India As The Fourth Largest Economy: An Analytical Perspective

India as the Fourth Largest Economy: An Analytical Perspective

Abstract

Over the past year, there has been intense debate in academic, policy, and media circles regarding whether India has officially become the world’s fourth-largest economy. While several reports, videos, and unofficial estimates suggested that India had overtaken Japan, an official confirmation from the Government of India was awaited. This confirmation came just before the New Year through a press release issued by the Press Information Bureau (PIB), stating that India has indeed surpassed Japan to become the fourth-largest economy in the world in nominal GDP terms. This article provides an overall analytical perspective on this development, explains what being the “fourth largest economy” actually means, examines the drivers behind India’s economic rise, compares India with Japan and Germany, and critically evaluates the gap between aggregate GDP and per capita income.

Introduction

India’s ascent in global economic rankings marks a significant milestone in its development trajectory. According to the Government of India, India’s nominal GDP has reached approximately USD 4.187 trillion, marginally surpassing Japan. Alongside this announcement, the government has projected that India may overtake Germany within the next three years, potentially becoming the third-largest economy by the end of the decade. However, headline rankings often conceal important structural realities. Therefore, it is essential to analyze this achievement from a broader economic perspective.

Understanding the Concept of the Fourth Largest Economy

The claim that India is the fourth-largest economy is based on nominal GDP, measured at current prices and converted into US dollars using prevailing exchange rates. Nominal GDP reflects the total monetary value of goods and services produced within a country over a year. It captures the overall size of economic output but does not account for population size or income distribution.

As per recent estimates: – United States: ~USD 28 trillion – China: ~USD 18 trillion – Germany: ~USD 4.5 trillion – India: ~USD 4.1–4.2 trillion – Japan: ~USD 4.168Slightly below India

This ranking reflects aggregate economic output rather than individual prosperity, a distinction that becomes crucial when comparing per capita income levels.

India’s “Goldilocks” Phase of Growth

In its PIB release, the Government of India described the current phase of growth as a “Goldilocks moment”—a situation where economic growth is strong while inflation remains relatively moderate. Typically, high growth is accompanied by high inflation, but India currently exhibits a favorable balance. Consumer Price Index (CPI) inflation has remained under control even as GDP growth has accelerated, creating conducive conditions for sustained expansion.

How Did India Overtake Japan?

Several structural and cyclical factors explain why India has surpassed Japan in nominal GDP terms.

1. Growth Trajectories

Japan is a mature, developed economy with limited growth potential. Over the past three decades, its average growth rate has hovered around 1% or less. In contrast, India, as a developing economy with a large and youthful population, has consistently recorded real growth rates between 6% and 7%.

2. Demographic Differences

Japan faces rapid population ageing, leading to a shrinking workforce and lower productivity growth. India, on the other hand, enjoys a demographic advantage with a median age of around 28 years, supporting both consumption and production.

3. Currency Effects

Nominal GDP comparisons are sensitive to exchange rate movements. While the Indian rupee has depreciated in recent years, the Japanese yen has weakened even more significantly. Since GDP is measured in US dollar terms, currency depreciation directly reduces nominal GDP rankings.

4. Structural Momentum

India is witnessing strong momentum in manufacturing expansion, infrastructure development, and the digital economy. Japan, by contrast, has faced prolonged deflationary pressures and relatively stagnant domestic demand.

Key Drivers of India’s Economic Rise

India’s economic expansion is supported by multiple reinforcing drivers:

Demographic Advantage

A large working-age population fuels consumption, savings, and investment, making demographics one of India’s strongest growth engines.

Infrastructure Push

Massive public investment in highways, railways, airports, ports, logistics parks, and urban infrastructure has reduced logistics costs and improved competitiveness across sectors such as cement, steel, and manufacturing.

Manufacturing and Industrial Policy

Government initiatives such as the Production Linked Incentive (PLI) schemes across electronics, defence, pharmaceuticals, and other sectors have boosted domestic manufacturing. Additionally, the global “China+1” strategy has redirected foreign investment towards India.

Strong Domestic Demand

India’s GDP composition reveals that consumption contributes nearly 55–60% of total output. A growing middle class has driven demand in housing, automobiles, services, and consumer goods, insulating the economy from global shocks.

Digital Public Infrastructure

The expansion of Aadhaar, UPI, and the GST network has lowered transaction costs, enhanced formalisation, and improved efficiency across the economy.

