India may soon become the third-largest economy in the world. But there is more to it

Indian Express

2 days ago

In a bout of professional enthusiasm, the chief executive officer of NITI Aayog, the Union government's policy body for transforming India, announced that the Indian economy had overtaken Japan to become the world's fourth-largest economy, following the USA, China and Germany. He jumped the gun because, as NITI Aayog member Arvind Virmani pointed out, this is likely to happen a few months down the road. With a nominal GDP of $4.187 trillion, India is set to move ahead of Japan's GDP of $4.186 trillion by the end of 2025.
However, as many have pointed out, the vast gap between Japan's per capita GDP of $33,900 and India's per capita GDP of $2,880 sets the two apart. India remains a low-middle-income economy, a developing economy with a modest per capita income but demographics that will sustain the growth process. Japan is a developed, if an ageing, industrial and trading power.
The sustained growth of the Indian economy over the past three decades, with its ups and downs, has, without doubt, slowly but surely increased the size of the economy. Way back in July 1991, the then finance minister of India, Manmohan Singh, told Parliament, prefacing his forecast with Victor Hugo's famous words that 'no power on Earth can stop an idea whose time has come', that the emergence of India as a major economic power in the world happens to be one such idea.
It became an idea that gained international recognition a few years later when the British historian Angus Maddison published his masterly survey of the world economy pointing to the resurgence of China and India. Maddison's classic study of The World Economy (OECD, 20023) made the point that in 1700, China and India accounted for almost half the world income and that two centuries of colonialism, combined with the fact that the Industrial Revolution had occurred mainly in Europe, contributed to the decline of these ancient and large Asian economies.
The Maddison study kindled hope in Asia that China and India were on the way to recover their lost space in the global economy and that the 21st century would once again be an Asian century. Since China was by then rising at a faster pace, it overtook Japan in 2010. This event happened soon after the transatlantic financial crisis (usually referred to as the global financial crisis), of 2008-09. The crisis had helped China overtake Japan and Europe and reduce the gap with the USA. It created a global flutter and marked the turning point in China's global rise. It is instructive to recall that in 2010, China overtook Japan when Japan's GDP was still $5.474 trillion.
China's emergence as the world's second-largest economy sent Japan into a funk. Japan had already lived through a decade of low growth and low expectations, and China overtaking it became a wake-up call. It would not be incorrect to speculate that the return of Shinzo Abe as prime minister of Japan in 2012 (his first term of 2006-07 was truncated by poor health) was partly on account of Japan's yearning for a strong and charismatic leader focused on economic revival.
Abe began his second tenure launching the 'three arrows' programme that came to be known as 'Abenomics' — of aggressive monetary easing, liberal fiscal policy and structural reforms aimed at enhancing productivity and growth. This gave Japan hope that, despite being pushed to third place by China, it could still remain a globally important economy.
The exit of Abe, followed by a string of lacklustre leadership and the challenges posed by the return of President Donald Trump, have depressed Japan once again. To add to its woes, Germany recently overtook Japan, becoming the third-largest economy, pushing Japan to fourth place. Germany, too, has been slowing down, and so Japan and Germany could see themselves swapping places from time to time, depending on their relative performance. Also, recall that China overtook a still-growing Japan, India is overtaking a slowing Japan and a slowing Germany.
It is against this background that news has come from the International Monetary Fund that India is now poised to overtake Japan. It is interesting to note that while there was much hand-wringing and widespread concern in Japan when China overtook it, the news about India has not made any impact in Japan. There was, according to my friends in Japan, little news coverage and no expression of any concern. This could be on account of the fact that while China is viewed as a challenge in Japan, India is viewed as an opportunity.
Good diplomatic and economic relations have, in part, contributed to a benign response in Japan to the news of India's rise. Equally, the fact that India in no way poses any challenge to Japan, either as an economic competitor or as a geopolitical rival, would also explain the subdued reporting of the IMF news. When China overtook Japan, the former was viewed as a significant competitor in the global market as well as a geopolitical rival. Export-dependent Japan viewed with concern the rise of China as a global trading power. India, on the other hand, is still not viewed as a competitor in the trading world, much less a geopolitical rival.
It is still possible that exchange rate changes, new challenges in global trade and seasonal performance of the three economies — India, Japan and Germany — may keep the rank race alive for some time. After all, the gap between the three is not much. If the Indian economy forges ahead over the next few years and crosses the $5 trillion mark, it would place some distance between itself and Japan and Germany. If not, these rankings could keep changing.
What is, however, certain is that once India clearly establishes itself as the third-largest economy, it will remain in that place for a long time to come, given the distance it has to travel to catch up with China, whose nominal GDP is currently around $18 trillion. With the US and China in a race for economic space and geopolitical influence, India's best bet would be to focus on its own economic performance and ensure that it is able to sustain an inclusive growth process that makes the economy more competitive and improves peoples' lives.
The writer is founder-trustee, Centre for Air Power Studies and distinguished fellow, United Service Institution of India