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.

India–New Zealand Free Trade Agreement: A Strategic Masterstroke In India’s Trade Diplomacy

India–New Zealand Free Trade Agreement: A Strategic Masterstroke in India’s Trade Diplomacy

In 2025, India took a decisive leap in reshaping its global trade architecture by signing its third Free Trade Agreement (FTA) of the year, this time with New Zealand. Following earlier FTAs with the United Kingdom and Oman, the India–New Zealand agreement marks another milestone in India’s evolving trade diplomacy and reflects its broader strategy of export expansion, market diversification, and protection of sensitive domestic sectors.

A Shift in India’s Trade Strategy: Historical Context

Over the past five years, India has signed seven FTAs, signaling a renewed push towards trade liberalisation after a long phase of cautious engagement. Before the onset of U.S. protectionist policies under former President Donald Trump, India had signed only four FTAs in four years. However, the global trade disruptions triggered by the U.S.–China trade war compelled India to reduce its overdependence on the United States and actively seek alternative markets.

This strategic shift has accelerated India’s engagement with multiple regions, including Europe, the Middle East, and the Pacific, with the New Zealand FTA emerging as one of the most advantageous deals negotiated so far.

Key Features of the India–New Zealand FTA

The India–New Zealand FTA has drawn attention internationally, particularly because of its asymmetric benefits in India’s favour, a point strongly criticised by New Zealand’s opposition parties.

One of the most significant provisions of the agreement is India’s decision to eliminate tariffs on nearly 95% of New Zealand’s export items, granting New Zealand extensive access to India’s vast consumer market. At the same time, India has strategically safeguarded its dairy sector, refusing to open domestic markets to New Zealand’s dairy products such as milk, butter, cheese, curd, and yogurt.

This protection is crucial for India, where the dairy sector supports millions of small and marginal farmers. Opening the sector to cheaper and highly competitive dairy imports from New Zealand could have destabilised rural livelihoods. Consequently, while the agreement expands trade, it also reflects India’s firm stance on protecting sensitive sectors.

The deal has also incorporated enhanced immigration and mobility provisions, enabling New Zealand to recruit skilled Indian professionals more easily. This aligns with India’s growing role as a global supplier of skilled labour, particularly in technology and services.

Economic Impact and Investment Prospects

Currently, bilateral trade between India and New Zealand stands at approximately $2.4 billion. With the implementation of the FTA, trade volumes are expected to rise sharply to $5–7 billion in the coming years. Moreover, the agreement includes a long-term investment commitment of $20 billion over the next 15 years, indicating deepening economic engagement beyond trade in goods alone.

Broader Implications for India’s Global Trade Policy

India’s sequential signing of FTAs with countries such as the UK, Oman, and now New Zealand has broader geopolitical and economic implications. Collectively, these agreements increase diplomatic and economic pressure on the United States to reconsider its trade engagement with India.

At the same time, India’s approach highlights a balanced trade philosophy—liberalising non-sensitive sectors while shielding critical domestic industries like agriculture and dairy. This model may shape future negotiations, including potential FTAs with the Eurasian Economic Union (EAEU), comprising Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan.

Conclusion

The India–New Zealand Free Trade Agreement represents a strategic win for India’s trade diplomacy. By securing expanded market access, protecting domestic farmers, encouraging skilled migration, and unlocking long-term investments, India has demonstrated a nuanced and assertive approach to global trade negotiations.

As global trade dynamics continue to shift in the post-protectionism era, India’s growing network of FTAs underscores its ambition to emerge as a diversified, resilient, and influential trading power in the global economy.

India–New Zealand Free Trade Agreement: A Strategic Masterstroke in India’s Trade Diplomacy

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 works in Public Economics and Public policy, with a special focus on contemporary economic issues.