Why Germany Is Likely to Be Next

Germany currently ranks as the world’s third-largest economy, with a nominal GDP exceeding USD 4.5 trillion. However, India is projected to overtake Germany within the next three years due to differential growth rates. India has been growing at an annual rate of approximately 6.5–7.7%, with recent quarterly growth figures reaching 7.4%, 7.8%, and 8.2%. Germany, in contrast, has struggled to grow beyond 1–2% annually.

Moreover, Germany is heavily export-dependent and vulnerable to global trade slowdowns, energy transition costs, and an ageing population. India’s growth model, driven largely by domestic consumption, provides greater resilience.

Additionally, India’s GDP base year is expected to shift from 2011–12 to 2022–23, which may further raise measured GDP levels, potentially accelerating the overtaking of Germany.

Aggregate GDP vs Per Capita Income: The Core Challenge

Despite India’s impressive aggregate GDP ranking, per capita income remains relatively low due to its large population. With a population of approximately 1.43 billion, India’s per capita GDP is around USD 2,800.

In contrast, Japan (population ~123 million) has a per capita GDP of around USD 34,000. – Germany’s per capita income is similarly high.

This implies that the average Japanese citizen earns nearly 12 times more than the average Indian. Thus, while India’s economic size has expanded, individual prosperity has not yet reached comparable levels.

Implications for Policy and Global Standing

Becoming the fourth-largest economy enhances India’s global standing. It strengthens India’s role in global supply chains, increases its attractiveness for foreign direct investment, and enhances its influence in multilateral institutions such as the IMF, World Bank, and G20.

Geopolitically, India is increasingly viewed as a balancing power between the United States and China, gaining leverage in trade negotiations, climate diplomacy, and technology governance.

However, the ultimate success of economic growth depends on its translation into employment generation, higher productivity, improved education, better healthcare, and rising living standards.

Conclusion

India’s emergence as the world’s fourth-largest economy is a significant symbolic and structural milestone. Official confirmation by the Government of India underscores the country’s strong growth momentum and favorable macroeconomic conditions. Nevertheless, this achievement should be interpreted with caution. High aggregate GDP does not automatically imply widespread prosperity. The central challenge ahead lies in converting economic growth into inclusive development, higher per capita incomes, and improved human development outcomes. Only then will India’s rise in global rankings reflect genuine progress for its citizens.

About the Author:

Dr. Nitish Kumar Arya

Dr. Nitish Kumar Arya is an Assistant Professor of Economics in the University Economics Department, Bhupendra Narayan Mandal University, Madhepura, Bihar, India. He is working in Public Economics and Public policy with a special focus on contemporary economic issues.

Internationalization of the Rupee: India’s Significant Geo-Economics Maneuver

Internationalization Of The Rupee: India’s Significant Geo-Economics Maneuver – Analysis – Eurasia Review

Internationalization of the rupee indicates that it may be freely exchanged between residents and non-residents and that it can be used as a reserve currency in international trade. It entails encouraging the use of the rupee for capital account transactions, other current account operations, and import and export trade.

International Trade Settlement in Indian Rupees (INR)

To promote the growth of global trade with an emphasis on exports from India and to support the increasing interest of the global trading community in Indian currency (INR), the Reserve Bank of India (RBI) announced a new mechanism for international trade settlement in Indian rupees (INR). Encouraging the use of the Indian currency in cross-border trade is one of the major goals of the Foreign Trade Policy (FTP) 2023 of India, which comes into effect from April 1, 2023.

The RBI has also updated from time to time about the broad framework for exporting goods and services from India according to the Master Direction of the Foreign Exchange Management Act, 1999 (FEMA). The approved dealer banks will need prior clearance from the RBI’s foreign currency department before implementing this method. All exports and imports made in accordance with this arrangement may be priced in rupees.

Market forces may decide the rate of exchange between the currencies of the two trade partners. The authorised dealer banks (DB) have been allowed to open rupee Vostro accounts (an account that a correspondent bank holds on behalf of another bank). The rupee payment system also allows Indian exporters to collect advance payments in Indian rupees from foreign importers against shipments. The surplus rupee balance in the Vostro accounts may be used for advanced flow management of export-import transactions, investments in government securities, and payments for projects and investments.

According to the RBI, the authorised dealer bank maintaining the special Vostro account will have to ensure that the correspondent bank is not from a country or jurisdiction in the updated public statement of the Financial Action Task Force (FATF) on high-risk and non-cooperative jurisdictions on which FATF has called for countermeasures.

