India as the 4th Largest Economy…with 3rd Largest Tag within reach!

What’s the Point?

Last week, NITI Aayog CEO highlighted that India crossed Japan in economic size to become the 4th largest. This aligns with the April 2025 update of ‘World Economic Outlook’ by IMF, which estimates 2025 GDP (FY2026E GDP) for India at US$4.187tn, marginally ahead of Japan’s US$4.186tn.
Germany, with a GDP of US$4.7 trillion, is currently the third-largest economy. According to IMF projections, India could surpass Germany by 2028 (FY2029).
India remains the fastest-growing major economy, with relative upgrades in growth outlook. Despite global volatility, India’s macroeconomic resilience and positive fundamentals support a strong long-term investment case.
Over the next decade, manufacturing growth on the ‘supply side’ and rising consumption on the ‘demand side’ are expected to drive growth. Investment portfolios could consider these opportunities while positioning portfolios.

Numbers in Perspective

Source: IMF World Economic Outlook, April 2025. IMF estimates for CY2025 use FY2026 estimates for India and CY2025 for other countries.

India’s Rising Rank amongst Global Economic Giants

India has seen a sharp rise in its rank amongst countries with the highest GDP, especially since the 1991 reforms and liberalisation. From Rank 17 in 1991, we grew to Rank 10 in 2009-10 after the high growth and subsequent bust of 2003-08, 7th in 2015 amidst a turbulent global economy, and broke in to the top 5 by 2021 on the back of high growth in investments and reforms. As recently as the October 2024 update of the WEO, India’s timeline for 4th rank was 2026, which was upgraded in the April 2025 update. In this update, the timeline was brought ahead, and now 2025 is poised to mark our entry in the Top 4 club, with 2028 being the hallmark year when we could enter Top 3 by overtaking Germany. However, China and the US remain significantly ahead, with economies several times India’s current size.

Why is Greater Economic Size important?

Global Influence: A larger economy has the potential to command greater influence in international forums and trade negotiations.
Domestic Demand: A bigger economy reflects strong internal consumption demand, encouraging both domestic and foreign investment for local and global markets.
Policy Leverage: Greater fiscal and monetary flexibility to manage economic cycles and fund expenditure on socio-economic objectives.

Need for Faster and Higher Growth – India remains a Lower-Middle Income Country on a per capita basis

India’s current per capita income for 2025 was estimated at US$2,711, which is generally classified as lower-middle income country. As per IMF estimates, India would reach US$4,468.54 in 2030, growing at a rate of 9.2%. This however, still is in the lower-middle income range. To break out of this group, and avoid the ‘middle income trap’ India will need to continue to grow at a rapid pace while it still has the advantage of demographic dividend. Therefore, sustained investment in education, infrastructure, productivity, and innovation will be critical.

Macro Resilience and Supportive Environment

India’s macro environment remains robust and supportive of long term growth.

Industrial policy is geared towards strong manufacturing growth with reforms and incentives.
Monetary policy is supportive with two rate cuts in past two meetings, and more expected by analysts. Liquidity has also been in surplus, allowing transmission of rate cuts.
On the fiscal side, while there has been a push towards capex and consumption, comfortable fiscal deficit position (robust revenue growth, high RBI dividend) allows space for the private sector to invest and grow.

A key risk in the environment remains risks to global growth and trade, but India’s relatively low exposure to trade, along with high potential to grow share in global trade allows some comfort on that risk. Other powerful growth drivers for this decade remain the demographic dividend, digitisation and formalisation.

In the medium term, India's growth could continue to remain higher than world growth. On the supply side, higher manufacturing growth is possible with its share targeted to grow from ~14% to 20% by 2030. Services is also placed well with Indian labour force being well-educated, young, and amongst the only growing labour force among organised, stable countries. While agriculture could see reduction in labour force, it could continue to see strong growth on account of rising productivity, higher irrigation coverage, and use of technology. On the demand side, discretionary consumption could grow at a higher pace as the country moves past the US$2000 mark in per capita income.

Bottom Line: India’s economic ascent signals opportunity for investors. With strong fundamentals, a young population, and a supportive policy environment, India is well-positioned for long-term, broad-based growth. Investors may consider remaining invested through India’s period of strong economic growth, while increasing exposure to themes aligned with India’s growth story, such as manufacturing, infrastructure, consumption, and digital services.

Sources: IMF, PIB, RBI, MoSPI and other publicly available information

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