India’s Path To Economic Power Status

India's strong post-pandemic recovery positions it to become the third-largest economy by nominal Gross Domestic Product (GDP) within the next decade, driven by its demographics and domestic market. Despite high GDP growth, low per capita income, inequality, infrastructure deficits, human capital limitations, bureaucracy, corruption, and environmental vulnerabilities challenge its ascent. Achieving "great economic power" status, defined by sustained high growth, widespread prosperity, resilience, innovation, and global influence, depends on overcoming structural weaknesses and ensuring sustainable growth.

The Current Economic Landscape: A Detailed Examination

India's economic potential is evident in its rapid overall growth, though significant developmental issues persist.

Regarding GDP size and global ranking:

In nominal US dollar terms, the GDP for FY24 was estimated at approximately $3.9 trillion.
Projections for FY25 suggest a further increase to between $4.19 trillion and $4.27 trillion. Based on these figures, India is positioned as either the 4th or 5th largest economy globally in nominal terms for 2025, vying closely with Japan.
When measured by Purchasing Power Parity (PPP), estimates for FY25 place India's PPP GDP at around $17.65 trillion, with alternative estimates as high as $21.9 trillion for 2025.These PPP figures consistently rank India as the 3rd largest economy globally.

Despite these impressive figures, India's per capita income remains a significant challenge.

Nominal GDP per capita was estimated around $2,711-$2,730 in FY24, with projections for FY25 hovering around $2,880-$2,980.
India's 2025 per capita income ranks low globally (136th nominal, 119th PPP). Despite a substantial 74% increase from 2014-2024, it remains far below developed nations and significantly behind China, whose nominal per capita income is almost five times greater.

This disparity is further reflected in human development indicators.

India's Human Development Index (HDI) score was 0.644 in 2022, placing it 134th globally in the 'medium' human development category.
Extreme poverty remains a significant issue in India. In 2021, a large percentage of the population lived on very limited means, with 44% below $3.65 per day and 82% below $6.85 per day. India's Human Development Index (HDI) score is 0.633, placing it in the 'medium' category and ranking it 134th. However, when accounting for inequality, the Inequality-adjusted HDI (IHDI) falls considerably to 0.444, dropping it to the 'low' category at 118th position.

The Indian economy is dominated by the services sector, which contributes approximately 54-55% of the country's GDP or Gross Value Added (GVA). The industry sector accounts for roughly 27-30% of GVA, with manufacturing contributing a stagnant 14-17%. Agriculture, forestry, and fishing contribute around 15-18% to GDP/GVA, but employ a disproportionately large share of the labor force, estimated at 40-44%.

The Engines of Growth: Demographics, Domestic Demand, and Digitalization

India's strong economic growth is driven by its large youth population and workforce (demographic dividend until 2055-56), substantial domestic market (60-70% of GDP, projected to double by 2030, though vulnerable to inflation and weak rural growth), and rapid digital transformation via the "India Stack" and a large user base. This potential relies on productive employment and improved education.

Over 950 million internet subscribers as of mid-2024.
India's digital revolution, with over 650 million smartphone users by mid-2024, drives significant economic impact. E-commerce and UPI digital payments are projected to triple by FY29, contributing to a digital economy expected to reach $1 trillion by 2025.
Artificial Intelligence (AI) is also emerging as a significant driver, projected to add an estimated $967 billion to India's GDP by 2035. The technology sector remains a cornerstone, with IT services exports expected to reach $224 billion in FY25.

Policy Levers and Their Impact: Assessing Key Government Initiatives

The Indian government has implemented several flagship initiatives aimed at accelerating economic growth, improving competitiveness, and fostering self-reliance.

