India’s Path to Becoming the Second-Largest Economy by 2038 in PPP Terms

Overview of India’s Economic Ascent

India is projected to become the world’s second-largest economy in purchasing power parity (PPP) terms by 2038, with a GDP of approximately $34.2 trillion, according to a recent EY report based on International Monetary Fund (IMF) projections. This milestone reflects India’s robust economic growth, driven by a young workforce, structural reforms, and strong domestic demand. Already the third-largest economy in PPP terms with a GDP of $14.2 trillion in 2025, India is poised to surpass the United States, trailing only China, which is expected to lead with a $42.2 trillion economy by 2030.

Evolution of India’s Economic Growth

India’s economic journey has been marked by significant shifts. From independence in 1947 until 1991, India followed protectionist policies under the Licence Raj, limiting growth. The 1991 economic liberalization opened markets, spurring growth and positioning India as a global player. By 2020, India secured its place as the third-largest economy in PPP terms, overtaking Japan, with a GDP of $8.9 trillion. Recent reforms, including the Goods and Services Tax (GST) and Unified Payments Interface (UPI), have further accelerated progress.

Strategic Economic Advantages

India’s growth is fueled by unique strengths. With a median age of 28.8 years in 2025, India boasts a youthful workforce, contrasting with aging populations in China, the U.S., Japan, and Germany. The country’s high savings rate, second only to China among major economies, supports capital formation. Additionally, India’s government debt-to-GDP ratio is projected to decline from 81.3% in 2024 to 75.8% by 2030, unlike peers where debt levels are rising. These factors, combined with reforms like GST and production-linked incentives, enhance India’s competitiveness.

Economic Projections and Drivers

GDP Growth Trajectory

The EY report outlines India’s GDP growth in PPP terms:

• 2025: $14.2 trillion (third-largest globally).
• 2030: $20.7 trillion (maintaining third position).
• 2038: $34.2 trillion (projected second-largest, surpassing the U.S.).

If India sustains a real growth rate of 6.5% annually beyond 2030, compared to the U.S.’s 2.1%, it could overtake the U.S. by 2038. India is also expected to become the third-largest economy in market exchange rate (MER) terms by 2028, surpassing Germany with a projected GDP of $5.2 trillion.

Key Growth Drivers

• Demographics: A young, skilled workforce supports productivity and innovation.
• Structural Reforms: GST, Insolvency and Bankruptcy Code (IBC), and UPI enhance efficiency and financial inclusion.
• Infrastructure Investment: Public spending on roads, railways, and digital infrastructure boosts connectivity.
• Technology Adoption: Investments in AI, semiconductors, and renewable energy position India as a tech hub.
• Domestic Demand: Nearly 70% of India’s GDP is driven by consumption, shielding it from global trade volatility.

Comparative Economic Indicators

The following table compares India’s economic metrics with major economies by 2030 (PPP terms, USD trillion):

India’s favorable demographics and declining debt ratio give it an edge over peers.

Benefits of Economic Growth

For India’s Economy

• Global Influence: As the second-largest economy, India will have greater sway in international trade and policy.

• Poverty Reduction: Sustained growth has reduced extreme poverty to below 1% at the global PPP poverty line of $1.9 per day.

• Job Creation: Investments in infrastructure and technology are expected to generate millions of jobs.

For Global Stakeholders

• Investment Opportunities: India’s growth attracts foreign investment in sectors like technology and manufacturing.

• Trade Partnerships: A robust economy strengthens India’s role in global supply chains, especially in agrochemicals and data centers.

• Geopolitical Stability: Economic strength enhances India’s position as a counterbalance in Asia.

Challenges and Risks

• Employment Gaps: India’s labor force participation rate (49.6% in 2024) and female participation (24.1%) are the lowest among peers, requiring policies to create productive jobs.

• External Pressures: U.S. tariffs could impact 0.9% of India’s GDP, though countermeasures like export diversification may limit this to 0.1%.

• Technology Disruption: Labor-saving technologies like AI pose challenges to job creation for India’s large workforce.

Related Economic Initiatives

India’s economic trajectory is supported by parallel initiatives:

• Viksit Bharat 2047: A vision to make India a developed nation by 2047, focusing on infrastructure, technology, and sustainability.

• Agrochemical Exports: India has become the second-largest exporter of agrochemicals globally, with exports doubling to $5.4 billion in six years.

• Data Center Hub: India leads the Asia-Pacific (excluding China) in data center capacity, with 950 MW installed and 850 MW planned by 2026.

Comparison: PPP vs. MER Rankings

PPP reflects India’s domestic purchasing power, while MER highlights its global market strength.

Frequently Asked Questions (FAQs)

What is purchasing power parity (PPP)?

PPP measures the value of a country’s currency based on the cost of a basket of goods and services, enabling fair economic comparisons.

Why is India projected to be the second-largest economy by 2038?

India’s young workforce, high savings rate, declining debt, and structural reforms drive its GDP growth to $34.2 trillion in PPP terms.

How does India’s debt-to-GDP ratio compare to other economies?

India’s ratio is projected to fall to 75.8% by 2030, while peers like the U.S. (>120%) and China face rising debt levels.

What challenges could hinder India’s growth?

Low labor force participation, especially among women, and external factors like U.S. tariffs pose risks, though mitigation strategies are in place.

How does PPP differ from market exchange rate (MER)?

PPP accounts for local purchasing power, making India’s economy appear larger than in MER, which uses currency exchange rates.

What initiatives support India’s economic rise?

Reforms like GST, UPI, and investments in infrastructure, AI, and renewable energy align with the Viksit Bharat 2047 vision.