The fifth-largest economy: What it means for India

India recently became the fifth-largest economy in the world, according to the latest GDP calculations from the International Monetary Fund (IMF).

According to news reports, which cited the IMF database, the Indian economy edged past the UK to become the fifth-largest in the world in December 2021 quarter.[1] The IMF now projects India to close 2022 with a GDP of $3.53 trillion, behind the US ($25.35 trillion), China ($19.91 trillion), Japan ($4.91 trillion) and Germany ($4.26 trillion).[2]

The gross domestic product is a metric of a country’s economic output – measured by the total value of all the goods and services produced during a period. To use the analogy on a factory, if it produced 100 units of an item last year priced at ₹100 each, its GDP would be ₹10,000.

In nearly a decade, India has leaped from the 11th place to the 5th place, powered by a GDP growth rate that eclipses most of the world’s largest economies.

Source: IMF

So how should one interpret this news, and what does this mean for the economy as a whole and for the average Indian. Below are three broad takeaways.

One, the trend of India continuing to outgrow other countries is expected to continue for a long time. This means that India is expected to climb the list of the world’s largest economies.

In fact, India is projected to overtake Japan and Germany to become the world’s third-largest economy around 2030 [3] and the US by the year 2048[4] when it will become the world’s second-largest economy behind China.

India’s fast growth rate is the result of several measures taken over the past few decades. The liberalisation of India’s economy in 1992, which abolished the licence raj that dictated how much companies could produce and when, created a services and consumption boom that lasts to this day. Since 2014, the NDA government has emphasised investment in infrastructure and has taken steps to ease doing business.

India also has a young population with more than 50% of its population under the age of 30. [5]

The second takeaway: while the above news is good, context is important. India’s $3.3 trillion economy is created by its vast population of 1.3 billion. This means that the output of the average person (or per-capita GDP) is a low $2,500 per person. In comparison, the average Chinese person has the economic output of about $16,000.

Source: IMF

As is obvious, the connection between the GDP and a country’s population shows well its people are doing, economically.

This means that while economists calculate a country’s overall GDP and then divide it by its population to arrive at the per-capita GDP, the exercise in reverse is more beneficial: a low per-capita GDP indicates that a country can has a long way off before it can be dubbed prosperous.

Organisations such as the World Bank use per capita income (which is loosely correlated with per capita GDP) to classify countries on economic status. The categories are low income, lower middle income (where India stands), upper middle income (China) and high-income countries (other large economies such as US, Japan, Germany and UK).[6]

The only way to climb the rung on per capita GDP is to grow fast.

​​​​​​​The third takeaway: the first and the second points above look contrasting. While India is a large economy on an absolute basis, it must continue to grow like it has been growing for a long time to lift the fortunes of its vast population.

But the overall GDP per-capita picture is not as weak is it appears.

There’s a third metric that economists use to measure economic progress: GDP on a purchasing power parity (PPP) basis. Basically, GDP is often measured in US dollars to make comparisons across countries but it does not take into account exchange rate. For instance, if it takes $10 to buy a shirt in the US but only ₹200 (about $2.5) to buy the same shirt in India, you could buy 4 shirts for the same price in India as you could in the US.

This PPP adjustment better represents the actual economic output of a country.

Measured on a PPP basis, India looks in a better place, though it is still some way off compared to its large global peers.

Source: IMF

As one can see in the above table, on an absolute GDP PPP basis, India is already the world’s third-largest economy. On a per capita basis, the average Chinese is now less than three times prosperous ($21.36 thousand vs $8.36 thousand).

There’s one final takeaway.

As countries go past the $2,000 per capita GDP stage (not adjusted for PPP), a stage India just passed a few years ago, economists say that this is where a large part of its population is lifted from poverty. That is where consumption goes through the roof, and multiplies several fold – as its middle class population now finds the income to spend on its wants rather than needs.

It is this trend that many experts believe is producing a consumption boom that could last many decades, and could make India the place to be for all businesses.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.

Sources:

1. https://www.bloomberg.com/news/articles/2022-09-02/uk-slips-behind-india-to-become-world-s-sixth-biggest-economy

2. https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD


3. https://www.fortuneindia.com/macro/india-set-to-be-worlds-3rd-largest-economy-by-2030-report/109567

4. https://www.ey.com/en_in/tax/economy-watch/indian-economy-by-twenty-fifty-in-pursuit-to-achieve-the-thirty-trillion-dollar-mark
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5. https://indianexpress.com/article/explained/half-indias-population-under-age-30-nfhs-explained-7910458/