India is Now the 4th Biggest Economy. What Drove the Surge?

India has emerged as the fourth-largest economy in the world by nominal GDP, overtaking Japan—a historic moment that underlines the shifting axis of global economic power. As per the IMF’s April 2024 World Economic Outlook, India’s GDP stood at $3.73 trillion, ahead of Japan’s $3.67 trillion.

This isn’t merely symbolic. For a nation that ranked 10th just a decade ago, the climb reflects a decade of sustained structural reforms, resilient domestic consumption, and favourable global macroeconomic tailwinds. While Japan grapples with demographic stagnation and deflationary pressures, India’s youthful economy is expanding in breadth and productivity.  Source: IMF World Economic Outlook 

From 5th to 4th: India’s Economic Ascent

India moved from the 5th spot in 2022, when it overtook the UK, to the 4th spot in under three years. This leap is significant because nominal GDP rankings are affected not just by real output but also by currency movements and inflation dynamics.

India’s growth story was buoyed by a 6.5 %+ real GDP growth rate, an expanding services sector, and domestic demand that remained resilient in the face of global shocks. In contrast, Japan’s economy contracted in late 2023 and early 2024, registering two consecutive quarters of negative growth, pushing it into a technical recession.

Structural differences between the two economies played a key role. While Japan has long relied on export-driven manufacturing, India’s services-led economy expanded with minimal global dependence, providing a growth buffer during global slowdowns. 

Metric	India (2024)	Japan (2024)
Nominal GDP (USD Trillion)	3.73	3.67
Real GDP Growth Rate (%)	6.5	1.3
Population (Billion)	1.43	0.124
GDP per Capita (USD)	~2,600	~29,000
Inflation Rate (%)	~5.0	~2.8
Fiscal Deficit (% of GDP)	5.8	6.3
Debt-to-GDP Ratio (%)	83	263

Sources: IMF, Statista, World Bank, Economic Times

The 5 Economic Engines Behind India’s Rise

1. Demographic Advantage

India’s demographic dividend is not just about size—it’s about timing. Over 65% of its population is working age (15–64), compared to just 59% for Japan. While Japan’s population is declining from 128 million in 2010 to under 124 million today, India recently became the most populous nation, surpassing China.

This demographic energy drives consumption, boosts productivity, and keeps healthcare and pension burdens low—something Japan has struggled to manage. By 2050, India is expected to contribute more than one-sixth of global workforce additions, a critical factor for sustainable GDP growth.

2. Resilient Domestic Demand & Services-Led Growth

Unlike Japan, which relies heavily on exports, India’s economy is consumption-driven, with nearly 60% of GDP coming from domestic consumption. Due to rapid digital adoption, sectors like IT services, financial services, e-commerce, and telecom have flourished.

India’s digital public infrastructure, including Aadhaar, UPI, and DigiLocker, has unlocked economic value by improving efficiency, reducing leakage, and creating inclusive systems. Services exports now exceed $325 billion annually, with IT and BPO services commanding over 50% share globally. Source: Livemint

3. Fiscal Management and Capital Expenditure

India has maintained a delicate balance between fiscal expansion and fiscal prudence. While the fiscal deficit remains high (~5.8%), much is directed towards capital creation, not subsidies. Government capex for FY24 reached a record ₹11.1 lakh crore, emphasizing infrastructure, railways, defence, and digital connectivity.

In contrast, though historically effective, Japan’s massive stimulus packages have ballooned its public debt to over 260% of GDP, limiting future fiscal maneuverability. India’s investments create long-term productive capacity, while Japan increasingly relies on monetary easing.

4. Currency Stability and the Weakening Yen

The Japanese yen has depreciated significantly, falling below ¥155 per USD in May 2024, its weakest in decades. This has eroded Japan’s nominal GDP when measured in dollar terms. Meanwhile, the Indian rupee, although volatile, has remained relatively more stable.

Nominal GDP calculations are sensitive to exchange rates. India’s stable rupee and better inflation targeting have given it a relative edge in dollar-based rankings. A stable INR also attracts more portfolio and FDI inflows, reinforcing GDP growth.

5. Global Geopolitics and Supply Chain Realignment

India has strategically positioned itself as a China+1 alternative, especially in electronics, semiconductors, and pharmaceuticals. The Production-Linked Incentive (PLI) schemes and improved Ease of Doing Business have supported this.

Japan, which pioneered many high-end manufacturing industries, is losing ground as companies look to diversify production bases. India, meanwhile, has emerged as a manufacturing hub for Apple, Samsung, and global auto giants.

India attracted $71 billion in FDI in FY23, with continued interest from sovereign wealth funds, VC firms, and industrial giants. 

The Road to Becoming the Third-Largest Economy

Germany currently ranks third with ~$ $5.1 trillion GDP. India needs to bridge a gap of around $1.4 trillion, which it could achieve by 2027 or 2028 if it maintains its current growth rate and avoids currency shocks.

Key to this transition will be:

• Accelerating manufacturing and exports 
• Investing in human capital and skilling 
• Strengthening urban infrastructure 
• Driving green energy adoption
  

As Anand Mahindra aptly remarked, India’s rise is not just about numbers—it signals what’s possible when aspirations meet execution. Source: NDTV

Challenges That Must Be Managed

Despite this milestone, several headwinds remain:

• Job creation hasn’t kept pace with GDP growth, especially in manufacturing. 
• Wealth disparity and rural-urban divides are widening. 
• Regulatory uncertainties, especially in tech and finance, need policy clarity. 
• Per capita income remains low, which could dampen consumption in the long term.
  

These challenges, if left unaddressed, could derail the momentum.

India Has Arrived, But the Journey Continues

India surpassing Japan is a marker of a new global reality: emerging markets are not just catching up but leading. India’s climb to the 4th spot reaffirms its potential, but its next phase, towards inclusive and sustainable growth, will be the actual test of leadership.

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