Is India the World’s Fourth Largest Economy?

General Studies Paper-3

Context

• According to recent data from the IMF, India has surpassed Japan to become the world’s fourth-largest economy by nominal GDP based on Market Exchange Rates (MER), however Purchasing Power Parity (PPP) rankings suggest India has been the third-largest economy since 2009.

Understanding GDP and India’s Economic Rank

• Gross Domestic Product (GDP) represents the total value of all goods and services produced within a nation’s borders over a specific period.
• Governments, economists, and policymakers rely on GDP to assess economic growth, formulate policies, and compare economies globally.

India’s GDP Ranking: MER or PPP Methods

• India’s GDP ranking varies depending on whether it is measured using Market Exchange Rates (MER) or Purchasing Power Parity (PPP).
  • Market Exchange Rates (MER): It converts a country’s GDP into US dollars using current exchange rates.
    • It reflects the economy’s size in global financial markets but does not account for cost-of-living differences.
  • Purchasing Power Parity (PPP): It adjusts GDP based on the relative cost of goods and services in different countries.
    • It provides a more accurate measure of economic strength by considering what people can actually buy with their incomes.
    • PPP is often considered a better measure of economic well-being because it accounts for differences in living costs.

GDP vs Per Capita GDP

• India’s per capita GDP in 2024: $2,711 (market exchange rates), ranking 144th globally.
  • Vietnam, once behind India in 1991, had a per capita GDP of $4,536 in 2024.
• Even in PPP terms, India’s per capita GDP ranks only 127th among 196 countries.

Key Drivers of Growth

• Demographic Advantage: India boasts a young and growing workforce, which contributes to its expanding economy.
• Technological Innovation: The country has made significant strides in digital transformation, boosting productivity and efficiency.
• Infrastructure Development: Investments in roads, railways, and urban expansion have strengthened economic foundations.
• Global Trade and Manufacturing: India’s push to become a manufacturing hub has attracted foreign investments and enhanced exports.

Challenges Ahead

• Income Inequality: Economic progress has not been evenly distributed, with disparities in wealth and access to resources.
• Concerns Related to Employment, Health, Education: While GDP growth is strong, job creation has lagged, raising concerns about sustainable development, income distribution, health, education, or living conditions.
• Policy Reforms: Continued structural reforms are necessary to maintain momentum and address economic vulnerabilities.

Way Forward: Beyond GDP Measures

• There is a need to move beyond GDP and embrace multi-dimensional indicators, such as: Health outcomes, Educational attainment, Access to basic services, Income equality, and Quality of employment to accurately assess India’s development status.

Conclusion

• Both MER and PPP offer valuable insights, but PPP is often considered a better measure of economic well-being, as it accounts for cost-of-living differences and reflects real purchasing power.
• However, MER remains crucial for assessing India’s position in global trade and investment.