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India's Economic Trajectory: From Fifth to Fourth Largest Economy

India's Economic Trajectory: From Fifth to Fourth Largest Economy

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The annual economic assessment that shapes the world's fastest-growing major economy

In 3 days: Union Budget 2026-27 Scheduled

Overview

India surpassed Japan in mid-2025 to become the world's fourth-largest economy. Six months later, the government's annual Economic Survey argues the country can sustain 7.5% growth—if it fixes two long-standing bottlenecks: manufacturing capacity and land reform.

The Survey, presented to Parliament on January 29, frames India's challenge as running 'a marathon and sprint simultaneously.' With agriculture still employing 46% of workers while generating only 20% of national income, the document signals where the upcoming Union Budget may focus: shifting labor into higher-productivity sectors without destabilizing rural communities.

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Key Indicators

$4.18T
GDP (2025)
India's nominal gross domestic product, now fourth-largest globally after surpassing Japan
6.8-7.2%
FY27 Growth Forecast
Projected real GDP growth range for fiscal year 2026-27
1.7%
CPI Inflation
Average Consumer Price Index inflation April-December 2025, lowest since the series began
8.4%
Manufacturing Growth
H1 FY26 manufacturing sector expansion, driven by robust domestic demand
46.1%
Farm Employment
Share of workforce in agriculture, despite sector contributing only 20% of national income

People Involved

Nirmala Sitharaman
Nirmala Sitharaman
Finance Minister of India (Presenting ninth consecutive Union Budget on February 1, 2026)
V. Anantha Nageswaran
V. Anantha Nageswaran
Chief Economic Adviser, Government of India (Term extended through March 2027)
Sanjay Malhotra
Sanjay Malhotra
Governor, Reserve Bank of India (Overseeing monetary easing cycle)

Organizations Involved

Ministry of Finance, Government of India
Ministry of Finance, Government of India
Government Ministry
Status: Preparing Union Budget 2026-27

The ministry responsible for India's fiscal policy, taxation, and economic planning.

Reserve Bank of India
Reserve Bank of India
Central Bank
Status: Maintaining neutral monetary stance after 125 bps of rate cuts in 2025

India's central bank, responsible for monetary policy and financial system stability.

Timeline

  1. Union Budget 2026-27 Scheduled

    Upcoming

    Finance Minister Sitharaman will present her ninth consecutive budget, expected to focus on consumption stimulus and labor-intensive manufacturing.

  2. Economic Survey 2025-26 Tabled in Parliament

    Policy Document

    Finance Minister Nirmala Sitharaman presented the annual Economic Survey, projecting 6.8-7.2% GDP growth for FY27 and highlighting manufacturing and land reform as keys to reaching 7.5% potential.

  3. Government Confirms Economy Overtook Japan

    Official Statement

    India's year-end economic review officially confirmed the country had surpassed Japan with GDP of $4.18 trillion.

  4. RBI Cuts Repo Rate to 5.25%

    Monetary Policy

    The Reserve Bank of India reduced its policy rate by 25 basis points, completing 125 bps of cumulative cuts in 2025 and bringing rates to their lowest since July 2022.

  5. India Becomes Fourth-Largest Economy

    Milestone

    India's nominal GDP surpassed Japan's, making it the world's fourth-largest economy behind the United States, China, and Germany.

Scenarios

1

Manufacturing Push Accelerates Growth to 7.5%

Discussed by: Chief Economic Adviser V. Anantha Nageswaran, government economic review, IMF analysis

India implements meaningful land reform at the state level, streamlines labor codes across major manufacturing states, and expands Production Linked Incentive schemes. Companies relocating supply chains from China choose India over Vietnam and Indonesia. Manufacturing's share of GDP rises from 17% toward the 25% target, absorbing workers from agriculture and enabling the economy to sustain 7.5% annual growth.

2

Steady Growth Continues at 6.5-7% Without Structural Reform

Discussed by: World Bank, Moody's, OECD economic outlooks

India maintains its current growth trajectory driven by domestic consumption, services exports, and digital infrastructure, but land acquisition challenges and inconsistent state-level policies limit manufacturing expansion. Agriculture continues employing a disproportionate share of the workforce. Growth remains solid by global standards but falls short of the acceleration needed to reach developed-nation status by 2047.

3

Global Shocks Derail Growth Momentum

Discussed by: Economic Survey 2025-26 risk scenarios, IMF World Economic Outlook

The Economic Survey warned that global political and economic turmoil could produce consequences 'worse than those of the 2008 global financial crisis.' Trade fragmentation intensifies, commodity prices spike, or major economies enter recession. India's export-oriented sectors suffer, foreign investment declines, and growth falls below 6%. The government's fiscal position deteriorates, limiting its ability to stimulate the economy.

Historical Context

India's 1991 Economic Liberalization

July 1991

What Happened

Facing a balance-of-payments crisis with foreign reserves covering only three weeks of imports, India pledged 67 tonnes of gold to avoid default. Finance Minister Manmohan Singh and Prime Minister P.V. Narasimha Rao dismantled the 'License Raj'—four decades of industrial controls—and opened the economy to foreign investment.

Outcome

Short Term

Foreign direct investment jumped from $77 million in 1992 to $3.6 billion by 1997. GDP growth accelerated to over 6% annually.

Long Term

India's GDP grew from $266 billion in 1991 to $4.18 trillion in 2025. The IT and services sectors emerged as global leaders, contributing over 50% of GDP.

Why It's Relevant Today

The 2026 Economic Survey's call for manufacturing and land reform echoes 1991's unfinished agenda. While services liberalization succeeded, manufacturing never matched China's growth, and land acquisition remains governed by state-level regulations that vary widely in effectiveness.

China's 1978 Economic Reforms

December 1978

What Happened

Deng Xiaoping launched 'Reform and Opening Up,' establishing Special Economic Zones in coastal cities like Shenzhen. China prioritized manufacturing exports and foreign direct investment, keeping the currency weak to boost competitiveness.

Outcome

Short Term

China attracted $194 billion in FDI between 1992-1997, compared to India's $9.4 billion over the same period.

Long Term

China's GDP grew from $150 billion in 1978 to over $19 trillion today, lifting hundreds of millions out of poverty and becoming the world's manufacturing hub.

Why It's Relevant Today

India started liberalizing 13 years after China and chose a services-led rather than manufacturing-led model. The Economic Survey's emphasis on manufacturing signals an attempt to capture supply chains leaving China, but India must overcome land, labor, and infrastructure constraints that China addressed decades ago.

India's Production Linked Incentive Scheme Launch (2020)

March 2020

What Happened

The government launched PLI schemes with ₹1.97 lakh crore ($26 billion) in incentives across 14 sectors, offering companies 4-6% of incremental sales for products manufactured domestically. The program aimed to reduce import dependence and create manufacturing jobs.

Outcome

Short Term

Major smartphone manufacturers including Apple suppliers Foxconn and Pegatron established or expanded Indian operations. Electronics production grew 146% from FY21 to FY25.

Long Term

By September 2025, PLI schemes attracted ₹2 lakh crore in actual investment, generated ₹18.7 lakh crore in production, and created 12.6 lakh jobs.

Why It's Relevant Today

The Economic Survey cites PLI success as evidence that manufacturing can scale in India with the right incentives. The question is whether land and labor reforms can extend this success beyond electronics into textiles, furniture, and other labor-intensive sectors.

13 Sources:
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