India Surpasses Japan as the World’s Fourth-Largest Economy Amid Global Challenges

In a historic milestone, India has overtaken Japan to become the world’s fourth-largest economy in 2025, with a nominal GDP of approximately $4.187 trillion, edging out Japan’s $4.186 trillion, according to the International Monetary Fund (IMF). This achievement marks a significant moment in India’s economic ascent, driven by robust domestic demand, favorable demographics, and strategic policy measures. The IMF projects India to remain the fastest-growing major economy over the next two years, with growth rates of 6.2% in 2025 and 6.3% in 2026. However, the Reserve Bank of India (RBI) has slightly tempered its optimism, revising its GDP growth forecast for the fiscal year 2025-26 to 6.5%, down from 6.7%, citing global trade tensions and U.S.-imposed tariffs as key challenges. This article explores the factors behind India’s rise, the implications of its new global ranking, the challenges posed by international trade dynamics, and the broader context of its economic trajectory.

India’s Economic Ascent: A Historic Milestone

India’s emergence as the fourth-largest economy is a testament to its sustained growth over the past few decades. The country’s nominal GDP has grown from $3.55 trillion in 2023 to an estimated $4.187 trillion in 2025, surpassing Japan, which has faced economic stagnation due to structural challenges like an aging population and a weak yen. According to NITI Aayog CEO B.V.R. Subrahmanyam, “We are the fourth-largest economy as I speak. We are a USD 4 trillion economy, and this is not my data—it’s IMF data”. This milestone positions India behind only the United States ($30.507 trillion), China ($19.231 trillion), and Germany ($4.744 trillion) in the global GDP rankings.

The IMF’s World Economic Outlook (April 2025) highlights India’s robust growth trajectory, projecting it to achieve a $5 trillion economy by 2027 and potentially surpass Germany to become the third-largest economy by 2028. This growth is underpinned by several key factors:

1. Strong Domestic Demand: India’s economy benefits from resilient private consumption, particularly in rural areas, where rising farm incomes and increased consumer spending have bolstered economic activity. The RBI notes that rural Fast-Moving Consumer Goods (FMCG) sales grew by 9.9% in Q3 of 2024-25, compared to 5.7% in Q2, while urban demand also improved to 5% from 2.6%.

2. Favorable Demographics: With a young and dynamic workforce, India is well-positioned to capitalize on its demographic dividend. Unlike Japan, which faces a shrinking workforce due to an aging population, India’s labor force continues to drive productivity across sectors like manufacturing, services, and technology.

3. Government Policies and Infrastructure Investment: The Union Budget 2025-26 has prioritized capital expenditure while balancing fiscal consolidation, boosting infrastructure development with strong multiplier effects on growth. The RBI highlights that public investment in infrastructure, coupled with tax exemptions, is expected to increase consumer spending and potentially boost GDP by 0.6% to 0.7%.

4. Robust Services and Export Growth: India’s services sector, particularly in pharmaceuticals and electronics, has driven export growth. The World Bank notes that India’s service exports have remained resilient, helping to narrow the current account deficit to 1-1.6% of GDP through 2026.

These factors have collectively propelled India past Japan, marking a significant shift in the global economic order. However, this achievement must be contextualized within the broader challenges of global trade tensions and domestic structural issues.

The IMF’s Optimistic Outlook for India

The IMF’s projections underscore India’s position as the fastest-growing major economy, with a forecasted GDP growth of 6.2% in 2025 and 6.3% in 2026. This is notably higher than the growth rates of other major economies, including the United States (1.8%), China (4%), Japan (0.6%), and the United Kingdom (1.1%). The United Nations’ World Economic Situation and Prospects 2025 report further supports this, projecting India’s growth at 6.6% in 2025, driven by strong export growth in services, resilient private consumption, and public investment.

India’s economic resilience is particularly striking given the global economic slowdown. The IMF has downgraded global growth forecasts to 2.8% for 2025, a 0.5 percentage point reduction from its January estimate, citing U.S.-imposed tariffs and rising trade tensions. Despite these headwinds, India’s growth outlook remains relatively stable, supported by domestic consumption and strategic fiscal measures. The RBI’s February 2025 bulletin emphasizes that India’s macroeconomic fundamentals and improvements in external sector indicators have helped it navigate global uncertainties.

However, the RBI’s downward revision of its 2025-26 growth forecast to 6.5% from 6.7% reflects caution. This adjustment aligns with other projections, such as the World Bank’s estimate of 6.3% for 2025-26, down from 6.7%, and the United Nations’ forecast of 6.3%, down from 7.1% in 2024. The primary reasons for this moderation include global trade uncertainties and the potential impact of U.S. tariffs on Indian exports.

Global Trade Tensions and U.S. Tariffs: A Looming Challenge

The global economic landscape is undergoing significant disruption, driven by escalating trade tensions and U.S.-imposed tariffs. On April 2, 2025, U.S. President Donald Trump announced universal tariffs on nearly all trading partners, with a 90-day pause on higher rates for most countries except China, which faces retaliatory tariffs of up to 145%. For India, the U.S. has imposed a baseline tariff rate of 10% on goods exports, increasing the effective trade-weighted average most-favored nation (MFN) tariff rate to 12.2%. A potential additional 16% tariff, currently paused, could raise this to 28.2% by the end of the fiscal year, potentially shaving 0.1% to 0.3% off India’s GDP growth.

