Is India the fourth-largest economy?

• India’s GDP projections from the International Monetary Fund (IMF) suggest it will be the fourth largest economy in the world in 2025, after the U.S., China, and Germany.

• The improved ranking is attributed to the Prime Minister’s leadership capabilities.

• There are rumors that India could become the third largest economy in 2028 and a high-income, developed country by 2047.

• The GDP of a country does not provide information about its people’s living and working conditions, health and education levels, and income distribution.

• There are calls to revise national account systems and use other indicators for better socio-economic assessment.

• The politicisation of statistical systems has clouded objective assessments of India’s economic status.

• Comparison of GDP sizes across countries is complex and requires careful use of the PPP method.

• The GDP estimates of all countries need to be in one common unit, the U.S. dollar.

• Two methods of converting a GDP estimate in a national currency to a GDP estimate in U.S. dollars are used: using market exchange rates from foreign exchange markets or dividing India’s nominal GDP by ₹85.69.

• The IMF projects India to be the fourth largest economy in 2025 and the third largest in 2028.

Comparing GDP Sizes Using PPP Exchange Rates

Variability of Market Exchange Rates

• Market exchange rates are volatile, making them unsuitable for stable temporal comparisons.

• They also fail to account for differences in “purchasing powers” between countries.

• Non-traded goods are often cheaper in developing countries than in developed ones.

PPP Exchange Rates

• PPP exchange rates convert national currencies into dollars, equating the cost of a “typical” basket of goods across countries.

• This method increases the estimates of GDP for developing countries where prices are relatively low.

Improving Comparisons

• PPP allows for a better comparison of GDP sizes than the market exchange rates method.

• However, the PPP method needs to be used carefully to avoid misleading inferences.

• Developing countries have lower wages, hence lower prices and incomes than in developed countries.

• The poorer and more underdeveloped a country is, the larger its “inflation” of GDP via the PPP route.

India’s Large GDP Size and Population

• India’s large GDP size has little to do with the well-being of its people.

• India’s per capita GDP in 2024 was $2,711, placing it at the lower end of the list of “lower middle-income countries.”

• A better way to measure India’s development is to compare indicators across countries that measure economic performance and social progress.