Has India Really Become the World's Fourth-Largest Economy?

India has become the fourth-largest economy in the world, as per the NITI Aayog CEO, B.V.R. Subrahmanyam. He clarified that this is based on projections for 2025-26 made by the International Monetary Fund (IMF) in its World Economic Outlook, which says that India’s nominal GDP is projected to rise to USD 4,187.017 billion, surpassing Japan’s estimated USD 4,186.431 billion. 

If this is correct, then it is something to be happy about, even if India will be ahead by USD 0.586 billion, 0.014% of GDP. 

Ignoring that India’s per capita income is one-thirteenth of Japan's in nominal dollars; several critical factors also need to be taken into account.

First, why is the IMF projection being used? The IMF is not a data-gathering agency. It uses government data and tweaks it. So, errors in government data are also in the IMF data. 

Since Indian GDP data has big errors, as pointed out in this article, how reliable is this projection? 

Basing the claim on the IMF projection is an attempt to gain credibility and avoid the criticism that Indian GDP data is erroneous.

Second, the world economy is passing through huge uncertainty since the victory of US President Donald Trump in November 2024. More so since he threatened to levy stiff protectionist tariffs soon after taking over as President. 

This threatens both inflation, due to supply disruptions, and recession, due to a decline in exports. Uncertainty and stock market turmoil have impacted currencies, gold prices, interest rates, investments and growth prospects. 

So, which economy would be impacted by how much is unclear. Thus, projecting growth rates is fraught. A projected 0.014% difference in GDP can easily turn out to be incorrect. For instance, if the economy’s growth is even 6.1% and not 6.2% or the depreciation of the Rupee compared to the Yen is even 0.1% more, then the claim of being fourth largest economy would be falsified.

In the past, too, IMF projections have proved to be incorrect. For instance, the IMF stuck to its projection of positive growth in 2008, during the global financial crisis, till the Lehman moment in September 2008. By then, the world economy had entered recession.

It was then said that the experts were behind the curve. Again, the IMF has decided not to factor in the likely impact of President Trump’s threat of tariffs and the possibility of a tariff war. 

This is possibly so as not to spook the markets by giving negative news. But, then, IMF projections cannot be relied upon.

Third, GDP for a given year is estimated using various databases for each of its components, and the data becomes final with a lag. There are the first advance estimate and second advance estimate based on partial data available during the year. 

Next, the revised estimate is announced after the year closes, and finally, after another gap, the final estimate is announced. So, finality about the GDP comes two years later. 

For example, in the latest GDP data announced on February 28, 2025, the data was given for the second advance estimate for 2024-25 (the running year), revised estimate for 2023-24 (previous year) and final estimate for 2022-23 (two years earlier).

So, only in 2027 would it be clear if India surpassed Japan’s GDP in 2025.

Fourth, the Indian economy has gone through four shocks since 2016-17 when demonetisation was announced. There was GST in 2017, the NBFC crisis in 2018 and a sudden lockdown in 2020. Given that GDP estimation is also based on projection from the previous year and using a benchmark from the reference year in the past, a shock would foul up this method. 

It is likely to lead to an overestimation of GDP. For instance, in 2016-17, demonetisation caused markets to be empty, fruits and vegetables to rot in the fields, industries to close down, and yet, official data showed an above 8% growth for the year, instead of a negative growth.

A recent article points out that prior to 2016-17, the ‘discrepancy’ in GDP was small, but subsequently it has become large and unstable, swinging from positive to negative. It is also pointed out that officially, the ‘production side approach’ to measuring GDP is taken as the more reliable one. But it also has big errors due to the nature of the shocks experienced.

Finally, the shocks have led to errors in the methodology used to measure the different components of GDP. Every sector of the economy has a private and a public component. The public sector is entirely organised. The private sector has an organised and an unorganised component. The data for the latter comes with a delay. In fact, for most of the quarterly GDP estimates, only limited organised sector data are available. So, estimates for the unorganised component of a sector are generated using the organised sector as a proxy.

Effectively, India’s official GDP is largely estimated using the organised sector data. This was possibly alright till the shock of demonetisation and subsequent shocks. But since demonetisation, the unorganised sector, which was badly impacted, has been declining. 

The other three shocks also damaged this sector. Evidence for this decline has come from trade, leather goods, pressure cookers, luggage, etc. The organised component has been growing at the expense of the unorganised component but we are proxying the declining unorganised sector by the growing organised sector.

Agriculture is a large part of the unorganised sector, and its data comes routinely during every crop season. But, experts have been questioning the correctness of the official data. 

A corollary of the decline of the unorganised sector is the aggravation of unemployment in India. If this sector were growing at anywhere like 6% per annum, the problem would not persist. The organised sector is getting increasingly automated and generates little employment. So, when it grows at the expense of the unorganised sector, it creates unemployment. 

In brief, there is a need to reassess the claim that India’s GDP is growing fast and will cross that of Japan in 2025. 

Arun Kumar is a retired professor of economics at JNU. He is the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020. 

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