As upbeat Indian economy closes gap with Japan, Germany, the real test will be at the podium

India Today

3 days ago

The arc of India's economic story is finally bending towards the inevitable. A country long seen as a sleeping giant of the global economy is now stirring into a position of hard power—measured not just in dreams and demographics, but in dollar terms.As of the latest IMF World Economic Outlook, India's nominal GDP in FY26 stands a chance to become $4.19 trillion and is likely to cross Japan's GDP. India is poised to not only beat Japan but also begin the chase to overtake Germany this fiscal.advertisementThe gap between India and Germany—the long-reigning industrial behemoth of Europe, currently at $4.74 trillion—is just $550 billion, narrower than it has ever been. The writing is on the wall: India is on track to overtake Germany and become the third-largest economy in the world by nominal GDP within the next 12 to 24 months.This shift is as much about momentum as it is about mathematics. Germany's economy is projected to grow at a sluggish nominal rate of 2.2 per cent in 2025 and 2.5 per cent in 2026, while India is clocking 9.8 per cent nominal growth in 2025 on the back of a 6.8 per cent real GDP increase and roughly 3 per cent inflation.
Apply compound interest math to both trajectories, and the projection becomes clearer: by end-2026, India's GDP will likely cross $4.6 trillion to $4.7 trillion while Germany's would rise marginally to $4.86 trillion. If the rupee remains relatively stable against the US dollar—hovering around the Rs 85-87 mark—the tipping point arrives either in the final quarter of 2025 or early 2026. By 2027, India could be nearly $200–$250 billion ahead.advertisementThat shift would mark a fundamental reordering of global economic heft. It will be the first time since post-War Bretton Woods institutions began ranking global economies that India enters the top three in nominal GDP—behind only the United States and China. And unlike China, which surged into second place powered by export-led manufacturing and heavy state intervention, India's rise is driven by a cocktail of domestic consumption, digitisation, services exports and a slow but steady resurgence in manufacturing.The numbers reveal a deeper story. In 2014, India's nominal GDP was $2 trillion, less than half of Germany's $4.2 trillion. Since then, India has doubled its GDP while Germany has added just $500 billion. In dollar terms, India has added more to global GDP than any European economy in the last decade, and it has done so despite multiple global headwinds: Covid-19, the energy crisis, rising interest rates and the reordering of global supply chains post-China.Much of that growth has been fuelled by domestic factors. India's tax-to-GDP ratio has improved marginally, from 10.1 per cent in FY15 to over 11.3 per cent in FY24. GST collections have stabilised above Rs 1.6 lakh crore per month, with e-invoicing and compliance measures increasing formalisation. The government's capex push—Rs 11.1 lakh crore in FY25, up nearly 27 per cent year on year—is reshaping India's infrastructure backbone. The railways, roads and airports pipeline is not just growing, it is catalysing private investment.advertisementMeanwhile, the services sector, especially IT and business process outsourcing, continues to deliver. India exported over $325 billion in services in FY24—up from $213 billion in FY19. Software exports alone are touching $180 billion. Combine this with the rise in remittances—over $125 billion annually, the highest in the world—and you have a robust current account buffer, despite being a net importer of energy.Germany, by contrast, is facing structural stagnation. Once the world's model exporter, it is now grappling with a declining industrial base, skyrocketing energy costs, and negative demographics. Its population has begun to shrink, with a median age of 47 and a birth rate of just 1.53 per woman. Contrast that with India's median age of 28.4, a fertility rate of 2.0, and an expected workforce addition of 100 million people by 2030.Germany's growth engine—export-led manufacturing—is faltering. Its trade surplus has fallen from over 8 per cent of GDP in 2015 to just 3.3 per cent in 2024. The war in Ukraine and the resulting cutoff from cheap Russian gas has devastated its energy-intensive industries—chemical plants, auto manufacturing and heavy engineering. BASF is downsizing, Volkswagen is facing electric vehicle competition from China, and industrial production is yet to recover to pre-Covid levels. As of Q1 2025, Germany narrowly avoided a recession, posting just 0.2 per cent real growth.advertisementIndia's challenge now is not whether it can cross Germany—it almost certainly will. The real question is: can it hold the position? Can it use its growing economic weight to build enduring competitiveness, create good jobs and avoid the middle-income trap?'Crossing Japan and later Germany will be symbolic, but what truly matters is whether this growth empowers India's masses. We must build self-reliant capabilities in manufacturing, reduce our