Why is it in the news?
1. According to the International Monetary Fund (IMF) and World Bank, India now ranks the fourth largest economy after the United States, China, and Germany. It has surpassed Japan.
2. As of now, in 2025, the nominal GDP of the USA is $28 trillion , China $18 trillion, Germany$ 4.8 trillion. India $4.2 trillion. India is projected to become the third largest economy by 2027 surpassing Germany. However, there are challenges in the Indian Economy in areas like income inequality, job creation, inadequate educational and health facilities and lack of inclusive growth.
Causes for the rise of Indian Economy
1. The rise in the Indian Economy has been due to the consistent annual GDP growth of 6-8% over the past decade. Higher growth in the services, manufacturing, Fintech, Digital infrastructure and startups has boosted GDP growth.
2. Secondly, since India has a young population having the median age of 28 years, thereby, providing a large and growing workforce.
3. Thirdly, a rising middle class has increased demand for goods and services.
4. India has witnessed structural reforms like GST, reforms in insolvency and bankruptcy code, digital India, Make in India, production linked incentives and improvement in ease of doing business.
5. Financial inclusion through Jana Dhana Yojana, UPI and DBT has further increased economic participation of the masses. The robust growth in the services sector further boosted the Indian economy so much as it now contributes more than 50% of India’s GDP. India has become now a global player in software, AI, and digital services. Increased spending on infrastructure further led to the growth of Highways, Ports, Airports and digital connectivity leading to the cost reduction in logistics. Rising foreign direct investments and indigenous capital investments further led to the investment and boosting of different sectors of the economy.
Implications of India’s economic rise
1. Greater strategic autonomy and global influence. India can assert greater strategic autonomy in foreign policy by balancing between the western powers like the US, EU and UK and other developed countries of the world on the one hand and Russia, China and Asian countries on the other. Moreover, India can assert more global influence on the UN Security Council, IMF , World Bank, WTO and World groupings like G-20, BRICS, QUAD and SCO.
2. Counterbalance to China - India is emerging as a democratic counterweight to China in the Indo-Pacific region. India would be able to challenge China’s debt diplomacy by providing more economic aid to the littoral states of the Indian Ocean. India can now provide more development aid to third world countries. The vigorous economic assistance to these countries would catapult India as a global leader.
3. A stronger economy would allow India higher defence spending. This would modernise further our military set up.
4. Shift in global supply chains - As global firms seek alternatives to China, a robust Indian economy would attract more foreign investments. Sectors like electronics, pharmaceuticals, textiles and semi conductors would see greater investments. Further, most of the multinational companies operating in China would shift their location to India because of the comparative low wages and ease of doing business. Further, a rising Indian Economy would instill confidence among its policy makers and they would sign free trade agreements with countries like EU, Canada,and other developed countries, thereby expanding India’s access to new markets. India has already signed an FTA with Australia, UK and UAE. A rising India may demand fair and inclusive globalisation and removal of protectionism.
5. Emergence of a multipolar world - A rising India, would reduce the dominance of the US or China, thereby promoting a multipolar global order. It can assert the restructuring of global institutions like the UN security council, IMF, World Bank and WTO. It can act as a balancer in a polarised world. It can promote issue based coalitions rather than permanent blocks.
6. Championing the global South - India can become the voice of the developing countries by advocating equitable climate finance, access to vaccines and technology, fair trade and development policies. With economic strength India will assert more effectively on global issues including border disputes with China, maritime security in the Indo Pacific,a bigger role in West Asia and Africa. It can effectively deal with the menace of terrorism. The recent operation Sindoor launched by India on 7th-10th May 2025 is an explicit example. The Indian airforce struck deep inside Pakistan and damaged various air bases and terror outfits.
Challenges Ahead
1. There is huge income inequality in India. According to estimates, India has become the most unequal society in the world. Top 10% of the people have amassed more than 50% of the wealth.
2. There is acute unemployment ranging between 7-9%. It is to be noted that there is unemployment rate of 23% among youths between age 18-24 years. It is essential to provide employment opportunities to the youths so that India can reap the demographic dividends to the maximum.
