Defining moment: India overtakes Japan to become world's fourth largest economy; enjoys ‘Goldilocks’ phase with high growth, low inflation

In a major feat, India has moved past Japan to become the world’s fourth-largest economy in nominal GDP terms, according to the government’s year-end economic review. The economy is set to overtake Germany to become the third largest after the US and China in the coming years.

A final confirmation will depend on the data released by the International Monetary Fund (IMF) in the first half of 2026 when the final figures for 2025 will be released.“With GDP valued at $4.18 trillion, India has surpassed Japan to become the world’s fourth-largest economy and is poised to displace Germany from the third rank in the next 2.5 to 3 years with projected GDP of $7.3 trillion by 2030,” the government release said.

India has been the world’s fastest growing major economy for several years now. The size of its economy has doubled in the last ten years, and it is now eyeing the position of being the third largest in the world.A government economic note issued late Monday highlighted that India remains one of the fastest-expanding major economies globally and is well placed to maintain its growth pace.

IMF forecasts for 2026 value India’s economy at $4.51 trillion, slightly above Japan’s projected $4.46 trillion.

The government’s optimistic outlook comes even as the economy faces headwinds following the imposition of steep US tariffs in August linked to India’s purchases of Russian oil.

Recent high-frequency data signals that economic momentum is holding firm. Inflation has stayed below the lower bound of the tolerance band, joblessness is easing, and exports are showing steady improvement, the government review noted.Financial conditions also remain supportive, marked by healthy credit expansion to businesses, while demand continues to be resilient, aided by a further pickup in urban consumption.

India’s real GDP expanded by 8.2% in the second quarter of FY 2025-26, accelerating from 7.8% in the preceding quarter and 7.4% in the final quarter of FY 2024-25. This growth was driven by strong domestic demand, even as global trade and policy uncertainties persisted.

Real gross value added rose 8.1%, underpinned by solid performance in the industrial and services sectors.The Reserve Bank of India raised its growth projection for FY 2025-26 to 7.3%, up from 6.8% earlier. The upward revision factors in sustained domestic demand, rationalisation of income tax and GST, softer crude prices, an early push in government capital spending, and accommodative monetary and financial conditions, all supported by contained inflation.“Ongoing reforms are likely to further enable growth prospects. The present macro-economic situation presents a rare “goldilocks period” of high growth and low inflation,” the review said.

CPI inflation stood at 4.26% in January and gradually moderated over the first half of the year, before declining further to multi-year lows during the latter half. Headline inflation continued to soften and touched historic lows of around 0.25% in October.

This sharper-than-expected disinflation was primarily driven by a correction in food prices.RBI has cumulatively cut the repo rate by 1.25% this year, down from 6.5% to 5.25%. The move reflected a balanced approach between supporting growth and managing inflation, aided by a favourable outlook for both headline and core inflation.

India’s external position continues to display considerable strength. Supported by healthy growth in services exports and a steady rise in overseas remittances, the current account deficit (CAD) narrowed to 1.3% of GDP in the second quarter of FY 2025–26, down from 2.2% in the corresponding quarter of the previous fiscal, the government release said. Remittance inflows rose by 10.7% year-on-year during the quarter, reinforcing external stability. With services exports maintaining momentum and remittance flows remaining strong, the CAD is expected to stay contained through 2025–26.“India’s growth outlook remains buoyant, with global and domestic institutions upgrading their assessments on the back of strong economic fundamentals. Reflecting broad-based momentum across key sectors, the Reserve Bank of India revised its GDP growth projection for FY 2025–26 upward from 6.8% to 7.3%,” the review said.