đź“°The Most Symbolic Achievement

India crosses Japan to become the world's fourth-largest economy.

May 30, 2025

Good afternoon, 

India crossed Japan to become the world’s fourth-largest economy, something that has been much celebrated. Others have derided this, pointing out India’s GDP-per-capita is lower than Japan’s. However, an even deeper dive reveals a much weirder story.

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Market Update.

India Passes Japan to Become 4th Largest Economy.

India’s economy continues to stun, with Q4 of the last fiscal year seeing growth of 7.4 percent, leading to FY24-25 seeing 6.5 percent for the year. The growth continues a post-pandemic trend of hyperbolic growth, which spells opportunity for global and domestic investors. In fact, IMF projections now have India’s nominal GDP at $4.187 trillion (â‚ą358 trillion), which just passes Japan’s estimate, which sparked premature celebration of India becoming the globe’s 4th largest economy.  

But, the super weird thing is... China crossed $4 trillion (â‚ą342 trillion) in GDP back in 2010, when per capita GDP was roughly $3,500 (â‚ą299,250) and PPP was double that. More simply, when China crossed the $4 trillion GDP mark, Chinese people were relatively far wealthier than Indians today living in a $4.2 trillion economy. Even as India catches up in the macro, it is not keeping up in the micro. How is this possible?

Symbolic strength: Firstly, some celebration is warranted; in 2000, the GDP was 10 percent of its current size for a billion citizens. There is proof that the last 25 years of economic reform and financial management have led to benefits for the country.

Still, passing Japan in GDP doesn’t reflect larger on-the-ground quality of life differences. GDP per capita comes in at $2,880 (â‚ą246,240), which ranks 134th in the world and is barely one-tenth of Japan’s. When controlling for purchasing-power-parity (PPP, which adjusts GDP by strength of currency and costs) puts India at around $12,000 (â‚ą1 million), India ranks 119th in the world. 

Population Dividend: As we have written about extensively, India’s growth phenomenon can be attributed to the “population dividend,” a term popularized by former Reserve Bank of India Governor Raghuram Rajan. The nation has the largest population of working-age humans, and the increase in the size of this group has done more to drive up GDP than technological advancement and improvements in quality of life. Cementing this point further is that neighboring Bangladesh has seen its GDP per capita rise 6.5 times since 2000, while India’s has only risen 5.4 times, despite starting from near identical economic metrics. The comparisons prove that “4th largest economy” is a laurel resting on aggregate size alone. 

Wealth Inequality: The top 1 percent of Indians own over 40 percent of the national wealth. If one subtracts the top 1 percent’s share (roughly $1.56 trillion) from the $3.9 trillion total, the remaining per-capita GDP across 99 percent of the population plummets to around $1,670 (₹142,785). Remove the top 5 percent, commanding 62 percent of wealth, and per-capita income collapses to roughly $1,100 (₹94,050). Those starkly lower figures align more closely with the realities faced by hundreds of millions of Indians living on informal or agrarian wages. It is for precisely this reason that India’s government continues to distribute subsidized food rations to roughly 800 million citizens.

The future is here but unequally distributed: High-GDP-growth sectors in IT services, finance, e-commerce, and other capital-intensive industries employ only a fraction of the workforce but generate outsized value added. Services now account for over 55 percent of GDP while employing fewer than 30 percent of workers. In contrast, agriculture employs roughly 50 percent of the workforce but contributes only 17–18 percent to GDP. Manufacturing, despite government pushes like “Make in India,” hovers around 15 percent of output, further limiting its ability to soak up labor. While India wants to become a manufacturing giant, excess regulation for foreign approval and a lack of move-in-ready factories make “Make in India” and other PLIs a factor in name alone. 

Within those service sectors, too, wage growth has lagged behind gains in corporate profitability. A middling real wage growth of 2–3 percent annually means urban consumption remains muted, even as corporate fortunes balloon. Profits grew at around 5+ percent in 2024, a year with squeezed margins and revenue. 

Not a unique story: The United States has a per-capita GDP above $89,000 (₹7.6 million), with some 38 million Americans living below the country’s poverty line and medical insolvencies. In such contexts, GDP becomes a blunt metric: it measures aggregate activity, and doesn’t control for cost-of-living.

Still... India must also invest in human capital — schools, skills training, and public health — to ensure its demographic dividend does not become a demographic liability. An economy is only as strong as the capacity of its people to participate in and benefit from growth. Unless India embraces an agenda of inclusive development by improving life expectancy, literacy, and per-capita consumption, the promise of “4th largest economy” risks becoming a symbolic victory.

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Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.