Driving factor

In a move to counter Russia’s war in Ukraine, the US and the European Commission issued a joint statement to exclude seven Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system, which was the trigger point for all countries. This payment arrangement assumed greater importance in 2022–23 as India increased its dependence on discounted Russian oil, making it the second largest source of crude oil. Russia’s exports to India in 2021 stood at $6.9 billion, mainly consisting of mineral oils, fertilisers, and rough diamonds, while India exported goods worth $3.33 billion to Russia in 2021, mainly comprising pharmaceutical products, tea, and coffee.

In December 2022, India made its first settlement of foreign trade in rupees with Russia as part of the ‘International Settlement of Trade in Indian Rupee’ mechanism initiated by the RBI. As per the Bureau for International Settlements (BIS) “Triennial Central Bank Survey 2022”, as of April 2022, USD accounts for about 88% of global foreign exchange market turnover, followed by the Euro, Japanese Yen, and Pound Sterling. The Indian rupee accounts for a mere 1.6%.

In March 2023, the RBI allowed the opening of Special Rupee Vostro Accounts (SRVAs) to put in place the mechanism for rupee trade settlement with as many as eighteen countries. It includes Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, the Seychelles, Singapore, Sri Lanka, Tanzania, Uganda, and the United Kingdom. In April 2023, India and Malaysia agreed to settle trade in Indian rupees. Amid talks towards finalising a free trade agreement with India, Bangladesh is also considering the settlement of bilateral trade in Indian rupees.

Significance

The most important advantage of internationalising the rupee is to reduce dependency on the USD for foreign trade. It would further increase the bargaining power of India in international business. Expanding the use of the rupee for international trade will reduce currency risk for Indian businesses by eliminating their exposure to currency volatility. This can reduce the cost of doing business and, hence, make exports more competitive in the global market. Additionally, the need to maintain forex reserves can be drastically reduced if a sizable share of India’s trade can be settled in terms of the domestic currency.

What are the major roadblocks to the internationalization of the rupee?

Rupee-trade arrangements are not easy to implement, which is why India and Russia have suspended efforts to settle bilateral trade in rupees after months of negotiations failed to convince the latter to keep rupees in their coffers. The rupee is not fully convertible; India’s share of global exports of goods is just about 2%, and these factors reduce the necessity for other countries to hold rupees. India accounts for less than 4% of global services trade, 2.5% of global merchandise trade, and an even lower percentage of global financial activities. 

Consequently, Russia wanted the trade to be done in Chinese Yuan, UAE Dirham, or other currencies. India has a trade deficit with its major trading partners, including China, the UAE, Saudi Arabia, and Russia. In fact, India’s large trade deficit vis-à-vis Russia, which implies that the latter would be saddled with large rupee balances, is also why it has been reluctant to engage in rupee-ruble trade. Balancing exchange rate stability and domestic monetary policy is one of the major obstacles to the internationalization of the rupee. As the rupee becomes more internationalised, it is likely to become more vulnerable to external economic shocks, such as changes in global interest rates or fluctuations in commodity prices. This could make it more difficult for the central bank (RBI) to maintain both exchange rate stability and a domestically oriented monetary policy.

When a currency is internationalised, both residents and non-residents can buy and sell domestic currency-denominated financial instruments such as stocks, bonds, and other securities. This means that the demand and supply of the country’s currency can be influenced not just by domestic but also external factors (outside the country). If this happens in the case of the rupee, the RBI will have limited control over the money supply within its own borders, which could make it difficult to maintain stable interest rates that are in line with the requirements of the domestic economy.

For the rupee to be effectively internationalised, the government will have to remove restrictions on any entity (domestic or foreign) from buying or selling rupee; this implies no restrictions on the flow of capital in and out of the country, which would require full convertibility on the capital account. However, successive Indian governments have avoided full convertibility on the capital account to prevent the Indian economy from being exposed to the risks of external financial shocks.

What Measures Can Be Taken to Facilitate Rupee Internationalization? 

Among the emerging economies, China is the only country that has been able to steadily internationalise its currency while maintaining controls on its capital account. It has done so by finalising currency swap agreements between the central banks of China and 43 other countries, which assure the markets that there will not be an oversupply of the renminbi.

Creating an offshore market for its domestic currency that allows foreign entities to sell renminbi for dollars. However, it must not be forgotten that China also has a trade surplus with most of the other countries.

India needs better planning

It would require India to have considerable thinking and planning to make the rupee's internationalization function in a manner that does not adversely affect the economy’s fundamentals. The government must carefully balance the benefits with the potential risks and respond appropriately to ensure the stability of the economy. It also requires India to have a large and deep domestic financial market to be better equipped to handle external shocks and make it easier for the RBI to manage its monetary policy. India has made a modest attempt at facilitating rupee trade; the idea will take time to gain acceptance.

