India’s economic and financial pundits and policy makers will have much to cheer about the affirmation made by NITI Ayog that based on IMF data, India has surpassed Japan, albeit marginally, to become the fourth largest economy in the world. As of April 2025, India’s nominal GDP stands at USD 4,187.017 billion against Japan’s USD 4,186.431 billion. More heartening has been news that India’s economy is also expected to surpass Germany’s economy by 2027 and become the third largest economy of the world in nominal terms provided present trends continue and the world is not engulfed into a devastating third world war.
GDP or Gross Domestic Product is a monetary measure of the market value of all the final goods and services produced within the borders of a country or region in a specified time period, generally the financial year. GDP is often used to measure the economic performance of a country. GDP is also used as a metric for international and inter-governmental comparisons as a broad measure of economic development. GDP is important because it gives information about the size of the economy and how an economy is performing. The usual method is to convert the value of GDP, which is in local currency (like Rupee or Ruble) into US dollars using the market exchange rates ~ this is called Nominal GDP. GDP is also calculated on the basis of purchasing power parity ~ how much money is required to purchase the same goods and services; this is known as GDP (PPP) which is also calculated in USD. Per capita GDP (Nominal) and per capita GDP (PPP) are derived by dividing the respective figures of total GDP by total population of the country.
As for example, the per capita GDP in the USA comes to $89,105 (total nominal GDP divided by total population), which is the same for Nominal as well as PPP for US citizens, but different for other countries. The modern concept of GDP was developed by the Nobel laureate economist Simon Kuznets in 1934, using it for the first time in a US Congress report. After the Bretton Woods Conference in 1944, GDP became the main tool for measuring a country’s economy. All international organizations, especially the IMF and the World Bank, and the member states of the United Nations adopted the concept for measuring and monitoring the economic progress of individual nations and of the world as a whole.
The international standard for measuring GDP is contained in the book, System of National Accounts (SNA 2008) which was prepared by the representatives of the International Monetary Fund, the European Union, Organization for Economic Cooperation and Development, United Nations and the World Bank. In the context of measurement of GDP, Kuznets statedin 1962 that “Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between short and long run. Goals for more growth should specify more growth of what and for what.” As far as India is concerned, I would like to highlightthe fact that India has already become the third largest economy for all practical purposes.
This is in terms of purchasing power parity (PPP). India’s GDP (PPP) stands at $17.65 trillion (3rd) against Germany’s GDP (PPP) of $6.161 trillion (6th) and the gap is huge. Economists agree that nominal GDP in dollar terms (USD) is a poor indicator of the real strength of a nation’s economy, standard of living of its people and the quality of life embedded in its cultural milieu and PPP has been a better yardstick by which the real GDP should be measured. Nominal GDP calculated in US dollar terms is a derived figure and is useful for the purpose of comparisons of economic performance of different nations and for international trade and transactions because the dollar has practically replaced the Gold Standard, but has little relevance for the functioning of a country’s economy. To give an example, a parking space in the United States may cost anything between $5 and 10 for one hour while the same money can buy more than 10 parking spaces in any city in India.
Similarly, in the USA, a personal chauffeur may cost $5000- 6000 (Rs.4.5 lakh) per month but with the same money, more than a dozen drivers could be hired in India. But these may be extreme examples. Let us take the example of a university professor. A university professor in the USA earns on an average $100,000+ (Rs. 85 lakh) per year which is just adequate to lead a modest life on the East Coast (cost of living on the West Coast is much higher), but the same amount will be adequate for Indian universities to hire at least four professors who can lead a higher standard of living with good accommodation, a chauffeur-driven car, maids and helpers. Therefore, GDP measured in terms of PPP does show the real power of the local currency ~ how much goods and services it can buy.
There is a caveat here. Critics argue that GDP in Nominal or PPP terms have been imperfect indicators as they leave out vital issues of environmental cost, depreciation of assets and economic inequality and that the quality of life is better measured by the Human Development Index (HDI), Genuine Progress Index (GPI), or Gross National Happiness Index (GNHI) combined with the GiniIndex (Ginicoefficient). However, while accepting the shortcomings, economists have stuck to the concept of GDP, arguing that no indicator is perfect and that the GDP indicator is better than the alternatives, and is universally accepted by international experts. It is also felt that per capita GDP does represent a fair view of the standard of living of the citizens, also reflecting the level of Gini-coefficient telling the level of economic inequality in the society.
Nominal GDP (in trillion of USD) and the relative ranking of the ten major economies of the world are as follows: United States with a whopping $30.51 trillion (25 per cent of world GDP) tops the list followed by China ($19.23 trillion), Germany ($4.74 trillion), India ($4.19 trillion), Japan ($4.19 trillion), UK ($3.84 trillion), France ($3.21 trillion), Italy ($2.42 trillion), Canada ($2.23 trillion) and Brazil ($2.12 trillion). In the rankings of ten major economic powers in terms of GDP (PPP), China tops the list with a staggering $40.72 trillion followed by the United States ($30.51 trillion), India ($17.65 trillion), Russia ($7.19 trillion), Japan ($6.74 trillion), Germany ($6.16 trillion), Indonesia ($5.01 trillion), Brazil ($4.96 trillion), France ($4.50 trillion) and UK ($4.45 trillion).
(The writer is a former Dy. Comptroller &Auditor General of India and a former Ombudsman of Reserve Bank of India. He is also a writer of several books and can be reached at)