Chasing a Mirage

What is the implication of being the world's third-largest economy? Over the past week, discussions around India’s ascent to soon overtaking Japan, based on the International Monetary Fund’s (IMF) 2024 projections, have received significant media traction. According to the IMF, India’s nominal GDP is expected to reach USD 3.94 trillion, overtaking Japan’s USD 3.87 trillion. The NITI Aayog’s further assertion that India is already the world’s third-largest economy in purchasing power parity (PPP) terms, and is on track to do so in nominal terms rekindles old questions with new urgency: Is aggregate GDP a meaningful measure of development?

At the heart of the issue lies the dominant use of nominal GDP based on market exchange rates as a benchmark for comparing economies. As early as the 1970s, Simon Kuznets warned that “The welfare of a nation can scarcely be inferred from a measure of national income”. This is especially relevant in the case of developing economies. For lower-cost economies like India, even PPP-based metrics can artificially inflate GDP.

Back in the days of glory of MDBs as primary funders, high GDP growth figures even with minimal resources as policy signaled to attract funds as a lever for development. In a world where multilateral development banks (MDBs) no longer play the dominant funding role they once did, why does policy discourse remain obsessed with GDP growth?

It is high time we expand the lens to include per capita considerations. While India may appear formidable with a projected USD 4.1 trillion GDP in 2025, its per capita income—about USD 2,800 (nominal) and USD 9,000 (PPP)—tells a far more modest story.

India’s ambition to reach a USD 30 trillion GDP by 2047 hinges on sustaining 6–8 per cent real growth annually, coupled with 4–5 per cent inflation. Mathematically, this trajectory seems feasible and inevitable. But the question of substance over scale is important. Even if India reaches USD 30 trillion in GDP, the per capita implications would be strained. With a projected population of 1.6 billion, nominal per capita income may still be under USD 20,000—well below today’s high-income thresholds. Worse, if income inequality worsens, median incomes may not rise significantly, meaning the average Indian might not feel richer despite impressive macroeconomic figures.

Indicative of this is the per capita income bias seen in the latest released HDI index. Despite rising GDP, India’s Human Development Index (HDI) rank remains low (though we climbed up three ranks forward). This raises a crucial question: Will India grow equitably—or merely grow large? Life expectancy and literacy rates are improving, but gross national income (GNI) per capita remains low, and the bottom 40 per cent of Indians continue to struggle with access to healthcare, employment, and sanitation.

India would not be the first country to climb the GDP rankings without achieving high-income status. This situation would be ideally termed as the ‘middle-income trap’. Brazil, South Africa, and Malaysia all grew rapidly, only to stagnate at middle-income levels. The "middle-income trap," the concept by Gill and Kharas (2007), describes how countries fail to transition from low-cost manufacturing to innovation-led economies. India, with its low R&D spending, skills mismatch, and poorly formalised labor markets, may risk the same fate, if institutional and structural reforms are not in place. Currently, India’s growth remains factor-accumulation driven, not productivity-led—a model that is ultimately unsustainable. Growth should be propelled endogenously, following the Solow Swan route so as to escape the trap.

Celebrating nominal GDP milestones may be politically useful, but they are developmentally insufficient. India’s rise to fourth place in global GDP rankings must not obscure the persistent weaknesses in employment, healthcare, and income distribution. It is imperative for media and policymakers to move beyond GDP fetishism and adopt a composite scorecard of national performance.

As Dani Rodrik reminds us, economic development is a national project, built on institutions—not just statistics. For India, reaching USD 4 trillion or even USD 30 trillion in GDP is less important than ensuring that a billion people live better, fuller lives. The USD 30 trillion GDP dream may be inevitable in scale, but elusive in substance.

India’s journey shall shift from symbolism to substance, from aggregates to averages, and ultimately toward inclusivity and resilience. The coming decades offer not just an opportunity to grow—but a chance to transform: economically, institutionally, and socially.

The writer is currently working as a Program Manager at The Convergence Foundation. Views expressed are personal