3. There are huge infrastructural gaps between the Urban and Rural areas. Rural areas suffer from power shortage. This may have an impact upon agricultural activities.
4. Global economic shocks on account of war between countries can disrupt the supply chain. Similarly, protectionism and especially the US tariff policy would have an impact upon the export of goods and services.
5. Literacy rate in India is 74% according to the 2011 census. India currently spends 4.6% of GDP on education. It must be increased to 6-8% of GDP, focusing on science, technology, engineering and mathematics (STEM) and vocational training. There is a need to achieve 90% literacy and 50% higher education enrollment by 2040 from the present 27%.
6. It is also necessary to increase healthcare spending from the present 2.1 % of GDP to 5% so that the poorest of the poor should get healthcare facilities. The present human development index of 0.644 should be increased to 0.768 of China’s level by 2040. Universal healthcare would boost workforce productivity.
7. There is a need to accelerate urbanisation with affordable housing and job creation so that rural migrants are absorbed.
8. There is also a need to increase female labour force participation from the present 23% to 60% as it obtains in countries like China, South Korea and Japan.
9. Regional disparities must be tackled on priority basis to achieve equitable development in all states. It should be noted that the per capita income of Bihar is less than 5 times that of Delhi and 10 times that of Goa.
10. India must reverse the emigration of 1 million skilled workers annually by providing them a slew of incentives.
Conclusion
1. India has become the fourth largest economy of the world in nominal GDP. It is to become the third largest economy by surpassing Germany in 2027-28. In terms of purchasing power parity China is the biggest economy having $35 trillion followed by the US having $28 trillion and India $15 trillion. Thus, on the scale of economy, there is a huge difference between India and China. The Chinese economy is almost 4.5 times greater than the Indian economy. In PPP terms, the Chinese economy is 2.5 times greater than the Indian Economy.
2. In order to catch the Chinese economy, India must maintain 7-8% annual GDP growth for the next 20 years, increasing the rate of productivity in agricultural and manufacturing, raising gross enrolment ratio in higher education from 27% to 50% by 2035, increasing the rate of urbanisation from the present 36% to 50% by 2040. It is necessary to reduce trade deficits by boosting exports and increasing the share of the manufacturing sector from the present 16-17% to 27-28% by 2035.
3. We must note that the size of the economies of both India and China was the same in the 1980s. China opened its economy in 1979 under the leadership of Deng Hsiao Ping. It was because of the continuous 10% growth rate of China from 1980 to 2010 that the Chinese economy increased manifold and became the second largest economy in nominal GDP and the biggest economy in PPP terms. The reasons for high economic growth were 45% gross fixed capital formation, enhanced productivity and agriculture and manufacturing sector, export oriented growth and huge investments from indigenous capital and foreign. So, India must increase its gross fixed capital formation percentage from the present 32% to 40% by increasing saving rates, exporting more than importing, huge investments from foreign direct investments and indigenous investment and finally increasing productivity of agriculture and manufacturing sectors. The share of manufacturing in GDP of 17% must be enhanced to 26-28%. Similarly, the productivity in the agricultural sector must be increased from the present 4.2% to more than 5% by investing in research and development and by patenting new strains of high yielding varieties of seeds of wheat, rice, oilseeds, pulses, cotton, sugarcane and millets.
4. India must strive to reduce income inequality, infrastructure gaps between urban and rural areas, increasing women’s participation in labourforce to 60%.
5. India must expand its military power by doubling the present spending of $84 billion annually in order to catch $296 billion annual spending of China.
To sum up , the GDP growth at 6.5% in 2024-25 must be enhanced in coming years by pumping huge investments from FDI and indigenous capital investment, reducing fiscal deficits below 5% of the GDP, promoting exports to reduce the trade deficit and skill upgradation to enhance labour productivity. It should be noted that the democratic resilience, one billion internet users by the end of 2025 to improve connectivity, digitalisation of the economy reinforced by computerization and cultural diversity are the unique advantages of India. Thus, India needs continued execution of sustained growth of its economy to achieve at par with China within 15-20 years.