India: 2nd Largest Economy by 2038 (PPP)

Context

India is projected to become the second-largest economy in the world by 2038 in purchasing power parity (PPP) terms, according to the latest EY Economy Watch report based on IMF data and recent analyses by leading agencies. This marks a groundbreaking shift in the global economic landscape, with significant implications for policymakers and society.

What is PPP and Why Does it Matter?

Purchasing power parity (PPP) adjusts GDP figures to reflect differences in the cost of living and inflation across countries, providing a fairer comparison of economic strength and actual domestic purchasing power. Unlike nominal GDP, PPP tells us how much people can buy with their earnings within their own country, making it a crucial metric for assessing real economic well-being.

Key Findings from the EY Report

• Projected Growth Trajectory

• • • India’s GDP in PPP terms may reach USD 20.7 trillion by 2030 and USD 34.2 trillion by 2038, surpassing the United States and placing India just behind China.
    • Current growth trends suggest India’s economy will maintain an average annual growth rate of around 6.5%, far outpacing several advanced economies, notably the US, which is projected to grow at about 2.1% per annum.

• Comparative Position in Global Rankings

• • As of 2025, India is already the world’s third-largest economy in PPP terms, behind only China and the US.
  • In nominal GDP terms, India is set to surpass Japan by 2026 and Germany by 2028, becoming the third-largest globally.

Drivers of India’s Economic Transformation

• Demographic Dividend

• • • India’s median age is just 28.8 years in 2025, making it the youngest among major global economies.
    • A youthful and expanding workforce ensures sustained productivity, innovation, and rising domestic consumption.

• High Savings and Investment Rates

• • • India enjoys the second-highest savings rate among the world’s five largest economies, facilitating strong capital formation for infrastructure and industry.
    • These savings translate into continual investments in key sectors, including technology, manufacturing, and services.

• Improving Fiscal Health

• • • India’s government debt-to-GDP ratio is set to decline from over 81% in 2024 to around 75% by 2030, signaling a commitment to fiscal responsibility over the medium term.
    • Other major economies, such as the US and China, are witnessing rising debt levels, making India’s fiscal discipline noteworthy.

• Structural Reforms and Resilience

• • Recent transformative reforms like GST, Insolvency and Bankruptcy Code (IBC), financial inclusion via UPI, and production-linked incentives are enhancing competitiveness across sectors.
  • Increased investments in emerging technologies—such as AI, renewables, and semiconductors—are building long-term resilience and global leadership capabilities.

Trade Challenges and Tariff Impacts

• India faces tariff pressures, particularly from the US, with duties as high as 50% on select exports since August 2025.
• However, EY estimates that the negative impact on India’s real GDP growth will be limited to a fraction (about 0.1 percentage points), thanks to robust domestic demand and diversification.

Geopolitical and Strategic Implications

• By 2038, India’s ascent to the second position in PPP terms will cement its status as a main driver of global economic growth and a key influencer in multilateral forums.
• This projection aligns with India’s national aspirations (“Viksit Bharat 2047”) and increased prominence in international policymaking.

 Source: ET

UPSC Mains Practice Question

Q. Examine the key factors driving India’s growth to become the second-largest economy by 2038 in PPP terms. What challenges could affect this growth trajectory?

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