These tariffs pose a significant risk to India, given that the United States is its largest trading partner. India’s goods trade surplus with the U.S. could decline by 12.8% under the current tariff structure, and by up to 19.6% if exemptions for sectors like pharmaceuticals and electronics are removed. The IMF warns that these tariffs could disrupt global supply chains, raise production costs, and amplify financial turbulence, particularly for emerging markets like India.

The U.S. tariffs are part of a broader trend of increasing protectionism, which has led to a projected 1.5 percentage point reduction in global trade growth to 1.7% in 2025. This fragmentation of the global economy threatens India’s merchandise exports, although its services-heavy export portfolio may mitigate some impacts. Sectors such as pharmaceuticals, electronics, semiconductors, and energy, which are currently exempt from higher tariffs, provide a buffer, but their long-term status remains uncertain.

Japan’s Economic Challenges: Why India Overtook

Japan’s slip to the fifth-largest economy is largely attributed to structural and external challenges. The IMF downgraded Japan’s 2025 growth forecast to 0.6% from 1.1%, reflecting the negative impact of U.S. tariffs and a weak yen. Japan’s aging population and shrinking workforce have further constrained its growth potential, with GDP growth projected at just 0.3% in 2024, down from 1.7% in 2023. Inflation and slow growth have also eroded consumer confidence, contributing to political instability, as evidenced by the Liberal Democratic Party’s loss of power in a recent election.

In contrast, India’s youthful population, expanding manufacturing and services sectors, and proactive government policies have given it a competitive edge. The weak yen has accelerated Japan’s economic reversal, with some estimates suggesting India’s overtake occurred a year earlier than anticipated. This contrast highlights the divergent trajectories of the two economies, with India poised for continued growth and Japan grappling with long-term stagnation.

Domestic Challenges: Structural Issues and Inequality

While India’s economic achievements are commendable, they mask deeper structural challenges. The RBI and other analysts note that private sector investment has remained stagnant over the past decade, limiting job creation for India’s growing youth population. Despite a robust GDP growth of 8.2% in FY23/24, the economy is operating below its potential due to insufficient high-paying job opportunities. Sectors like renewables, refineries, steel, and cement, previously poised for growth, may scale back investments due to trade uncertainties.

Economic inequality remains a pressing issue. While rural consumption has risen, driven by farm incomes, urban-rural disparities persist. The benefits of growth have not been evenly distributed, with the middle class and rural populations often facing higher costs and limited access to quality jobs. Social issues, such as manual scavenging, continue despite legal bans, highlighting enforcement gaps and systemic inequalities.

Policy Responses and Future Outlook

India’s government and the RBI are taking steps to address these challenges. The RBI began an easing cycle in February 2025, reducing the policy rate from 6.5% to support growth, with further cuts expected to 5.75% in June and possibly 5.5% by August. These measures aim to stimulate private investment and consumption amid declining inflation, projected at 4.0% in FY24/25 and 4.3% in FY25/26. The Union Budget’s focus on infrastructure and tax exemptions is expected to boost household incomes and consumption, further supporting growth.

To mitigate the impact of U.S. tariffs, India is exploring deeper integration into global value chains and diversifying its export basket. The World Bank emphasizes the need for India to reduce tariff and non-tariff barriers to achieve its $1 trillion merchandise exports goal by 2030. Strengthening multilateral cooperation and leveraging digital initiatives, such as the National Logistics Policy, could enhance India’s competitiveness in global trade.

Critical Perspective: Navigating a Fragmented Global Economy

While India’s rise to the fourth-largest economy is a significant achievement, it must be viewed critically. The IMF and other institutions often frame India’s growth as a success story, but their projections rely on assumptions of continued policy stability and global economic conditions. The escalating trade war, driven by U.S. tariffs, introduces significant uncertainty. A potential U.S. recession, with the IMF estimating a 40% probability, could further dampen global demand and impact India’s exports.

Moreover, the focus on nominal GDP rankings can obscure underlying issues like per capita income, which remains low in India compared to developed economies. GDP per capita is a critical indicator of prosperity, and India’s lower ranking in this metric underscores the need for inclusive growth. Policymakers must prioritize job creation, education, and skill development to ensure that economic growth translates into tangible improvements in living standards.

Conclusion

India’s ascent to the fourth-largest economy in 2025, surpassing Japan, is a landmark achievement that reflects its robust growth, young workforce, and strategic policies. The IMF’s projection of India as the fastest-growing major economy, coupled with its potential to become a $5 trillion economy by 2027, underscores its rising global influence. However, challenges such as U.S.-imposed tariffs, global trade tensions, and domestic structural issues like stagnant private investment and inequality require careful navigation. The RBI’s cautious revision of its 2025-26 growth forecast to 6.5% signals the need for proactive measures to sustain momentum.

As India charts its path forward, balancing domestic reforms with global trade dynamics will be critical. By leveraging its demographic strengths, investing in infrastructure, and fostering inclusive growth, India can solidify its position as a global economic powerhouse while addressing the needs of its diverse population. The road ahead is fraught with challenges, but India’s resilience and adaptability offer hope for a sustainable and equitable economic future.