Make in India & Production Linked Incentive (PLI) Policies:

Key Objectives: India aims for economic power through self-reliance by boosting manufacturing GDP to 25%, attracting FDI, creating jobs, and reducing imports.
Reported Successes/Impacts: India's improved Ease of Doing Business ranking (63rd from 142nd) has attracted $17.5B in investment (by Nov 2024), boosted production/sales ($150B) and exports ($48B), created an estimated 950,000 jobs, and yielded notable success in mobile phone manufacturing.
Key Challenges/Criticisms: India's manufacturing sector faces challenges: stagnant share (15-17%), missed production targets (37% achieved by Oct 2024), slow incentive payouts (<8% by Oct 2024), domestic value addition concerns, and uneven sectoral performance.

Goods and Services Tax (GST):

Key Objectives: Unify Indirect Taxes, Simplify Compliance, Remove Cascading, Create Common Market, Enhance Tax Compliance/Transparency, Reduce Evasion, Boost Revenue.
Reported Successes/Impacts: Increased transparency, Improved formalization, Improved logistics efficiency, Positive impact on growth/revenue (some studies), Broadened tax base, Record high revenues recently.
Key Challenges/Criticisms: India's GST burdens SMEs with compliance, multi-tiered rates, frequent changes, and technical issues, hindering its potential for simplicity and efficiency.

Digital India:

Key Objectives: Build Robust Digital Infrastructure, Deliver e-Governance Services, Improve Digital Literacy, Foster Cashless Economy/Startup Ecosystem.
Reported Successes/Impacts: India Stack (Aadhaar (Digital identity), UPI (Unified Payments Interface), DigiLocker (Secure sharing of and access to data.)) revolutionized digital payments, boosted e-commerce/fintech, improved government service access, and may increase GDP by $1 trillion in 2025.
Key Challenges/Criticisms: Significant digital divide persists, Lack of digital literacy for large segments, Usage skewed towards entertainment over education, Cybersecurity threats, Data privacy concerns.

Infrastructure Push:

Key Objectives: Address Infrastructure Deficit (Transport, Energy, Logistics), Boost Connectivity & Economic Growth.
Reported Successes/Impacts: Significant improvements in physical infrastructure, Enhanced connectivity (road, rail, air, sea), Reduced logistics costs, Supported manufacturing/trade, Attracted investment.
Key Challenges/Criticisms: India requires substantial urban infrastructure investment ($840B over 15 years) but faces a large deficit. Funding heavily depends on public sources (>75%) with limited private involvement (~5%) and ongoing implementation issues such as land acquisition and delays.

Navigating the Hurdles: Infrastructure, Extreme Poverty, and Institutional Challenges

Despite strong growth, India faces major infrastructure deficits ($840 billion needed in 15 years, mainly for power, transportation, and water/sanitation). Infrastructure deficit is a critical bottleneck for India's economic growth, limiting productivity, increasing business costs, hindering manufacturing competitiveness, and capping the economy's growth potential.

Extreme poverty has significantly decreased (16.2% in 2011-12 to 2.3% in 2022-23), as India’s middle class emerges.

This growing middle class is a significant factor driving India's economic trajectory and its large domestic market.

It is increasingly contributing to the burgeoning domestic market.
It is projected to expand from 31% to 38% of the population by 2031.
A growing middle class is a key factor fueling India's strong reliance on domestic consumption, which accounts for a large portion (nearly 60-70%) of India's GDP

India significantly improved its Ease of Doing Business ranking from 142nd in 2014 to 63rd in 2020. However, persistent institutional weaknesses remain, including slow contract enforcement (averaging 1,445 days), bureaucratic inefficiency, regulatory issues, and corruption.

India scored 38 out of 100 on Transparency International's 2024 Corruption Perceptions Index (CPI).
Ranked 96th out of 180 countries in the CPI. This indicates a perception of high levels of public sector corruption.

Human Capital Conundrum: Education, Skills, and labor Force Dynamics

A nation's economic potential is intrinsically linked to the quality and productivity of its people. For India, human capital development presents both immense opportunities and critical challenges.

A significant skills gap between the workforce and modern job market demands hinders productivity and contributes to unemployment. For instance, India's projected AI talent demand will nearly double from roughly 650,000 in 2022 to over 1.25 million professionals by 2027.