For the time being, the rupee’s acceptance will potentially be limited to countries that have a deficit with India. India will need to enrol other trade partners that will be able to use their rupees to buy goods from India. The US and European Union are the major export destinations for India, and the others would be oil-exporting nations. Getting the latter into our fold sounds plausible. Removal of restrictions on buying and selling of domestic currency in both the spot and forward markets. Domestic firms can invoice exports and imports in their own currency. Foreign firms, financial institutions, government institutions, and individuals can hold the country’s currency and financial instruments.

About the Author

Dr. Nitish Kumar Arya

Dr. Nitish Kumar Arya is an Assistant Professor of Economics in the University Economics Department, Bhupendra Narayan Mandal University, Madhepura, Bihar, India. He is working in Public Economics and Public policy with a special focus on contemporary economic issues.

Innovation, Growth, and the Power of Creative Destruction: The 2025 Nobel Laureates in Economics

Innovation, Growth, and the Power of Creative Destruction: The 2025 Nobel Laureates in Economics

“Progress is never calm. It thrives on disruption, creativity, and courage.” — Philippe Aghion, Nobel Laureate 2025

When the Royal Swedish Academy of Sciences announced the 2025 Nobel Prize in Economics, three familiar names echoed across academic corridors: Joel Mokyr, Philippe Aghion, and Peter Howitt. Each, in his own way, has helped redefine how we understand the driving force of modern prosperity — innovation. Together, they have reshaped the field of growth economics by explaining how societies progress not through stability, but through the restless churn of creative destruction.

Their joint recognition celebrates decades of research that explores one central idea: economic growth is not a natural consequence of capital or labour alone, but the result of human creativity constantly reinventing the world.

The Core Idea: Innovation as the Engine of Growth

At the heart of this Nobel recognition lies the theory of innovation-driven growth, which builds upon and modernizes Joseph Schumpeter’s concept of creative destruction. This process — the incessant cycle where new ideas and technologies replace old ones — forms the foundation of what economists now call endogenous growth theory.

Instead of viewing technological progress as an external or random factor, Mokyr, Aghion, and Howitt demonstrated how innovation arises from within the economic system itself. Entrepreneurs, researchers, and inventors are not peripheral players; they are the beating heart of modern economies.

Joel Mokyr: The Historian of Progress

Born in the Netherlands and now a professor at Northwestern University, Joel Mokyr has long been regarded as one of the most original thinkers in economic history. His lifelong quest has been to answer a deceptively simple question: Why did the modern world begin when and where it did?

Mokyr’s work blends history, economics, and culture to show that the Industrial Revolution was not just a mechanical transformation, but a cultural one. In his influential books — such as The Gifts of Athena (2002) and A Culture of Growth (2016) — he argued that Europe’s scientific culture, intellectual openness, and communication networks laid the groundwork for an unprecedented explosion of innovation.

According to Mokyr, ideas are the true capital of civilization. He demonstrated that societies prosper when they create environments that encourage experimentation, debate, and the free exchange of knowledge. His research traces how the Republic of Letters — an informal network of scholars and thinkers in 17th- and 18th-century Europe — created the fertile intellectual soil for industrial and technological revolutions.

In doing so, Mokyr connected historical insight to modern growth theory, suggesting that innovation flourishes only when institutions reward curiosity and tolerate failure. This perspective made him not just an economist, but a philosopher of progress — reminding us that economic growth begins in the imagination.

Philippe Aghion and Peter Howitt: The Architects of Modern Growth Theory

While Mokyr looked to history to understand innovation, Philippe Aghion and Peter Howitt built the mathematical and theoretical scaffolding that explains how innovation drives growth today.

Their collaboration began in the early 1990s, culminating in their landmark 1992 paper “A Model of Growth through Creative Destruction.” This paper — now one of the most cited works in modern economics — transformed Schumpeter’s metaphor into a rigorous model.

The Aghion-Howitt Model: Creative Destruction in Equations

In their model, economic growth arises from a constant process of technological innovation. Each new idea or product displaces an older one, raising productivity but also rendering some skills, firms, or industries obsolete.

This process is not smooth; it is disruptive by design. The Aghion-Howitt model captured how the incentives for innovation depend on competition, intellectual property rights, and the structure of markets. Too little competition can stifle creativity, while too much can erode the rewards of innovation. Balancing these forces is what determines whether an economy becomes stagnant or dynamic.

