India's economy may overtake Japan soon, but with caveats

India is set to become the world’s fourth-largest economy by the end of 2025 (FY 2025-26), according to the International Monetary Fund’s (IMF) World Economic Outlook (WEO) report released in April.

A few years ago, India overtook the United Kingdom to become the fifth largest, and is now well on its way to rise to the fourth spot in the list of the top 10 largest economies in the world by overtaking Japan.

In just 11 years, India has surged from the world’s 10th to the 4th largest economy — a remarkable trajectory driven by sustained growth and strategic reforms under the NDA government.

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India’s growth numbers have triggered premature celebrations, as there is more to it than meets the eye.

India is set to become the world’s fourth-largest economy this year, but with the world’s largest population, its per capita GDP remains strikingly low at just $2,880, according to the IMF — far behind China’s $13,690 and Japan’s $33,960.
Gross Domestic Product (GDP) per capita is a key economic indicator that measures the average economic output (or income) per person in a country. Economists use GDP per capita to determine the prosperity of countries based on their economic growth.

India doesn’t even rank in the top 100 countries when it comes to GDP per capita, not even in the Purchasing Power Parity or PPP rankings.

A large population (1.4 billion) dilutes the gains of the GDP doubling. Also, informal employment ( approximately 90% of workforce) and low female workforce participation (26% vs. global 47%) limit per capita gains, says Sachchidanand Shukla.
Still, the per capita income has close to doubled over the last 10 years. “That is keeping pace with the overall GDP growth as the population growth is slowing down with fertility rates going close to the replacement rate of 2.2. However, there are regional disparities owing to differential population growth rates as well as the pace of economic development,” says Ranen Banerjee.

The brighter picture in 5 points:

In 2025, India will become the 4th largest economy in the world, in nominal GDP terms, overtaking Japan, and will be behind only the US, China, and Germany.

India’s nominal GDP has more than doubled from 2014 to 2025 (projected). It’s a growth of 105% in just a decade. In 2025, India will also become a $4 trillion economy.

India was the 10th largest world economy in 2014 - come 2025 it will be the 4th largest - a six places jump in rankings in just 11 years.

In a world of increasing global economic uncertainties, and amidst geopolitical conflicts and Donald Trump’s tariffs, India will still retain the tag of being the fastest growing major world economy with a GDP growth rate of 6.2% for 2025.

India achieved an average annual growth rate of 6.7% from 1990–2023 & in fact outpaced the US (3.8%), Germany (3.9%), and Japan (2.8%).

What lies ahead?
India will realise its dream of becoming a $5 trillion economy in 2027 and the world’s third largest in 2028 by overtaking Germany. But to be on the path of stable and sustained economic growth, experts stress on the need for continuous reforms.

PwC’s Ranen Banerjee advocates for reforms that enable private enterprise to do business without the fear by decriminalising regulatory compliances with application of technology to support in compliances.

“Enabling exports through common facilities for quality outputs by MSMEs and continued investment in infrastructure to bring down logistics cost and enhance evacuation capabilities will be needed,” he adds.

L&T’s Shukla says, “Going forward India will need to undertake deep agricultural reforms, labour reforms, education & skilling at a scale along with judicial administrative & police reforms,” he says.

Radhika Rao of DBS Bank sees the need to focus on employment generation. “Wheels of the structural engine will require to be oiled by keeping the development and reform agenda on track. Quality of growth is also likely to improve as macro balances remain in check alongside a changing trade composition. Lifting employment generation and by extension boosting incomes will be the vital objective for the administration in the rest of its term,” she says.

There’s no question that India ranks as one of the most crucial markets worldwide, including for major powers like the US and China. Over the past 11 years, political stability at the central government and ongoing reforms have strengthened global investor confidence. However, for the benefits of this growth to reach the broader population, it’s essential to focus on creating ample employment opportunities for young people and building a robust manufacturing sector to ensure sustained, stable, and dependable economic progress.

(With TOI inputs)