The World’s 'Fourth Largest Economy' and its Deepest Divide

First things first, it’s a tad premature right now to say India has overtaken Japan and become the 4th largest economy. True, IMF’s projections for India for April are slightly higher than that of Japan’s. India at $4187.02 while Japan at $4186.43 billion. 

So, both are going to be economies of $4 trillion. But the catch is these are the projected numbers. The cause behind this whole fiasco where the Niti Aayog CEO ended up making official statements about India being the 4th largest economy is a misreading of how IMF labels a year. FY 2024-2025 is the year 2024 as per IMF, so the $4 trillion projection is for the year 2025 that would mean FY 2025-2026.

As of now, India’s GDP is estimated to be at about $3.9 trillion, while that of Japan is around $4 trillion. We’ll know exactly what the size of the economy in FY 2024-2025 is by May 30, when official GDP figures for March quarter are released.

India may easily take over Japan in the near future, but right now, it is not the case. So, celebrations are a bit premature. As per IMF’s projections, India is slated to grow at 6.2% of GDP, while Japan’s real GDP growth percentage is 0.6. So, it’s certain India will overtake a weakening Japan in the near future, in the race of numbers, by sheer magic of maths.

It’s worthwhile to remember that Japan is a country of 123 million people, with a per capita income of $33900. While India is a country of 1.46 billion people with a per capita income of $2880.

Another comparison that appears is when China reached a $4 trillion economy, its per capita income was about $3500. And today after a decade of rapid economic transformation, its per capita stands over $13,000, while its economy is $19.23 trillion strong. In the largest economy, the US ($30.51 trillion), per capita income is $89,000. Even if we jump up two more spots, and take over not just Japan ($4.19 trillion) but also Germany ($4.74 trillion), our per capita would hardly resemble that of the other largest economies.

When you think of Japan, you think of high speed rail, shiny business centres and cherry blossoms falling on neat and clean roads and footpaths. So, come to the real bit, what does India becoming the fourth largest economy, mean for its people? How does it elevate their standard of living? Does it boost domestic consumption? What difference does it make to their lives?

Also read: India's GDP 'Milestone': Five Ways the Typical Indian Experience Differs From the Grand Narrative

GDP growth without shared prosperity

According to the World Inequality Report 2022, the top 1% of India's population holds more than 40% of the nation's wealth, while the bottom 50% own just 3%. In terms of income, the top 10% earn over 57% of national income.

This level of wealth concentration means that GDP per capita becomes a misleading metric. India’s GDP per capita stands at roughly $2880, but this is a mean average. If you remove the top 1% of earners from the calculation, the number drops dramatically.

For instance, if India’s GDP is about $3.9 trillion, and the top 1% controls 40% of that (i.e., $1.56 trillion), that leaves $2.34 trillion for the remaining 99% — nearly 1.4 billion people. This results in a per capita GDP of around $1,670, a far cry from the official average. If you remove the top 5%, who control about 62% of national wealth, the average per capita drops to just about $1100. That is less than 1 lakh rupees for an entire year and that’s where the majority lives. It is for this reason the govt has to give out free rations to 80 crore Indians.

A critical reason why India’s economic growth has not translated into mass upliftment is because the sectors driving GDP expansion are not the ones employing the majority of the population. India’s economic model is increasingly reliant on capital-intensive sectors: IT, finance, e-commerce, and large corporates. It is these sectors that generate high GDP numbers, but do not create jobs at scale. While actually a large number of the population is employed in the informal sector, with little to no social protection. Consider this, nearly 50% of Indian workforce is employed in agriculture, but the sector contributes only about 18% to the GDP. On the other hand, capital-intensive service sectors like IT, finance, and real estate contribute over 50% to GDP, but employ only 30% of the workforce and often concentrated in urban areas.

Even here, wages have been stagnant for years, and profit margins have dropped, throwing the middle class off its earlier growth trajectory. The middle class isn’t just being left behind in India’s skewed success story – it’s increasingly at risk of sliding downward.

At the same time, billionaires thrive. Gautam Adani’s net worth jumped from $9 billion in 2020 to over $100 billion by 2022 at one point. The stock markets soar, but over 90% of Indians have no exposure to equities. We are going to be the fourth largest economy with the largest number of the world’s poor.

The truth of 'largest economies' in a new world

India is not alone in facing this dilemma. The United States, despite being the world’s largest economy, is battling similar demons. It has a GDP per capita of over $89,000, yet 38 million Americans live in poverty, and medical bankruptcies remain common. The homelessness, and decaying infrastructure in parts of the country highlight the disconnect between GDP and human development.

This has led to reactionary political responses, such as Donald Trump's protectionist trade policies and rhetoric against globalization. Tariffs on Chinese goods, anti-immigrant sentiment, and populist economic narratives stem from a sense of loss among the working and middle classes, despite the country’s overall wealth.

The lesson for India is clear: economic growth without redistribution leads to social and political instability.

Extreme inequality should alarm you, because it is the first time in the world that we are seeing a stark difference between the rich and the poor. And for the first time, countries are growing richer, but their people are not. Income and wealth inequality not only skew per capita averages, they make economies seem healthier than they are. In short, they reflect realities of a few, at a huge cost to others.

Consider the policy capture worldwide, the way the wealthy are influencing tax policy, and regulations and public investment decisions. For instance consider, how the US has been constantly decreasing tax on its super-rich.

And because the elite can opt out of public services, think schools, private hospitals, gated housing societies, the political will to invest in these universal public systems reduces. Think of our crumbling infrastructure, once again exposed by the heavy rains in coastal areas, how long can we sustain under the mirage of the largest economy? GDP rankings won't matter to the 800 million Indians struggling with basic nutrition, housing, education, and healthcare. 

Unless India tackles inequality with bold action; progressive taxation, universal public services, labour formalization, and serious public investment; its rise as the world’s largest economy will be little more than a jackpot for its richest elite, and a mirage for everyone else. 

Kavita Kabeer is a writer and satirist.

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