import dependence and ensure that economic expansion translates into jobs and dignity for every Indian,' said Dr Ashwani Mahajan, economist and national co-convenor of the Swadeshi Jagran Manch, an affiliate of the Rashtriya Swayamsevak Sangh (RSS), in a conversation with INDIA TODAY.The pitfalls are many. First is the jobs crisis. While India is growing, the employment elasticity of that growth is worryingly low. The Periodic Labour Force Survey still shows unemployment among urban youth in double digits. The manufacturing sector's contribution to GDP has hovered around 16-17 per cent for the last two decades. The government's Production Linked Incentive (PLI) schemes aim to change that, but so far, only a few sectors—mobile phones, electronics and solar modules—have shown scale impact.advertisementFor India to create the 10 million jobs a year it needs, manufacturing has to expand at a consistent 9-10 per cent clip for the next decade.Second, there's the looming risk of fiscal slippage. India's combined (Centre + states) fiscal deficit remains at around 8.9 per cent of GDP in FY24, with the debt-to-GDP ratio at 82 per cent. Though the Centre is committed to reducing its fiscal deficit to below 4.5 per cent by FY26, any populist deviation—particularly in light of the 2029 general elections—could unnerve investors. India needs to maintain macroeconomic discipline if it wants to keep its sovereign rating above the investment grade threshold.Third, India's trade deficit—over $245 billion in FY24—remains a vulnerability. While service exports and remittances help balance the current account, any spike in crude oil prices or capital outflows due to global rate hikes could destabilise the rupee. Even a 5 per cent depreciation could erase gains in nominal GDP rankings, given the dollar-denominated nature of global comparisons. The rupee-dollar equation will be a silent but powerful variable in this race.advertisementThe rupee, in fact, has depreciated from Rs 62 per dollar in 2014 to Rs 85-87 in 2025. If that trend continues unchecked, even high nominal growth may not reflect in dollar terms. Therefore, the Reserve Bank of India's (RBI) management of external balances, forex reserves (now at $645 billion), and inflation expectations will remain crucial.India's regulatory and institutional bottlenecks also loom large. Despite advances in ease of doing business, issues like contract enforcement, land acquisition and complex tax compliance continue to deter investors. India ranks 163rd in the world in contract enforcement and still struggles to attract global FDI in large-scale manufacturing beyond electronics and automobiles. Germany, for all its problems, still ranks among the world's top five destinations for FDI per capita due to its policy certainty, skilled labour and logistics infrastructure.'India's rise to becoming the third-largest economy must be backed by deep structural reforms. We need to strengthen our fiscal fundamentals, deepen financial inclusion and invest in long-term capital formation. Without strong institutions and sound macroeconomic management, even rapid growth can become fragile,' explains Dr Charan Singh, chairman of the EGROW Foundation and former chairman, Punjab & Sindh Bank.To truly consolidate its position in the top three, India must invest heavily in human capital. As of 2023, India spends just 2.9 per cent of GDP on education and 2.1 per cent on healthcare—far below the OECD (Organisation for Economic Cooperation and Development) average. Without a robust skills and social safety net ecosystem, the demographic dividend could easily turn into a demographic liability.But the upside is enormous. India is already the world's fastest-growing major economy. It has more internet users than the US and EU combined. It is home to 100-plus unicorns, over 800 million UPI users, and a digital public infrastructure that the World Bank calls a 'global public good'. If India can plug its institutional gaps and build trust-based regulation, it could become the growth engine of the 2030s.Consider this: by 2030, if India sustains an 8 per cent nominal GDP growth rate and the rupee stabilises, its economy will cross $6.8 trillion–$7 trillion. Japan, already behind India at $4.11 trillion and barely growing due to an ageing population and persistent deflationary pressures, is unlikely to regain its position. Germany, growing at 2.5 per cent, would hover around $5.3 trillion. The lead would be decisive—India would not just have overtaken Germany and Japan but would firmly establish itself as the world's third-largest economy and second-largest in Asia, behind only China.Of course, these are projections, not inevitabilities. But what is now certain is that India's climb is no longer a dream deferred—it is a milestone imminent. The baton is passing. From Berlin to New Delhi. From the Old World to the New South. The world's third-largest economy could ultimately be a democracy of 1.4 billion, not an industrial giant of 84 million. The race to be number three is hot. The real test will begin at the podium.Subscribe to India Today MagazineMust Watch