Why India shouldn't get high on its 3rd largest economy status

Despite being gripped by an economic slowdown and policy paralysis, India has edged past Japan to become the world’s third-largest economy in terms of purchasing power parity (PPP).

International Monetary Fund (IMF) data shows that India’s gross domestic product in PPP terms stood at $4.46 trillion in 2011, marginally higher than Japan’s $4.44 trillion, making it the third-biggest economy after the United States and China, a report in The Economic Times said.

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In addition, Japan’s trade deficit in the past fiscal year ending in March stood at 4.41 trillion yen (about 54 billion), marking the worst-ever deficit reading for the country.

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India is also now Asia’s second-largest economy, behind China.

Still, being ahead of Japan does not necessarily mean India has done supremely well. Figures show that the Japanese economy was worth $4.31 trillion in 2010, while India was close behind with $4.06 trillion. But after the devastating tsunami and earthquakes in Japan, its economy was expected to contract, while India’s economy is estimated to have grown by about 7 percent over the past financial year.

Another piece of information: India’s share in world GDP in terms of PPP, a measure of relative consumer prices across countries, stood at 5.65 percent in 2011 against Japan’s 5.63 percent. In five years, the IMF estimates the share of India’s GDP in PPP terms will grow to 8.09 percent compared with 4.8 percent for Japan.

To the uninitiated, the PPP system allows GDP comparisons to be made by asking how much money would be needed to purchase the same goods and services in two countries and using that to calculate an implicit foreign exchange rate.

The method helps to adjust income to prices for a meaningful comparison on quality of life in countries with widely varying prices.

India’s move up the PPP league table is a reminder of the boundless potential the country offers, despite the prevailing mood of pessimism. But this is not where we should stop; there are miles to walk ahead before we become one of the biggest economies in the world.