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India set to overtake Japan as world’s fourth-largest economy by 2025

Driven by consumption, demographics, and foreign investment, India’s economic rise is nearly sealed — but sustaining momentum requires urgent reforms.

   
May 30, 2025, 10:44
Business & Energy
U.S. loses $14 billion in green energy investments amid Trump policy shift

NEW DELHI (Realist English). India is on track to surpass Japan and become the world’s fourth-largest economy in 2025, according to projections from the International Monetary Fund, marking a symbolic leap for the South Asian powerhouse. The IMF forecasts India’s GDP will reach $4.187 trillion, just ahead of Japan’s projected $4.186 trillion.

The claim, echoed by B.V.R. Subrahmanyam, head of the government think tank Niti Aayog, has stirred pride on Indian social media. But analysts caution that the country’s economic journey — from 10th place in 2014 — is far from complete.

“This is IMF data,” Subrahmanyam told reporters. “India today is larger than Japan.” He also predicted India would overtake Germany by 2028 to become the third-largest economy, behind only the U.S. and China.

Engines of growth

India’s economic momentum rests on a combination of long-term structural drivers and short-term tactical advantages. Malcolm Dorson, senior portfolio manager at Global X ETFs, describes India as a “fine-tuned compounding machine,” citing its young, educated population and growing capacity in technology, services, and manufacturing.

Consumption remains India’s economic backbone, contributing over 56% of GDP. In the first quarter of 2025, nearly 40% of consumer goods sales came from rural areas, according to NielsenIQ. Improved weather conditions, rising crop yields, and falling inflation are expected to boost both rural and urban spending.

Dhiraj Nim, economist at ANZ Bank, believes India’s ascent to the No. 4 position is a “natural course of events.” But he warns: “India is not yet prosperous. There’s more work to be done to uplift citizens’ quality of life.”

Recent fiscal policies — including tax cuts and stimulus measures, along with expected interest rate reductions by the Reserve Bank of India — are seen as positive steps. India’s economic surge has already attracted rising foreign capital flows, with Dorson noting it could lead to higher equity valuations and deeper integration of Indian markets into global indices.

Persistent challenges

Despite the milestone, India lags far behind in per capita GDP, standing at $2,880 compared to Japan’s $33,960. Shumita Deveshwar, chief India economist at TS Lombard, stressed that “a huge disconnect” persists in infrastructure, education, and employment.

Reforms in labor laws, agriculture, and capital expenditure have long been delayed. “India has historically struggled with effective policy implementation,” said Deveshwar. “To sustain growth and climb further, these bottlenecks must be addressed.”

Both she and Nim recommend that India avoid spreading itself thin across sectors. Instead, they suggest focusing on areas of comparative advantage, ensuring skilled labor can deliver competitive, exportable products.

Geopolitical tailwinds

India’s rise also comes amid a broader geopolitical realignment. According to Canalys, Indian exports of iPhones to the U.S. surged 76% year-on-year in April, while Chinese exports plunged by the same margin — a result of U.S. tariffs under President Donald Trump.

Trump has signaled further trade barriers, warning that all smartphones built outside the U.S. — “whether in India or anyplace else” — will face a 25% tariff, potentially complicating India’s role in global supply chains.

Meanwhile, a potential India–U.S. trade deal could be finalized as early as June, though imports of genetically modified crops remain a sticking point.

Market pulse

Despite robust fundamentals, Indian equities were largely flat on Thursday. The Nifty 50 and BSE Sensex held steady, while 10-year bond yields slipped slightly to 6.171%. Year-to-date, both indices are up around 4–5%, reflecting cautious optimism amid global trade uncertainty.

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