better
- Limitations of GDP: Gross Domestic Product (GDP) is a common measure of a country’s economic output.
- However, GDP does not reflect how wealth is distributed, how healthy or educated people are, or how well they live.
- It also ignores unpaid but essential economic activities—such as domestic work, often carried out by women.
- Over time, many experts and economists have called for moving beyond GDP as the sole measure of national progress. Still, global and domestic discourse continues to prioritize it.
- Politicisation: What complicates the picture further is the politicisation of statistics in recent years, which often distorts objective assessments.
- The current debate on India’s GDP rank is one such example. Comparing the GDP of different countries is far from straightforward—it depends on how GDP is calculated and converted into a common currency like the U.S. dollar.
How GDP Is Measured: Market Exchange Rate vs. Purchasing Power Parity (PPP)
To compare national economies, GDP must be expressed in a single currency. This is usually done in two ways:
- Market Exchange Rate (MER) Method: This uses real-time currency exchange rates to convert a country’s GDP into U.S. dollars.
- By this method, India ranked fifth globally since 2021, and is projected to become the fourth-largest economy in 2025, overtaking Japan. It may become the third-largest by 2028.
- Purchasing Power Parity (PPP) Method: The PPP method accounts for differences in cost of living and price levels across countries.
- It compares how much a “basket of goods” would cost in different economies.
- Since goods and services tend to be cheaper in developing countries, their GDP looks larger when adjusted for PPP.
- For example, a Big Mac may cost $12 in New York but just $4.50 in Mumbai. A haircut in New York may be $30, while it’s just $2.40 in India.
As a result, under the PPP method: India became the third-largest economy as early as 2009. The IMF’s PPP projections show no rank change between 2024 and 2030.
- So why has the government opted to highlight MER-based GDP rankings? Simply put, it suits a political narrative of rapid global ascent—even though PPP-based rankings tell a more consistent, long-term story.
Understanding the Limitations of PPP and GDP Rankings
- While PPP-adjusted GDP offers a fairer view of real economic capacity, it can also inflate the economic status of poorer countries.
- This is because low wages and prices make goods and services appear more affordable. But these lower prices also stem from deep structural issues such as:
- Widespread informal employment
- Low productivity
- Wage suppression
- Unpaid labor
- For instance, 76% of India’s casual agricultural workers and 70% in construction earn below minimum wage (ILO India Employment Report, 2024).
- The reality is that lower prices in India reflect economic underdevelopment, not superior affordability.
- Statements like those by NITI Aayog Vice-Chairperson Suman Berry, who claimed India’s PPP-based GDP had reached $15 trillion—half that of the U.S.—must be treated cautiously. These figures mask the glaring gap in per capita income and quality of life.
India’s Per Capita GDP: The Real Indicator of Well-Being
- Per Capita GDP: India may be climbing in total GDP size, but its per capita GDP remains low due to its massive population: $2,711 in 2024 (current dollars) – placing India among lower-middle-income countries.
- In contrast, Vietnam’s per capita GDP reached $4,536, and Sri Lanka’s was $4,325.
- Even in 1991, India had a higher per capita GDP than Vietnam—but by 2024, Vietnam had surged ahead.
- Market Exchange Rate: In terms of market exchange rate, India ranked 144th out of 196 countries in per capita GDP in 2024.
- Even with PPP adjustments, it ranked only 127th.
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- This mismatch between total GDP and per capita GDP has led many to call this the “big economy illusion”—a scenario where total output hides persistent poverty and inequality.
What Should We Measure Instead?
To understand whether India is truly progressing, it’s important to look beyond GDP. A more accurate picture of development comes from indicators such as:
- Life expectancy and healthcare quality
- Literacy and education levels
- Employment rates and job security
- Access to clean water and sanitation
- Gender parity in the workforce
- Wealth and income inequality
- These human development indicators offer a clearer sense of how people are living and working—not just how much their country produces.
India’s expected rise to the fourth-largest economy in 2025 is no doubt a noteworthy milestone. But GDP rankings are not an end in themselves. True development must be measured by how well a nation meets the needs of its people.
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The Source’s Authority and Ownership of the Article is Claimed By THE STUDY IAS BY MANIKANT SINGH
