Road to Number Three

IS INDIA'S ECONOMY NOW THE WORLD'S FOURTH largest as NITI Aayog CEO B. V. R. Subrahmanyam announced last month? Not quite, not yet.

- Minhaz Merchant

The International Monetary Fund (IMF) says India will become world's fourth largest economy by the end of 2025, moving marginally ahead of Japan with a GDP of $4.19 trillion.

What's next? Germany is currently at number three, only slightly ahead of India at $4.53 trillion. The IMF projects that India’s economy, growing at 6.5 per cent a year, will overtake Germany's economy, growing at less than one per cent a year, to become the world’s third largest economy in 2027-28 with a GDP of $5.3 trillion. Only the United States and China will lie ahead.

What about per capita income? India’s nominal per capita income is less than $3,000, below the level of several sub-Saharan African countries. But of course, nominal per capita income is an inaccurate measure of living standards. The cost of living differs widely between, for example, Boston and Bhopal.

The IMF and World Bank recognise this. They routinely publish per capita income measured by purchasing power parity (PPP). It is instructive to examine India’s and Japan's per capita income by both nominal and PPP metrics.

According to the IMF, India’s nominal per capita income in 2025 is $2,900 compared to Japan’s $33,900. The gap is around eleven times. According, again, to the IMF, India’s per capita income (PPP) in 2025 is $12,132. Japan's per capita income (PPP) is $54,680. The gap narrows from 11:1 to just above 4:1.

Critics say India’s ascent to the world’s third largest economy by 2027-28 is simply a function of a large population. Per capita income, they point out, should be the only metric of importance. And India fares poorly on that count. This argument is flawed on two grounds.