India could become 2nd-largest economy by 2038, says EY report: It's reforms, not just demography

India could become the world’s second-largest economy by 2038 with a gross domestic product of $34.2 trillion in purchasing power parity (GDP-PPP) terms, according to EY.

In the August issue of Economy Watch Report, the EY said that India’s growth trajectory is reinforced not just by demographics but also by structural reforms and resilient fundamentals.

In the short-term, the report said that India’s economy could reach $20.7 trillion (PPP) by 2030. As for American tariffs, the report said that they may affect nearly 0.9 per cent of India’s GDP but their impact on GDP growth can be contained to just 0.1 percentage point with appropriate countermeasures like export diversification, raising domestic demand, and advancing trade partnerships with other countries and blocs.

What works in India’s favour?

What sets India apart among the world’s largest economies today is its strong economic fundamentals including high savings and investment rates, favourable demographics, and a sustainable fiscal position, according to EY.

Even as countries across the world have been affected by uncertainties such as tariff pressures and slowing trade, India’s resilience stems from its reliance on domestic demand and increasing capabilities in modern technologies, the report said.

Among the world’s largest economies, India stands out with a median age of 28.8 years in 2025, the second-highest savings rate, and a government debt-to-GDP ratio projected to decline from 81.3 per cent in 2024 to 75.8 per cent by 2030 unlike peers where debt levels are rising, the report said.

Referring to data from the Internationaal Monetary Fund (IMF), the EY said that India’s economy could reach $20.7 trillion (PPP) by 2030 and, using average growth rates for 2028-30 as projected by the IMF, it said that India may become the world’s second-largest economy in PPP terms by 2038 with a projected GDP of $34.2 trillion.

Compared to other large economies of the United States, China, Germany, and Japan, India has the benefit of a younger demography.

While China is projected to be the biggest economy in PPP terms by 2030 at $42.2 trillion, its ageing population and rising debt are challenges, the report said.

Similarly, the report said that United States faces high debt levels rising to 120 per cent of the GDP and slower growth rates. As for Japan and Germany, both of whom are developed economies, the report said that they are constrained by high median ages and heavy reliance on global trade.

Moreover, the report said that India’s growth trajectory is also strengthened by structural reforms like the goods and services tax (GST), the Insolvency and Bankruptcy Code (IBC), financial inclusion through UPI, and production-linked incentives (PLI) to boost manufacturing.