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Informist, Wednesday, May 28, 2025

NEW DELHI – India's economy could reach the combined size of Japan and Germany by 2040, even as currently it is still behind the east Asian nation as the world's fifth largest economy, Capital Economics said Wednesday. Capital Economics expects India's economy around $16 trillion in 2040--the combined size of Japan and German economies.

NITI Aayog Chief Executive Officer B.V.R. Subrahmanyam last week claimed that India has already surpassed Japan to become the fourth largest economy, citing International Monetary Fund projections, which showed that India will overtake Japan by the end of 2025. Capital Economics, however, believes India will overtake Japan only by the middle of 2026, which could also be pushed beyond next year if the rupee weakens more than expected or if the yen strengthens more than assumed right now.

"Debate around whether or not India's economy has surpassed Japan's in size is raging, but the big picture is that India was always going to overtake Japan--and also Germany--given its positive demographics and scope for continued productivity gains," Shilan Shah, deputy chief emerging markets economist at Capital Economics said in a report. "For what it's worth, our forecasts suggest that India will overtake Japan by the middle of 2026. But in truth, the entire discussion risks missing the woods for the trees."

Shah said it is clear India's economy will be larger than Japan's and Germany's within the next few years. This will make India the world's third largest economy at market exchange rates, behind the US and China.

India's GDP has risen by over $2 trillion since 2010, which has taken its global ranking to fifth from 10th, Shah said. "Over the same time period, Japan's GDP has fallen by $1.2 trillion (due entirely to the weakness of the yen), while Germany's has risen by $1.2 trillion."

India's quicker rate of growth in recent years has been underpinned by demographics and productivity growth, both of which will continue over the coming years, Shah said.

India's population growth has averaged 1.5% per annum since 2010, and overtook China as the most populous country in 2023, Shah said, adding that while population growth may slow over the coming years, it will remain positive, unlike in Japan and Germany. "India is on track to have the world's largest labour force by 2027. Provided even the most basic jobs are available, a larger working-age population implies a higher level of aggregate output," Shah noted.

Secondly, India's total factor productivity growth has averaged 4.7% per year since 2010 compared with 0.4% in Japan and 0.6% in Germany. "And India is still a poor country in per capita terms, meaning there is still plenty of scope for further gains as workers shift into higher productivity sectors, the government continues to make gradual progress on liberalising reforms and India reaps the benefits of rapid digitalisation," Shah said.  End

US$1 = INR 85.36

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

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