A critical aspect of India's labor force dynamics is the persistently low participation rate of women.

India's female labor force participation rate (31.2% in 2023 for ages 15+) is significantly lower than males (76.8%), the average for lower-middle-income countries, and many Asian nations. This underutilization represents a substantial loss of economic potential.

India in the Global Arena: Benchmarking Against Economic Peers

To gauge India's trajectory, benchmarking against established and emerging global players, particularly China and the United States, is essential.

Comparing India and China:

In 2024, China's nominal GDP ($18.3 trillion) was approximately 4.7 times that of India ($3.9 trillion).
The gap in PPP terms is smaller but still considerable.
China's per capita income is significantly higher, nearly 4.8 times India's in nominal terms ($12,969 vs $2,698 in 2024).
While India's percentage GDP growth rate has recently exceeded China's, the absolute increase in China's GDP each year remains larger.
Historically, China sustained exceptionally high growth rates (>10% annually for 22 years), a feat India has not matched.

Comparing India and the United States:

The United States remains the world's largest economy by nominal GDP (projected $30.5 trillion in 2025).
US nominal GDP per capita (projected $89,100 in 2025) is roughly 30 times higher than India's (projected ~$2,900).
The US consistently ranks much higher than India in global competitiveness and social mobility.

India aims for economic power, a goal closely linked to its geopolitical actions. The "China Plus One" strategy, driven by China's rising labor costs and global uncertainties, makes India a desirable manufacturing alternative, potentially increasing foreign investment and strengthening its manufacturing base. India's participation in alliances like the Quad may also bring economic benefits through improved trade, investment, and technology exchange. Moreover, India's "multialignment" foreign policy, which involves engaging with multiple global powers, seeks to expand its strategic and economic opportunities.

The Verdict: Can India Become the Next Great Economic Power?

India's upward trajectory towards economic greatness is supported by strong GDP growth, favorable demographics, robust domestic demand, a strong IT/services sector, improving infrastructure, rising FDI, and relative macroeconomic stability. However, this potential is tempered by low per capita income, high inequality, poor human capital outcomes, large infrastructure deficits, institutional weaknesses, low female labor force participation, and environmental stress, making the ultimate outcome contingent on addressing these challenges.

Economic forecasts consistently project India's continued rise in global rankings.

There is a strong consensus that India is on track to become the world's third-largest economy by nominal GDP, likely between 2027 and 2031.
Projections suggest India's GDP could more than double from its current level to reach $7.5-$8.1 trillion by 2031-32.
The Indian government has set a goal of achieving 'Viksit Bharat' (developed India) status by 2047, envisioning an economy potentially reaching $30 trillion. Achieving such transformative growth would require sustaining high annual growth rates, likely in the range of 7% or more.

Realizing India's potential and achieving 'great economic power' status is contingent on successfully addressing its critical challenges through sustained and effective policy action. Key priorities include:

Human Capital Development: Radically improving the quality of education and bridging the skills gap.
Quality Job Creation: Generating millions of productive jobs annually.
Boosting Female Labor Force Participation: Addressing barriers to women's participation in the workforce.
Infrastructure Enhancement: Sustaining investment and ensuring efficient execution of projects.
Deep Institutional Reforms: Tackling systemic issues of bureaucratic inefficiency, judicial delays, regulatory uncertainty, and corruption.
Manufacturing Competitiveness and Trade Strategy: Enhancing domestic manufacturing and strategically engaging with the global economy.

India's probable rise to the world's third-largest economy in the 21st century requires addressing structural issues to become a major economic power. Supported by geopolitics, democracy, a strong private sector, and proven capabilities, India has significant potential. Realizing this depends on political will, effective policies, and consistent reform implementation. While on track to be a leading economic power, sustained effort, strategic planning, and dedicated sustainable development are crucial.

India of the Future!

[Spencer]