India has crossed a historic economic milestone by overtaking Japan to become the world’s fourth-largest economy, marking a defining moment in the country’s long-term growth story. With a gross domestic product (GDP) valued at approximately USD 4.18 trillion, India now trails only the United States, China, and Germany in nominal economic size. According to the Indian government’s end-of-year economic review, the country is also on track to surpass Germany within the next two-and-a-half to three years, potentially becoming the world’s third-largest economy by the end of the decade.

While official confirmation will depend on the final annual GDP data to be released by the International Monetary Fund (IMF) in 2026, preliminary estimates and forward-looking projections strongly support the government’s assessment. IMF forecasts suggest that by 2026, India’s economy will reach USD 4.51 trillion, slightly above Japan’s projected USD 4.46 trillion, reinforcing expectations that the crossover is imminent and sustainable.

The government described the development as evidence of India’s economic resilience and momentum at a time of persistent global uncertainty. “India is among the world’s fastest-growing major economies and is well-positioned to sustain this momentum,” the economic review noted, highlighting the country’s strong domestic fundamentals, ongoing reforms, and improving macroeconomic conditions.

A Decade of Rapid Expansion

India’s ascent to the fourth position has been years in the making. Over the past decade, the size of the Indian economy has doubled, propelled by structural reforms, expanding domestic consumption, and growing integration with the global economy. In 2022, India became the world’s fifth-largest economy after overtaking the United Kingdom, its former colonial ruler, according to IMF figures.

Since then, India has maintained its position as the fastest-growing major economy globally, even as growth in many advanced and emerging economies slowed amid inflationary pressures, tighter monetary policies, and geopolitical disruptions.

According to the latest government estimates, India’s real GDP growth accelerated to 8.2 percent in the second quarter of the 2025–26 fiscal year, rising from 7.8 percent in the first quarter and 7.4 percent in the final quarter of FY 2024–25. This marked a six-quarter high, underscoring the economy’s resilience despite ongoing global trade and policy uncertainties.

Real gross value added (GVA) grew by 8.1 percent, supported by strong performance in both the industrial and services sectors, further reinforcing the breadth of the expansion.

Domestic Demand Drives Growth

A defining feature of India’s current growth phase has been the strength of domestic demand. Government data shows that robust private consumption played a central role in driving economic expansion, offsetting headwinds from a volatile global environment.

Urban consumption has shown a particular pickup, supported by rising incomes, improved credit availability, and stable inflation. Financial conditions have remained supportive, with strong credit flows to the commercial sector, enabling businesses to invest and expand.

The government described the current macroeconomic environment as a rare “Goldilocks” phase, characterised by high growth and low inflation. According to the review, strong corporate balance sheets, steady credit growth, and a reform-oriented policy framework have positioned India for sustained expansion.

Inflation, Monetary Policy, and the Goldilocks Moment

Inflation trends have been especially supportive of growth. Consumer Price Index (CPI) inflation stood at 4.26 percent in January and gradually moderated through the first half of the year before falling to multi-year lows in the latter half. Headline inflation touched historic lows of around 0.25 percent in October, driven largely by a sharp correction in food prices.

With both headline and core inflation easing, the Reserve Bank of India (RBI) adopted a calibrated approach to monetary easing. Over the course of the year, the central bank cut the repo rate cumulatively by 1.25 percentage points, reducing it from 6.5 percent to 5.25 percent. The RBI said the policy stance balanced the need to support growth while maintaining price stability.

Reflecting improved economic conditions, the RBI also revised its GDP growth projection for FY 2025–26 upward from 6.8 percent to 7.3 percent. The upward revision factored in sustained domestic demand, rationalisation of income tax and GST, softer crude oil prices, an early push in government capital spending, and accommodative monetary and financial conditions.

“Ongoing reforms are likely to further enable growth prospects,” the economic review stated. “The present macroeconomic situation presents a rare Goldilocks period of high growth and low inflation.”

