CNBC's Inside India newsletter: India is set to be the world's fourth-largest economy — but sustained growth will warrant more reforms

CNBC

29-05-2025

A top Indian official's recent claim that the South Asian powerhouse has become the world's fourth-largest economy has created a lot of buzz in the country's social media, with an outpouring of self-congratulatory messages.
While India has taken giant strides in boosting its GDP — it was ranked No. 10 in 2014 — and continues to be the fastest-growing major economy, it's best to take the latest claims with a fistful of salt.
Briefing the media on Sunday, B.V.R. Subrahmanyam, CEO of India's state-run think tank Niti Aayog said, "we are the fourth-largest economy as I speak ... and this is not my data. This is IMF [international monetary fund] data."
"India today is larger than Japan," Subrahmanyam said, adding that the nation will go on to displace Germany as the third-largest economy and place just behind the U.S. and China in around three years.
IMF data, however, projects India's economy to reach $4.187 trillion in 2025, marginally surpassing Japan's $4.186 trillion. So while not already there, the country is very much on the path to becoming the fourth-largest economic powerhouse, preceded by Germany, China and the U.S.
Keeping the trajectory in focus, and putting aside the merits of the claim, what is it that's working for the country — and what is holding it back?
"Long-term structural dynamic," driven by India's huge demographic and growing educated youth population, is enhancing India's capabilities in technology and services, while also paving its ambitions to become a manufacturing hub, said Malcolm Dorson, senior portfolio manager at Global X ETFs — one of the largest foreign asset owners in India.
Dorson also sees "tactical tailwinds" from lower oil and higher gold prices, given India imports around 80% of its energy needs, while roughly 20% of the nation's household savings in physical gold.
Collectively, these factors make India a "fine-tuned compounding machine," he said, adding that the country gaining a spot in the top four by GDP ranking "is a done deal."
Dhiraj Nim, foreign exchange strategist and economist at ANZ Bank agrees: It should not be surprising if India becomes the world's fourth-largest economy around mid to end this year, aided by improving domestic consumption as demand in rural clusters improves.
Consumption constitutes over 56% of India's economy — making it the top growth engine. Rural areas accounted for nearly 40% of overall consumer goods sales in the first quarter of 2025, data from market research firm NielsenIQ shows.
A sizable number of India's rural population is farmers, so Nim expects a pickup in their spending in the upcoming quarters with better weather conditions facilitating higher crop yields and in turn stronger income and purchasing power, with falling inflation also supporting consumption.
He also expects urban consumption to grow, albeit at a slower pace, following tax cuts and stimulus doled out in the budget earlier this year, with more rate cuts by the Reserve Bank of India offering an added boost.
The benefits of India's economic growth will translate into increased capital flows, as foreign investors would want to capitalize on it, Dorson said.
"This could lead to higher valuations, which inherently would translate into more supply, and deeper capital markets. We could also see Indian equities more prominently included in global exchanges, which would lead to more flows," he said.
India has strong tailwinds supporting its economy, but it needs to undertake several reforms to ensure sustained growth.
While India is set to be the world's fourth-largest economy, there is a "huge disconnect in the standard of living and the social, economic and physical infrastructural between India and Japan," Shumita Deveshwar, chief India economist at TS Lombard said.
India's current per capita GDP is $2,880, a fraction of Japan's $33,960, IMF data shows.
"There's so much work that really needs to be done in India to bridge this gap and it starts from increasing capital expenditure on infrastructure such as transportation networks, to improving access to education, workforce skills upgrading and jobs in general," Deveshwar noted.
ANZ's Nim calls India becoming the world's fourth-largest economy merely a "natural course of events."
"It really means not much to me. India is now the fifth-largest economy, but is not very prosperous, so more work needs to be done to increase the prosperity of citizens," he said, flagging the need for India to be more open to foreign businesses which already have an incentive to be in the country given its cheap cost structures.
He suggests that policymakers strategically identify sectors India has a comparative advantage in, rather than try to manufacture everything. Focusing on select industries over a range of sectors will ensure that the workforce has the needed skills to make quality products that are competitive against those produced in other emerging markets with lower costs.
Deveshwar highlights that policymakers should ensure that reforms are meted out quickly, so that growth is sustained. Lack of capacity, manpower and physical infrastructure have historically held back policy rollouts, so effective execution is needed to meet quite aspirational and ambitious targets.
"There have been hurdles and lags in policy implementation such as in passing labor reforms, farm reforms and other incomplete reforms that have really delayed the productivity and output in many sectors. We need to fix that so India remains competitive and sustains its position as the world's fourth — or eventually even third largest economy," Deveshwar added.
A trade deal between India and U.S. could be reached in late June. Negotiations are progressing quickly and U.S. officials are expected to visit India soon to discuss the deal further, reported CNBC-TV18, which cited government sources. Imports of genetically modified crops from the U.S. will still be prohibited by New Delhi because of regulation, but non-modified agricultural products could see the green light.
India's shipment of iPhones to the U.S. jumped in April. Market analyst firm Canalys, now part of Omdia, estimates that total shipment rose 76% year on year to around 3,000,000. By contrast, China's iPhone shipments to the U.S. fell to 900,000 in the same month, plummeting roughly 76% from a year earlier. The huge shifts in numbers are because of harsh tariffs the White House imposed on China, Omdia said.
U.S. President Donald Trump told Apple CEO Tim Cook he wants iPhones built in America. Smartphones manufactured outside the U.S., whether in "India, or anyplace else," wrote Trump on his social media platform Truth Social, will incur a "Tariff of at least 25%." Analysts have said it would be a tall feat for Apple to shift production to America because of supply chain and cost issues. Apple is also continuing to expand its operations in India.
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Indian stocks were trading flat Thursday even as most Asian markets rose after a U.S. federal trade court ruled that President Donald Trump exceeded his authority with his "reciprocal" tariffs. The benchmark Nifty 50 and the BSE Sensex were little changed as of 12.10 p.m. Indian Standard Time.
Since the start of the year, the 50-stock benchmark has risen 4.6%, while the BSE Sensex has gained over 4%.
The benchmark 10-year Indian government bond yield were down marginally at 6.171%.
On CNBC TV this week, Nikhil Bhandari, Goldman Sachs' co-head of APAC natural resource and clean energy research, said the bank believes India's oil demand will be the "fastest growing" among large economies over the next two decades because of income growth in the country. However, as India's oil production is flat, the South Asian nation will have to rely on diversifying its import sources for energy security.
Meanwhile, Abrar Mir, managing partner at Quadria Capita, a private equity firm that focuses on healthcare companies, said that there's "significant" innovation happening in India's hospital sector. Businesses in the country are building high quality hospital systems that serve the underprivileged in rural areas, while doing it in a financially viable way, which is an "eminently exportable business model," Mir said.
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India's first-quarter economic growth data, out Friday, will give an indication if the country's economy can meet its growth target for the current fiscal year.
With four mainline initial public offerings the upcoming week, India's IPO market seems to be picking up.
May 30: India gross domestic product data for FY25 fourth quarter
June 2: India HSBC manufacturing PMI, final reading, for May, Aegis Vopak Terminals IPO, Schloss Bangalore IPO
June 3: Prostarm Info Systems IPO
June 4: India HSBC services PMI, final reading, for May, Scoda Tubes IPO
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