India may become world’s second-largest economy in PPP terms by 2038: EY Report
News Summary
An August 2025 EY Economy Watch report projects India could emerge as the world’s second-largest economy in purchasing power parity (PPP) terms by 2038, with an estimated GDP of $34.2 trillion. The report highlights India's robust fundamentals, demographic advantages, and structural reforms as key drivers for its long-term growth trajectory. The International Monetary Fund (IMF) projects India's GDP to reach $20.7 trillion (PPP) by 2030. EY's analysis extrapolates this, suggesting India could secure the second global spot within 13 years, behind only China, which is estimated to reach $42.2 trillion in PPP terms. The report also anticipates India will surpass Germany by 2028 to become the world's third-largest economy in market exchange rate (MER) terms. India's economic ascent is underpinned by rising domestic demand, high investment rates, and a relatively sustainable debt position. The report contrasts India's youthful demographics, fiscal prudence, and high savings rate with challenges faced by other major economies like China's aging population and the US's high debt. Despite the positive outlook, EY cautions about external risks, such as recent US tariff hikes potentially impacting 0.9% of India's GDP, though countermeasures could limit the hit to 0.1 percentage point.
Background
India has long been viewed as an emerging market with vast, yet often untapped, economic potential. Over recent decades, despite challenges like infrastructure deficits and bureaucratic hurdles, India has pursued economic liberalization and reforms to attract foreign investment and foster domestic growth. Since taking office, the Modi administration has implemented significant structural reforms, including the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC), and Production-Linked Incentive (PLI) schemes, aimed at streamlining taxation, improving the ease of doing business, and boosting manufacturing competitiveness. Financial inclusion initiatives like the Unified Payments Interface (UPI) have also substantially deepened access to formal banking. These reforms are central to its economic growth narrative, designed to capitalize on its large and young demographic dividend.
In-Depth AI Insights
What is the practical investment implication of viewing India's economic growth through a 'PPP' lens for global investors? - Purchasing Power Parity (PPP) measures an economy's actual output and living standards by comparing the cost of a standardized basket of goods and services, distinct from Market Exchange Rate (MER). While India's economy appears vast by PPP, its direct impact on global trade, financial markets, and corporate earnings may not be as immediate as MER data suggests. For investors focused on export markets, foreign exchange risk management, or direct investment in MER-denominated corporate profits, MER data might be more indicative. - The strength of PPP lies in reflecting a country's internal market size and consumption power, signaling immense domestic demand potential. This will attract investors focused on India's domestically driven sectors (e.g., consumer goods, infrastructure, digital services). However, PPP growth doesn't necessarily translate into proportional foreign capital inflows or increased global financial market influence, so investors must still monitor MER-based economic performance and policy openness. How will external risks, particularly tariff pressures under President Trump's ongoing term in 2025, truly impact India's long-term growth trajectory? - The Trump administration's continued focus on trade deficits, especially following his re-election in 2024, implies ongoing trade protectionist challenges for India as an emerging manufacturing hub. The report's mention of tariffs impacting 0.9% of GDP, though manageable with countermeasures, suggests that long-term geopolitical tensions and trade barriers could compel India to accelerate domestic supply chain development and market self-sufficiency, which presents both risks and opportunities. - Such external pressure might stimulate India to expedite its 'Make in India' and 'Atmanirbhar Bharat' (self-reliant India) policies, pushing local businesses to enhance competitiveness and reduce reliance on specific markets. For investors, this means greater focus on Indian companies that can adapt to or benefit from domestic production, export diversification, and balanced trade relations with Western markets. Simultaneously, India is actively expanding partnerships with other emerging markets and trade blocs to hedge against US policy uncertainties. Can India genuinely challenge China's role as Asia's economic growth engine in the long term, offering alternative opportunities for investors? - While China's PPP economy remains larger in the EY report, it faces structural challenges like an aging population and accumulating debt. India, conversely, boasts a significant demographic dividend and a relatively healthier fiscal position, giving it an advantage in long-term growth potential. For investors seeking exposure to high-growth, young markets, India presents a compelling alternative. - However, challenging China is no easy feat. China's advantages in infrastructure, manufacturing scale, and global supply chain integration remain substantial. India needs to continuously deepen reforms, improve its business environment, upgrade infrastructure, and effectively manage social and political risks to translate its demographic dividend into sustained economic competitiveness. Investors should view India as a critical diversification option, rather than simply 'the next China,' as its investment rationale and risk profile remain distinctly different.