Why in News?

NITI Aayog CEO BVR Subrahmanyam recently claimed that India has overtaken Japan to become the world’s fourth-largest economy, citing IMF data. This claim was met with both celebration and skepticism, with some insisting IMF data still places India fifth.

What’s in Today’s Article?

• India's Economic Ranking – Data, Debate, and Context
• Understanding Economic Rankings Through Nominal GDP and Purchasing Power
• Understanding Purchasing Power Parity (PPP)
• The Politics Behind GDP Rankings
• The Limits of Aggregate GDP Rankings – Why Per Capita Matters

India's Economic Ranking – Data, Debate, and Context

• NITI Aayog CEO recently claimed India is now the fourth-largest economy, overtaking Japan.
• A More Surprising Claim: India Is Third
  • 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
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  • 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 Through Nominal GDP and Purchasing Power

• Cost of Living vs. Nominal Income
  • Two individuals earning similar salaries may not enjoy the same quality of life if one lives in a high-cost city like Mumbai and the other in a lower-cost city like Patna.
  • This difference is due to the cost of living, which affects purchasing power and not just nominal income.
• Nominal GDP
  • Nominal GDP is the total market value of all goods and services produced in a country, measured using current prices and converted into US dollars.
  • This is the metric currently being used to claim India has overtaken Japan.
• Problems with Nominal GDP Comparisons
  • Exchange Rate Sensitivity: Changes in the rupee-dollar or yen-dollar exchange rate can alter rankings without actual changes in economic output.
  • Data Revisions: India's GDP figures often undergo revisions, making real-time comparisons less reliable.
  • Lack of Cost Context: Nominal GDP ignores purchasing power and cost of living, which are essential for assessing real economic well-being.
• India’s Current Position
  • As per IMF data, India overtook the UK post-COVID in nominal GDP.
  • However, it is still behind Japan and Germany as of the end of 2024. IMF projections show India overtaking both soon.
• Why Purchasing Power Parity (PPP) Matters
  • Unlike nominal GDP, GDP by Purchasing Power Parity (PPP) adjusts for cost-of-living differences across countries.
  • It provides a more accurate comparison of what people can actually buy with their incomes — making it a more meaningful metric of economic strength.
  • While nominal GDP rankings create headlines, PPP-based GDP offers a more realistic picture of a nation’s economic capacity and the standard of living of its citizens.

Understanding Purchasing Power Parity (PPP)

• PPP is a method used to compare the economic productivity and standards of living between countries by accounting for the relative cost of living and inflation rates.
• It tells us how much actual goods and services one can buy in a country with its income, instead of relying on exchange rates alone.
• India’s Global Ranking by PPP
  • According to PPP-based GDP estimates, India became the third-largest economy in the world as early as 2009, not just recently — a fact often overlooked in public discussions.
  • PPP gives a truer picture of a country’s economic strength by adjusting for what money can actually buy. In PPP terms, India has been among the top economies for over a decade.

The Politics Behind GDP Rankings

• India has made significant progress in nominal GDP terms, growing at an average rate of 6% to 7% since 2004.
• This growth has helped India surpass major global economies in dollar-based rankings.
• Why Governments Prefer Nominal Rankings
  • Governments often highlight nominal GDP milestones because:
    • They’re easier to communicate.
    • They show recent progress.
    • They help claim political credit.
• Why PPP-Based Rankings Are Ignored
  • Even though India became the third-largest economy by PPP in 2009, this ranking has remained unchanged.
  • Since the relative position hasn’t shifted, PPP metrics offer no fresh political advantage.
  • Hence, they are rarely mentioned in political discourse, despite offering a truer economic picture.

The Limits of Aggregate GDP Rankings – Why Per Capita Matters

• Since 2021, India’s nominal GDP has been higher than the UK’s in total terms. This is often used to highlight India’s economic rise on the global stage.
• Per Capita GDP Tells a Different Story
  • Despite India’s higher total GDP:
    • In 2021, UK’s per capita GDP was $46,115 vs. India’s $2,250.
    • By 2025, UK’s per capita GDP will be $54,949, while India’s will only be $2,879.
    • UK’s per capita GDP remains nearly 19 times higher than India’s.
• Why Per Capita Metrics Matter More
  • While aggregate GDP rankings can fuel national pride, they hide the reality of low average incomes and purchasing power.
  • Such rankings often divert attention from core challenges such as Poverty; Low productivity and Unequal development.