External Sector and Export Performance

India’s external position has also shown notable improvement. Supported by strong services exports and rising overseas remittances, the current account deficit (CAD) narrowed to 1.3 percent of GDP in the second quarter of FY 2025–26, down from 2.2 percent in the same quarter of the previous fiscal year.

Remittance inflows rose by 10.7 percent year-on-year during the quarter, reinforcing external stability. With services exports maintaining momentum and remittance flows remaining robust, the government expects the CAD to remain contained through FY 2025–26.

Merchandise exports have strengthened as well. According to the review, exports rose to USD 38.13 billion in November, compared with USD 36.43 billion in January, supported by engineering goods, electronics, pharmaceuticals, and petroleum products.

Global Institutions Echo Optimism

India’s growth trajectory has been widely endorsed by global financial institutions and rating agencies. The World Bank has projected 6.5 percent growth in 2026, while Moody’s expects India to remain the fastest-growing G20 economy, with growth of 6.4 percent in 2026 and 6.5 percent in 2027.

The IMF has raised its growth projections to 6.6 percent for 2025 and 6.2 percent for 2026, while the Organisation for Economic Co-operation and Development (OECD) forecasts 6.7 percent growth in 2025 and 6.2 percent in 2026.

Similarly, S&P Global Ratings anticipates growth of 6.5 percent in the current fiscal and 6.7 percent in the next, the Asian Development Bank has lifted its 2025 forecast to 7.2 percent, and Fitch Ratings has raised its FY 2026 projection to 7.4 percent, citing stronger consumer demand.

These assessments reinforce the view that India’s expansion is broad-based and underpinned by strong fundamentals rather than short-term stimulus.

Geopolitical Headwinds and Policy Challenges

India’s upbeat economic outlook comes despite significant external challenges. In August, the United States imposed steep tariffs on Indian goods linked to New Delhi’s purchases of Russian oil, raising concerns about trade disruptions and diplomatic friction.

Currency pressures have also emerged. The Indian rupee hit a record low against the US dollar in early December, after depreciating by around 5 percent over the course of 2025. The decline reflected concerns over the absence of a trade agreement with Washington and the potential impact of higher levies on Indian exports.

Earlier in the year, economic growth had slowed to a four-year low in the 12 months ending March 31, prompting the government to introduce sweeping consumption tax cuts and push through labour law reforms. Prime Minister Narendra Modi described these measures as necessary to revive momentum and strengthen India’s long-term growth capacity.

Demographic Advantage and Structural Challenges

India’s rise in aggregate GDP masks deeper structural challenges. In 2023, India overtook China to become the world’s most populous country, with an estimated population of 1.4 billion.

More than a quarter of the population is aged between 10 and 26, making India one of the youngest nations globally. While this demographic profile offers a powerful growth dividend, it also presents a formidable challenge: generating enough well-paid, productive jobs for millions of young graduates entering the workforce each year.

In per capita terms, India still lags far behind advanced economies. According to the World Bank, India’s GDP per capita stood at USD 2,694 in 2024, around 12 times lower than Japan’s USD 32,487 and nearly 20 times lower than Germany’s USD 56,103.

“As one of the world’s youngest nations, India’s growth story is being shaped by its ability to generate quality employment that productively absorbs its expanding workforce and delivers inclusive, sustainable growth,” the government noted in its review.

The Road Ahead: Towards 2047

Looking ahead, the government has set an ambitious long-term vision. With the goal of attaining high middle-income status by 2047, the centenary year of India’s independence, policymakers are betting on a combination of structural reforms, infrastructure investment, social progress, and sustained economic expansion.

If current projections hold, India’s GDP is expected to reach USD 7.3 trillion by 2030, placing it firmly behind only the United States and China in terms of economic size. Whether this translates into broad-based prosperity will depend on how effectively India addresses challenges related to employment, productivity, inequality, and global integration.

For now, however, India’s rise to the position of the world’s fourth-largest economy stands as a landmark achievement—one that reflects both the scale of its economic transformation and the opportunities and responsibilities that lie ahead.

With inputs from agencies

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