Context:

NITI Aayog CEO recently claimed India is now the fourth-largest economy, overtaking Japan. Based on IMF data, another claim emerges — India has actually been the third-largest economy in the world since 2009, when it overtook Japan, during the govt under PM Manmohan Singh.

Evidence 

• The above figure displays India’s GDP trajectory (dark green line) clearly separating from others in 2009. 

• It also marks another pivotal shift in 2016, when China overtook the US to become the largest economy.

Understanding Economic Rankings: Nominal GDP vs. Purchasing Power

Cost of Living vs. Nominal Income

• Two people earning similar salaries might experience vastly different living standards depending on where they live—for example, someone in high-cost Mumbai versus someone in lower-cost Patna.
• This difference stems from variations in the cost of living, which influence actual purchasing power beyond just nominal income figures.

Nominal GDP:

• Nominal GDP represents the total market value of all goods and services produced within a country, calculated at current prices and converted into US dollars.
• It is the primary measure used to assert claims like India overtaking Japan in economic size.

Challenges with Comparing Economies by Nominal GDP

• Exchange Rate Volatility: Fluctuations in currency exchange rates (rupee-dollar, yen-dollar) can change rankings without reflecting real shifts in economic output.
• Data Revisions: India’s GDP numbers are often revised, making immediate comparisons less reliable.
• Ignoring Cost of Living: Nominal GDP does not factor in purchasing power or living costs, which are critical for understanding true economic well-being.

India’s Nominal GDP Status

• According to IMF data, India surpassed the UK in nominal GDP after the COVID-19 pandemic.
• However, as of the end of 2024, India still trails Japan and Germany, though IMF forecasts suggest it will surpass them soon.

Why Purchasing Power Parity (PPP) is Important

• Unlike nominal GDP, PPP adjusts for differences in the cost of living between countries.
• PPP shows how much goods and services people can actually buy with their income, making it a more accurate gauge of economic strength.
• While nominal GDP often dominates headlines, PPP offers a more meaningful view of a country’s economic capacity and citizens’ standard of living.

Understanding Purchasing Power Parity (PPP)

• PPP is a method for comparing economic productivity and living standards by accounting for differences in local prices and inflation.
• It reflects the real value of income by measuring what can actually be purchased domestically rather than relying solely on currency exchange rates.

India’s Ranking by PPP

• PPP-based estimates placed India as the world’s third-largest economy as early as 2009—long before recent headlines about nominal GDP.
• PPP provides a more accurate depiction of economic strength by showing what income truly buys, with India maintaining a top global ranking for over a decade.

Politics and GDP Rankings

India’s Growth in Nominal Terms

• Since 2004, India has grown nominal GDP at an average annual rate of 6–7%, helping it surpass several major economies in dollar terms.

Why Governments Highlight Nominal GDP

• Nominal GDP milestones are easier to communicate.
• They showcase recent economic progress.
• They provide political leaders with tangible achievements to claim.

Why PPP Rankings Are Overlooked

• India’s position as the third-largest economy by PPP hasn’t changed since 2009, offering little new political leverage.
• As a result, PPP-based rankings are rarely cited in political debates despite presenting a more accurate economic picture.

The Limits of Total GDP Rankings — The Importance of Per Capita Measures

Aggregate GDP vs. Per Capita Reality

• Since 2021, India’s total nominal GDP has exceeded that of the UK, often cited as proof of India’s economic rise.
• However, per capita GDP tells a different story:
  • In 2021, the UK’s per capita GDP was $46,115 compared to India’s $2,250.
  • By 2025, the UK’s per capita GDP is projected to reach $54,949, while India’s will be about $2,879.
  • This means the UK’s average income per person is still nearly 19 times higher than India’s.

Why Per Capita Figures Matter More:

• While total GDP rankings can boost national pride, they mask the reality of low average incomes and limited purchasing power.
• Focusing only on aggregate GDP overlooks critical issues such as poverty, low productivity, and uneven development across regions.