India’s GDP Size: A Closer Look beyond the Hype

R Ramakumar

THERE has been a noticeable increase in media coverage regarding India’s economic position on the global stage. This surge in interest stems from the International Monetary Fund (IMF) releasing updated estimates of the gross domestic product (GDP) for various nations for 2024 alongside projections for the years from 2025 to 2030. According to these forecasts, India’s GDP in 2025 is anticipated to be approximately $4,187.03 billion, edging slightly ahead of Japan’s GDP, projected at $4,186.43 billion. Should these predictions materialise, India is likely to secure the position of the fourth largest economy globally by 2025, trailing behind only the United States, China, and Germany.

This development has not only captured media headlines but has also ignited a lively political debate. Government officials, for instance, have attributed this improved ranking to the “visionary” leadership of the prime minister. Moreover, the narrative suggests that this milestone could serve as a springboard for India to ascend further and claim the title of the third largest economy by 2028. Beyond 2028, aspirations are being articulated for India to evolve into a high-income, developed nation (referred to as viksit bharat) by the year 2047.

THE LIMITATIONS OF GDP METRIC

At its core, a country’s GDP offers a numerical depiction of the size of its economy. However, it falls short of revealing how its citizens live, work, or thrive. Metrics like GDP provide little insight into the population’s health and education standards or the inequities in income distribution. Furthermore, several essential dimensions of economic activity remain outside the purview of GDP calculations. For instance, unpaid domestic and caregiving work carried out predominantly by women is often excluded from national accounting systems.

This inadequacy has prompted repeated calls from experts to overhaul the methodologies underpinning GDP calculations. Many argue that alternative indicators should be employed to offer a more nuanced understanding of socioeconomic progress and achievements. But despite these critiques, the metric of GDP continues to dominate economic discussions both domestically and internationally.

MULTIPLE MEASURES OF GDP

The discussions surrounding India’s GDP rank underscore the challenges in interpreting the concept of GDP. Technically, GDP measures the monetary value of final goods and services produced in a country in a given period. In the net, we multiply the “quantity” of production with its “price” in this process to estimate a final value. Comparing such GDP estimates of different countries is an intricate exercise requiring standardised methodologies. Economists and international institutions have devoted decades to refining these techniques. As a result, no single GDP metric covers all aspects of an economy. Instead, multiple estimates exist, each derived using distinct approaches and units.

The process of determining GDP across various nations has been largely harmonised, although variations persist in the quality of data collection. Typically, GDP is calculated and presented in the domestic currency of each country. However, when comparing one nation’s GDP to another’s – such as India versus the United States – a common currency is required, and the US dollar serves as the standard unit for these comparisons.

CONVERSION WITH MARKET EXCHANGE RATES

Converting GDP values from domestic currencies into US dollars involves two principal methods, each with its own set of challenges. The first approach uses market exchange rates derived from foreign exchange markets. For example, one US dollar is currently equivalent to about Rs 85.59. Using this exchange rate, India’s nominal GDP can be divided by Rs 85.59 to arrive at the GDP figure in US dollars. This method can then be replicated across various countries to produce a global ranking of economies.

Based on GDP calculations using market exchange rates, India has held the position of the fifth largest economy since 2021. Projections from the IMF indicate that India is poised to rise to the fourth largest economy by 2025 and the third largest by 2028. These rankings place the United States at the top, followed by China in second place.

CONVERSION WITH PPP EXCHANGE RATES

But there are problems in using GDPs converted to dollars based on market exchange rates. These rates are highly volatile and can provide unstable estimates of ranks over time. These also disregard the fact of different purchasing powers of people across countries. For example, prices of most traded and non-traded goods are lower in developing countries than in developed countries. This is because the wages paid to workers are lower in developing countries, which also leads to lower incomes for workers.

So, GDP is also compared using purchasing power parity (PPP) exchange rates. PPP adjusts for price level differences across countries, providing a sense of the relative purchasing power of citizens in an economy. This method assumes that the same goods and services should cost the same when priced in a common currency.

When assessing India’s GDP using PPP exchange rates, the global rankings change significantly. In PPP terms, IMF’s projections place India as the third largest economy globally behind only China and the United States. Interestingly, India had attained the third rank in GDP size in 2009 itself and has continued occupying that rank since then. There is also no hope that India will further climb up its rank anytime in the next 50 years. While the government and its spokespersons have gone to town celebrating the rank based on market exchange rates, they have been amusingly silent on the rank based on PPP exchange rates.

RETHINKING ECONOMIC RANKINGS

But the PPP method also has its problems. The PPP method offers a nuanced comparison of GDP sizes but requires cautious application to avoid misleading conclusions. While using PPP exchange rates, one is essentially “inflating” the GDP size of countries like India to “match” the purchasing powers of people in the developed world. This “inflation” gives you a better rank (i.e., the move from fifth rank to the third rank) but “hides” the actual disparity in incomes between countries. For example, it masks significant socio-economic challenges such as low wages, widespread informal labour, and unpaid female workers. Take per capita GDP. India’s per capita GDP in 2024 was $2,711, ranking 144th globally at market exchange rates and 127th globally in PPP terms. Comparisons with nations like Vietnam, Sri Lanka and Bhutan reveal India’s lagging progress despite its large GDP size. This showcases a “big economy illusion,” where GDP size does not correspond to improved living conditions or socioeconomic development for its citizens.

In summary, while GDP metrics provides a snapshot of a nation’s economic capacity, it fails to capture the deeper dimensions of societal progress. The GDP size of an economy does not reflect the quality of life experienced by its citizens. For instance, a high GDP size does not automatically translate into lower income poverty, equitable education, widespread healthcare access, or reduced income disparities.

Moreover, GDP metrics often fail to account for informal economies and non-market activities, such as community work or household caregiving. These exclusions mean that GDP figures provide an incomplete picture of a nation’s economic realities. As India climbs higher in global economic rankings, these limitations warrant attention to ensure that progress in GDP aligns with improvements in human development indicators. Alternative frameworks, such as the Human Development Index (HDI), or simpler individual indicators related to literacy, schooling, infant/maternal mortality rates, malnourishment and so on, offer new perspectives that can enrich our understanding of growth and development. In the coming years, India must lead the global discourse by advocating for more inclusive and comprehensive indicators of development.

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