Ten Optical Illusions of India’s GDP Ranking by the IMF

India’s GDP ranking slipped to sixth place in the International Monetary Fund’s April World Economic Outlook, raising eyebrows. Only a year ago, India was projected to become the world’s third-largest economy. Japan now occupies fourth place at $4.38 trillion, the UK fifth at $4.26 trillion, with India close behind at $4.15 trillion in 2026. For a country positioning itself as the fastest-growing major economy and a credible competitor to China, the shift appears puzzling. Yet, this ranking obscures more than it reveals.

First, the gap between Japan, the UK, and India is narrow, at less than $250 billion, or under 5.5% of India’s GDP. Such tight rankings are highly sensitive to even small currency movements. Over the past year, the rupee depreciated by 10.1%, from ₹85.5 to ₹91.1 per dollar. The IMF calculates GDP in US dollars by dividing projected GDP in local currency by the average market exchange rate. A 10.1% depreciation reduces GDP in US dollars even when the real economy expands, as India did by 7.6% last year. In contrast, even modest appreciation or slower depreciation of other currencies against the US dollar, despite weaker growth, can inflate their GDP in US dollars.

Second, the new GDP series, with the base year revised from 2011-12 to 2022-23, provides a more accurate measure but lowers nominal GDP by ₹11.5 trillion, to ₹345.5 trillion, a 3.2% decline from ₹357 trillion. Consequently, the IMF revised India’s nominal GDP projections for 2027 from $4.96 trillion in October 2025 to $4.58 trillion in April 2026. However, this does not indicate an economic downgrade, as real GDP is still estimated to grow by 6.5% in 2026, compared with 0.8% for the UK and 0.7% for Japan.

Third, Japan’s fourth position remains fragile due to underlying economic weakness. Despite a fiscal stimulus of ¥17.7 trillion (2.9% of GDP) in July-September, the economy contracted at an annualised rate of 2.3%. While it narrowly avoided recession in October-December, with growth of 0.3%, real wages continue to decline. The Bank of Japan raised interest rates to 0.75% in December, the highest level in 30 years, yet the yen fell to a 38-year low against the US dollar. Japan’s debt-to-GDP ratio stands at about 236%, the highest globally. Although most of this debt is domestically held in yen, it constrains the BoJ’s ability to raise rates without increasing fiscal costs. Since 2020, the yen has depreciated by nearly 35% against the US dollar. Japan’s merchandise trade deficit of ¥6.6 trillion in 2023 was driven by costly fossil fuel imports, further exacerbated by the weaker yen. Despite this, Japan recorded a current account surplus of ¥20.6 trillion in fiscal year 2023.

Fourth, the UK’s real GDP per capita in 2024 remained at 2019 levels, though above 2008 levels. The UK’s 30-year gilt yields, considered a safe-haven asset, reached a high of 5.7% in September 2025, the highest since 1998. A high debt-to-GDP ratio and higher interest rates to control inflation are consuming a significant share of fiscal resources, constraining growth. The UK’s current account deficit-to-GDP ratio stood at 2.3% in 2024-25, alongside a fiscal deficit of around £70 billion and a trade deficit of £243 billion, partially offset by net financial and service inflows of around £205 billion. Reliance on external financing to fund these imbalances exposes the balance of payments and the pound sterling to global uncertainty. The UK’s productivity growth has averaged just 0.5% annually since 2010, about one-third of its pre-2008 rate, raising concerns about long-term growth prospects.

Fifth, since the pandemic, Germany has been among the weakest-performing G7 economies, with GDP growth largely stagnant since 2019. Although there has been some recovery after two years of contraction, the risk of prolonged stagnation persists, particularly as industrial production has declined since 2022. Germany has announced a €500 billion infrastructure fund, which may push its debt-to-GDP ratio to around 64%.

Sixth, China’s GDP is projected to grow by 5% in 2025, but a declining GDP deflator over 12 consecutive quarters signals deflationary pressures. The IMF expects growth to slow further to 4.5% in 2026.

Seventh, India’s post-pandemic growth has been strong, averaging 7.6% with cumulative growth of about 35%, more than twice that of the US and seven times that of Germany. On a purchasing power parity basis, which better reflects the real value of goods and services produced, India’s GDP is about $18.9 trillion, accounting for roughly 8.9% of global PPP GDP. This places India third globally, behind China and the US, and well ahead of Japan’s $7.26 trillion and the UK’s $4.72 trillion. India’s PPP GDP is roughly 2.5 times Japan’s and four times the UK’s.

Eighth, India’s real effective exchange rate peaked at 104 in November 2024 and fell to 91.0 by March 2026, indicating a correction from earlier overvaluation. This adjustment improves India’s trade competitiveness. In comparison, the UK’s REER is 111, suggesting real appreciation, while Japan’s is about 67, reflecting significant depreciation. While a higher REER can signal strength, it can also reduce export competitiveness.

Ninth, India’s CAD-to-GDP ratio declined from 1.3% in the previous year to 0.8% in early 2026. Foreign direct investment inflows reached $70 billion, while remittances totaled $135 billion in FY25. The Reserve Bank of India’s foreign exchange reserves stood at around $700 billion in April, covering approximately 11 months of imports and about 94% of external debt. India’s external debt-to-GDP ratio remains low at around 19%, among the lowest in the G20. General government debt is about 81% of GDP. The government remains committed to fiscal consolidation, targeting a fiscal deficit of 4.4% of GDP. CPI inflation was 3.4% in March, below the medium-term target of 4%. Overall, India maintains a relatively strong macroeconomic position compared with major economies.

Tenth, the post-COVID period, along with the conflicts in Russia-Ukraine and West Asia, has reshaped fiscal and monetary dynamics, particularly in managing supply shocks and inflation. Japan has struggled with a deflationary environment for decades, marked by weak demand and stagnant wages. In February, Japan experienced 1.3% cost-push inflation, which contributed to higher yields and wage pressures. In the UK, restrictive monetary policy has also pushed up yields, while inflation has remained above 3%, contributing to subdued growth of around 0.8%, alongside weak productivity and labour participation. In contrast, India has shown resilience. Despite avoiding excessively tight monetary policy, inflation has remained benign, and public infrastructure investment has helped crowd in private sector investment.

However, India’s nominal per capita income remains relatively low at $2,813, significantly below that of advanced economies such as the UK and China. Despite its strong growth performance, India remains classified as a lower-middle-income economy.

The April ranking is therefore significantly influenced by currency movements and statistical revisions, rather than any deterioration in economic fundamentals. The IMF projects that India could overtake Japan by 2028 and become the third-largest economy by 2031. Nevertheless, India still needs to raise per capita income, improve the ease of doing business, increase R&D investment, and boost female labour force participation to sustain long-term growth.

Rajat Gupta, Intern, Corporate Finance (FX Treasury) L&T and IIM Lucknow, contributed to the article