The Mirage of Market Exchange Rates

In 2025, India was widely hailed as about to become the fourth largest economy in the world in 2026, overtaking Japan.  In April 2026, however, the IMF’s calculations showed that India has slipped to sixth place, trailing the US, China, Germany, Japan and the UK. What happened? Did India suffer an economic contraction? Hardly so; it expanded by 7.7% in 2025-26 – the world’s fastest-growing economy.

Apparently, it is a statistical illusion.

International nominal GDP rankings are calculated by taking a country’s GDP in local currency and dividing it by the average exchange rate against the US dollar. First, in 2025-26, the Indian rupee depreciated by about 5% against the US dollar, not out of alignment with its longer-term trend. Yet the dollar surged as it became a safe haven. Currency movements also gave an edge to the pound sterling and the yen. 

Second, India updated its GDP series, with several coverage and methodological improvements; but the technical adjustment from the update of the base year from 2011-12 to 2022-23 reduced nominal GDP in rupees by roughly 3%. This fall from grace is expected to be brief. India is projected to reclaim the fourth position by 2027. By 2031, India’s nominal GDP is projected to climb to $6.8 trillion, overtaking Germany’s $6.4 trillion to take the third position.

Market Exchange Rates

These flip-flops reveal the fickleness of market exchange rates. When currencies trade in financial markets, they fluctuate wildly, being exposed to numerous idiosyncrasies. They can change by the minute on the pivot of investor sentiments, speculation, shifts in interest rates and in capital flows, all of which have little to do with actual economic performance. Therefore, the use of market exchange rates in cross-country comparisons vastly underestimates economic activity and the quality of life, especially for developing economies.

Reality

Purchasing power parity, or PPP, which compares how much a standard basket of goods and services, reflecting the average standard of living, costs in national currencies, yields more accurate comparisons. It measures what money can buy and thereby prevailing living standards. It naturally adjusts for the fact that some parts of the standards of living that are not traded, like haircuts or housing, are differently priced in different countries and are, in fact, cheaper in developing countries. It eliminates the volatility inherent in market exchange rates.

PPP Revelations

When PPP calculations are made, the results are dramatically different. China claims the first position, because the physical volume of its output surges past the US, which falls to second place. India vaults to third place, with its GDP jumping from $4.2 trillion in terms of market exchange rates to $18.9 trillion in terms of PPP. Russia takes the fourth position, elbowing Japan out to the fifth rank. Germany, which is third by market exchange rates, drops to number six, and the UK to number ten.

Burger Arithmetic

Almost 40 years ago, The Economist introduced its Big Mac index to compare the cost of living in various countries with McDonald’s outlets via the price of a hamburger, the Big Mac. As The Economist puts it, the index has amused readers, intrigued currency traders and irritated central banks. Adjustments have to be made for cheese not being in the burger in Israel because it is not kosher, and there is no beef in the Big Mac in India, where it is called the Maharaja Mac. Adjustments are also made to the raw index, which compares pure dollar equivalents, or the traveller’s experience, by taking per capita GDP in PPP terms.

The Economist has updated its index in July 2026, as it does every year in that month, as also in January.

According to the latest update, a Big Mac costs ₹236.25 in India and $6.22 in the US. This yields an exchange rate of ₹37.98 per US dollar. Thus, the Big Mac costs 60.5% less in India at market exchange rates and 21.9% less, based on differences in per capita GDP. Typically, this is interpreted to measure how undervalued the rupee is relative to the dollar. If, however, the blinkers of valuations are taken off, this boosts purchasing power in India by volumes.

Provisional estimates from the MoSPI placed India’s nominal GDP in 2025-26 at ₹346.36 trillion. Assuming a growth rate of 10% in nominal terms, GDP could be ₹381 trillion in 2026-27. Divided by the exchange rate of ₹37.98 implied in the Big Mac comparison, India’s GDP in 2026-27 would work out to $10 trillion as against the market exchange rate calculation of $4.2 trillion. This is higher than that of Germany at $5.5 trillion in 2026 ($6.4 trillion in PPP terms), where the burger purchasing power is about the same as in the US and, therefore, India would displace it as the third largest economy in the world!

The Future’s Ours to See

The Big Mac’s calculations could well be foretelling the results of the International Comparison Program (ICP) calculated globally by major international bodies, with primarily the World Bank managing the worldwide data collection and coordinating multilateral price surveys across economies to compute baseline global PPPs. The OECD also computes and publishes regular PPP figures for its member and partner countries.

The World Bank’s calculations are lagged by 2-3 years, while the IMF extrapolates from them every six months. The OECD’s lag time is 3-14 months. The Economist claims that its results line up reasonably well with those of the multilateral bodies and are “quicker, fresher and easier to digest.”

The OECD’s latest calculations indicate that in the mid-2040s, India will overtake the US in economic heft and become the second largest economy in the world. Around that time, China’s economy will plateau due to its demographics, still-unravelling property woes, rising debt burdens, deflationary pressures, and slowing productivity growth. By the mid-2060s, India will overtake China and become the largest economy in the world.

History Rhymes

For those who think I am a dreamer, let me remind you that India was the largest economy in the world for much of the ancient and pre-industrial era, specifically from the 1st millennium until the 17th century. The late economic historian Angus Maddison estimated that regions of the Indian subcontinent generated roughly 30% of global output and wealth. At the peak of the Mughal Era in the 17th century, India became the foremost global manufacturing and economic power, accounting for nearly 24-25% of the entire world economy.

It has been said that history doesn’t repeat itself, but it often rhymes.