Their framework also reshaped the way policymakers view long-term growth. Instead of relying solely on macroeconomic stability or capital accumulation, Aghion and Howitt showed that innovation policy — education, research funding, and competitive markets — is the true key to sustainable prosperity.

Philippe Aghion: The Visionary of Inclusive Innovation

Aghion, born in France and currently teaching at the Collège de France, has extended the growth model into the terrain of policy and inequality. His recent work explores how innovation interacts with competition, social mobility, and the environment.

He has argued that innovation should not be feared as a destroyer of jobs or industries, but managed as a force for inclusion and resilience. In his book The Power of Creative Destruction (with Céline Antonin and Simon Bunel), Aghion contends that societies must embrace technological change while protecting those displaced by it through education, retraining, and dynamic welfare systems.

Aghion’s policy message is both optimistic and pragmatic: “We should not try to slow down innovation; we should make it fairer.” His vision aligns growth theory with the moral imperative of shared prosperity — a theme that resonates deeply in an era of automation, inequality, and climate anxiety.

Peter Howitt: The Theorist of Endogenous Growth

Canadian economist Peter Howitt, Professor Emeritus at Brown University, has been Aghion’s long-time collaborator and one of the pioneers of endogenous growth theory.

His contributions go beyond formal modelling. Howitt explored how innovation spreads through economies, how institutions adapt to technological change, and how policy can nurture — or stifle — the innovative process.

In later research, he analysed how credit markets, education systems, and regulatory frameworks interact with innovation. Howitt’s models explained why some nations, even with similar resources, achieve vastly different growth trajectories — depending on how effectively they channel creativity into productivity.

Together, Aghion and Howitt built a framework that integrates micro-level innovation incentives with macroeconomic outcomes. Their theory now underpins much of modern economic policy, influencing debates on industrial strategy, intellectual property, and environmental transitions.

From Theory to Reality: Why It Matters Today

The Nobel Committee’s choice in 2025 reflects not just academic brilliance, but relevance. In an era defined by artificial intelligence, automation, and climate challenges, the trio’s work offers profound guidance.

Their research collectively tells us that growth is not about producing more of the same, but about constantly producing what’s new.

• Mokyr reminds us that culture and institutions create the conditions for innovation.
• Aghion shows how policy can harness innovation for social good.
• Howitt demonstrates that growth depends on nurturing creativity at every level of the economy.

Together, they provide a comprehensive answer to one of the world’s most urgent questions: How can societies innovate without leaving people behind?

Bridging History and the Future

One of the most striking aspects of this Nobel trio is how their work connects centuries of thought. Mokyr’s historical perspective bridges the Enlightenment to the digital age; Aghion and Howitt’s models translate those lessons into modern economic mathematics.

In essence, their contributions form a continuum — from the philosophical to the empirical, from the historical to the mathematical. Each stands on the shoulders of Schumpeter, yet extends his ideas into new domains.

Today, when policymakers debate how to regulate AI or transition to green technologies, they are unknowingly echoing the principles that Aghion, Howitt, and Mokyr spent decades articulating: that progress is a double-edged sword — destructive yet essential — and that wise governance must harness its power for collective benefit.

The Legacy of the 2025 Nobel Laureates

As the three economists join the ranks of Nobel luminaries, their combined legacy transcends academia. They remind us that innovation is not just a technical phenomenon but a human one — born from curiosity, courage, and the willingness to challenge old certainties.

Their message is clear: economic growth is a story of renewal. Whether in the steam engine, the silicon chip, or the algorithm, humanity’s greatest asset has always been its ability to reinvent itself.

In honouring Joel Mokyr, Philippe Aghion, and Peter Howitt, the Nobel Committee has not merely celebrated economists; it has honoured the spirit of progress itself — the belief that, despite disruption and dislocation, the future remains ours to invent.

Nobel for the Future

As Mokyr, Aghion, and Howitt join the ranks of Nobel laureates, their message rings clear: Our greatest resource isn’t gold, oil, or data. It’s imagination.

They remind us that the future is not inherited; it’s invented — and that innovation, though often disruptive, remains humanity’s most hopeful act.

“Progress,” wrote Mokyr, “is a promise we make to the future.”

The 2025 Nobel Prize in Economics is more than a recognition of academic brilliance — it’s a celebration of that promise.

About the authors:

• Dr. Nitish Kumar Arya: Assistant Professor (Economics), University Department of Economics, Bhupendra Narayan Mandal University, Madhepura, Bihar
• Mrs. Tulika Singh: Research Scholar, University Department of Economics, Bhupendra Narayan Mandal University, Madhepura, Bihar