India — towards becoming the third largest economy in the world

India is climbing the ladder of large economies at an accelerated pace.

In brief

• India is predicted to become the third-largest economy by FY28, overtaking both Japan and Germany.
• In that year, India’s GDP is estimated to be US$5.2 trillion, crossing the US$5 trillion benchmark.
• Strategies to absorb oil price shocks and contain government borrowing at prudent levels would help India sustain high growth in the medium term. 

India’s medium-term growth prospects

While most advanced economies (AEs) are facing an economic slowdown, chronic shortages, high inflation, and aging populations, the Indian economy is acknowledged to be the fastest-growing large economy by major multilateral organizations, including the IMF.

Size of the Indian economy in market exchange rate and purchasing power parity (PPP) terms

In comparing the relative size of the economy, using GDP as a summary measure, two perspectives can be drawn. One relates to the conversion of the domestic currency using the market exchange rates and the other, using the PPP conversion rate. Table 1 shows that in market exchange rate terms, India’s GDP overtook that of the UK in 2021 (FY2022 for India), making it the fifth-largest economy. Further, the Indian economy is projected to overtake both Japan and Germany in 2027 (FY28 for India) to become the 3rd largest economy. At this point, the US economy would still be nearly six times as large as the Indian economy¹.

In PPP terms, which focuses on the purchasing power of the domestic currency within the economy, India is already the third-largest economy, well above Japan and Germany. Further, at the end of 2027 (FY28 for India), the US economy would be only about 1.7 times that of India in PPP terms. In the next few decades, if India can maintain a real growth of about 6% to 7%, it would be possible to catch up with the US economy².

There are, however, various critical economic parameters other than GDP that are relevant in such inter-country comparisons of economic growth prospects and potential. We consider some of these below.

Trends in the growth of population and workforce

In the current century, unlike other major economies, the Indian economy has a significant advantage linked to the economic potential of its large size and age structure of its population. Recent population trends³  indicate that India has already overtaken China in terms of total population. With this, India is estimated to have the largest share of the global population at 17.8%, equivalent to more than one-sixth of the global population. In terms of the share of working-age population, India is expected to overtake China in 2030. This share is projected to remain not only higher than that of China in the remaining decades of this century, but the gap is also estimated to increase. Further, India would maintain the lowest old-age dependency ratio throughout the remaining decades of the century relative to the peer countries⁴, enabling higher saving and investment rates.

A key challenge for the Indian economy is to find productive employment for the large and growing working age population. Creation of suitable employment opportunities is therefore India’s key current policy challenge. This situation may become even more challenging due to the emerging labor-saving technological developments relating to AI and Generative AI. It is notable that India’s total labor force participation rate estimated at 49.6% in 2024 is the lowest among peer countries. India’s female labor force participation rate at 24.1% would also be the lowest amongst these countries.

Trends in indebtedness

Another critical economic dimension is to assess a country’s liabilities relative to its respective GDP, as this indicates the burden of debt servicing for future generations which is to be provided from future income. India is most favorably placed in comparison to its peers with a total debt-GDP ratio⁵ of 172.7% at the end of December 2022. In comparison, China’s total debt-GDP ratio is nearly 300% and that of Japan is more than 400%. These high liabilities would have to be serviced by these countries, especially in a period when the share of their working-age population would be shrinking. Considering the liabilities of the government alone, India’s general government debt-GDP ratio is the second lowest after Germany.

Strategies for promoting and stabilizing India’s growth

Technological innovations pertaining to AI/Gen AI result in growth-promoting but employment-reducing impacts. India must ensure, by suitable policy support, that the employment reducing effect of these technological developments is overcome by the growth-expansion effects in a manner such that net employment growth remains suitably positive while overall GDP growth is considerably enhanced. Table 2 provides a summary of some of the recent available estimates of the economic impact of AI/Gen AI on the global as well as the Indian economies.