In a significant milestone for its economic trajectory, India has officially overtaken Japan to become the world's fourth-largest economy in terms of nominal Gross Domestic Product (GDP). This achievement, highlighted in the government's year-end economic review, sets the stage for the nation to potentially surpass Germany and secure the third position globally within the next few years.
A Landmark Achievement and the Road Ahead
The government's review, released late Monday, stated that with a GDP valued at $4.18 trillion, India has now moved past Japan. The nation is firmly on track to displace Germany from the third rank, potentially within the next 2.5 to 3 years. Projections indicate that India's GDP could reach an impressive $7.3 trillion by 2030.
A final, formal confirmation of this new ranking is expected when the International Monetary Fund (IMF) releases its complete dataset for 2025 in the first half of 2026. The IMF's own forecasts for 2026 already value India's economy at $4.51 trillion, slightly ahead of Japan's projected $4.46 trillion.
Robust Growth Amidst Global Headwinds
India has cemented its status as the world's fastest-growing major economy, with its economic size doubling over the past decade. The government note emphasized that India remains one of the fastest-expanding major economies and is well-positioned to maintain this momentum.
This optimistic outlook persists even as the economy navigates challenges, including the imposition of steep US tariffs in August linked to India's purchases of Russian oil. Despite these external pressures, recent high-frequency data points to sustained economic strength.
Key indicators show inflation staying below the lower tolerance band, a gradual easing of unemployment, and steady improvement in exports. Financial conditions continue to be supportive, marked by healthy credit expansion to businesses. Demand remains resilient, aided by a further pickup in urban consumption.
Drivers of Expansion and Future Prospects
The engine of this growth is powerful domestic demand. India's real GDP expanded by a robust 8.2% in the second quarter of the fiscal year 2025-26. This marks an acceleration from 7.8% in the preceding quarter and 7.4% in the final quarter of FY 2024-25.
Real gross value added rose by 8.1%, underpinned by solid performances in both the industrial and services sectors. Reflecting this strong momentum, the Reserve Bank of India (RBI) has raised its growth projection for FY 2025-26 to 7.3%, up from an earlier estimate of 6.8%.
The central bank's upward revision factors in several positive elements:
- Sustained domestic demand.
- Rationalisation of income tax and GST structures.
- Softer crude oil prices.
- An early push in government capital spending.
- Accommodative monetary and financial conditions.
All these factors are supported by contained inflation. The government review described the present macroeconomic situation as a rare "goldilocks period" characterized by high growth and low inflation. It further stated that ongoing reforms are likely to enhance future growth prospects, paving the way for India's ascent in the global economic order.
