India Overtakes Japan to Become the Fourth Largest Economy

India Overtakes Japan to Become the Fourth Largest Economy

India has officially emerged as the world’s fourth-largest economy in terms of nominal Gross Domestic Product (GDP), surpassing Japan in 2025, as per a report from NITI Aayog. This significant milestone places India just behind the United States, China, and Germany. With a GDP of approximately $4.2 trillion, India narrowly edged past Japan’s output of around $4.19 trillion, signaling its steady ascent in the global economic hierarchy.

This achievement aligns with India’s long-standing vision of reaching a $5 trillion economy, a goal initially articulated in the early 2020s. While symbolic in nature, such rankings reflect both the scale of economic activity and the country’s expanding global influence. However, beneath the surface of headline figures lie complex structural challenges that must be addressed for this growth to be sustainable and inclusive.

 

Tracing the Growth Journey: A Tale of Two Decades

India's economic trajectory over the last two decades can be split into two contrasting phases. Between 2004 and 2014, the Indian economy witnessed a tripling of its GDP, powered by post-liberalization reforms, a booming IT sector, and strong inflows of foreign direct investment (FDI). This period also saw increased integration with global supply chains and rising consumer demand.

From 2014 to 2024, although the economy continued to grow and doubled in size, the pace slowed compared to the previous decade. Key events such as demonetization (2016), the Goods and Services Tax (GST) rollout (2017), the COVID-19 pandemic, and global trade disruptions caused by tariff wars and inflation, collectively hampered growth. Analysts believe India could have grown faster in this phase had it not been for these internal and global shocks.

 

What’s Fueling the Rise: Key Growth Drivers

India’s transformation into an economic powerhouse is anchored by a few major pillars:

1. Service Sector Dominance
 Unlike traditional economic models that pass through agriculture to manufacturing and then services, India leapfrogged into becoming a service-driven economy. Sectors such as Information Technology (IT), telecommunications, fintech, and digital services account for over 50% of GDP. The development of platforms like UPI (Unified Payments Interface) has enabled frictionless digital transactions across socio-economic groups.

2. Expanding Digital Economy
 India’s rapid digitization, supported by initiatives like JAM Trinity (Jan Dhan-Aadhaar-Mobile), ONDC (Open Network for Digital Commerce), and Digital India, has revolutionized financial inclusion and e-governance. These innovations have brought millions into the formal financial system, encouraging consumption and entrepreneurship at grassroots levels.

3. Government Schemes and Reforms
 Various policy interventions have also played a key role. The Production Linked Incentive (PLI) scheme incentivizes manufacturing across sectors such as electronics and pharmaceuticals. The Gati Shakti Mission focuses on improving logistics infrastructure, reducing transport time and costs. Similarly, Make in India and Atmanirbhar Bharat (Self-Reliant India) campaigns aim to boost domestic manufacturing and reduce import dependence.

 

The Structural Fault Lines: Major Economic Challenges

Despite GDP growth and global recognition, India’s economy faces deep-rooted structural and socio-economic issues that require immediate attention:

1. Human Development Lags Behind GDP Numbers
 Economic size, while important, does not automatically translate into improved quality of life. India’s per capita income stands at around $2,000, far below that of Japan (~$34,000). As a result, a large section of the population remains poor or vulnerable.

2. High Youth Unemployment
 With a youth unemployment rate between 15% and 18%, joblessness continues to be a persistent problem. Even as GDP expands, the economy is experiencing jobless growth, particularly affecting fresh graduates and young job seekers.

3. Inequitable Wealth Distribution
 Wealth inequality is stark. According to an Oxfam report, the top 1% of Indians hold around 40% of national wealth, while the bottom 50% possess only 3%. This economic polarization could create social unrest if left unaddressed.

4. Agricultural Dependence Without Productivity
 Agriculture still employs around 45% of India’s workforce, but its contribution to GDP is only 18%. This mismatch indicates disguised unemployment, where more people work in agriculture than are actually needed. Productivity remains low, and dependence on monsoon rains further exposes the sector to climatic risks.

5. Manufacturing Sector Underperformance
 India’s manufacturing sector contributes just 16–17% to GDP, despite a national target of 25%. Factors include high logistics costs, complex regulations, and lack of adequate infrastructure, which deter large-scale investment.

6. Shrinking FDI Inflows and Weak Innovation
In 2024–25, India experienced a 96% drop in FDI inflows, partly due to regulatory uncertainty and policy inconsistency. At the same time, India spends less than 0.7% of its GDP on Research and Development (R&D), far below global leaders like the U.S. (3.5%), China (2.4%), and Israel (5%).

7. Informal Sector and Skill Gap
 A vast proportion of India's workforce is employed in the informal sector, lacking job security, social benefits, and proper training. This limits productivity and prevents upward mobility.

8. Global Economic Pressures
 External shocks such as volatile crude oil prices (India imports ~85% of its oil), geopolitical tensions, and global trade slowdowns pose continuous threats to economic stability and inflation control.

 

The Road Ahead: Policy Measures for Inclusive Growth

India's path to sustainable and inclusive growth will depend on comprehensive structural reforms and strategic public investment. The following steps could help unlock India's economic potential:

  • Promote Inclusive Development: Focus on human development indicators like health, education, and housing alongside GDP growth.
     
  • Enhance Rural Infrastructure: Invest in rural roads, warehousing, cold chains, and irrigation to support farmers and reduce urban migration.
     
  • Encourage Labor-Intensive Industries: Sectors such as textiles, tourism, and construction can absorb large numbers of semi-skilled workers.
     
  • Boost Skill Development: Implement vocational training and digital literacy programs aligned with market needs.
     
  • Support MSMEs and Startups: These enterprises are employment-rich and innovation-driven, needing easier credit access and regulatory simplification.
     
  • Push Manufacturing Reforms: Land and labor law simplification, coupled with programs like Bharatmala and Sagarmala, can improve supply chain logistics.
     
  • Increase R&D Investment: Public and private sectors must jointly invest in innovation ecosystems to enhance competitiveness and self-reliance.
     
  • Explore Universal Basic Income Models: Especially in backward regions, to reduce poverty and improve consumption.
     

 

Conclusion: The Fourth Largest Economy, But Not the Final Destination

India’s economic rise to the fourth-largest position is undoubtedly a milestone worth celebrating. Yet, it is not the end goal. True development must be measured not just by national income but by human well-being, employment generation, and social equity. GDP growth must lead to higher quality of life and better opportunities for all, especially the most marginalized.

As one development economist aptly noted,

"GDP growth is meaningful only when it translates into human development."

India’s journey toward becoming a $5 trillion economy and beyond must therefore be rooted in inclusive, equitable, and innovation-led strategies that balance numbers with needs.