India has achieved a landmark milestone by surpassing Japan to emerge as the world's fourth-largest economy in nominal GDP terms, as outlined in the government's year-end economic review.

With a GDP valued at $4.18 trillion, this positions India ahead of Japan and on track to overtake Germany for the third spot after the United States and China within the next 2.5 to 3 years. Projections indicate a GDP of $7.3 trillion by 2030, underscoring the nation's rapid ascent.

Final confirmation awaits data from the International Monetary Fund in the first half of 2026, which will validate the 2025 figures. India has consistently ranked as the fastest-growing major economy for several years, with its economic size doubling over the past decade. This trajectory reflects robust domestic reforms and resilient growth drivers amid global challenges.

The government's economic note, released late on Monday, emphasises India's position among the quickest-expanding major economies worldwide. It highlights sustained momentum despite headwinds, such as steep US tariffs imposed in August over India's purchases of Russian oil. Yet, high-frequency indicators point to firm economic activity.

India now enjoys a 'Goldilocks' phase characterised by high growth and low inflation, a rare macroeconomic sweet spot. Recent data shows inflation dipping below the lower tolerance band, unemployment easing, and exports improving steadily. Financial conditions support this, with healthy credit growth to businesses and resilient demand, particularly from urban consumption.

Real GDP surged by 8.2 per cent in the second quarter of FY 2025-26, up from 7.8 per cent in the prior quarter and 7.4 per cent in the last quarter of FY 2024-25. This acceleration stemmed from strong domestic demand, even as global trade uncertainties lingered. Real gross value added climbed 8.1 per cent, bolstered by robust industrial and services sectors.

The Reserve Bank of India has revised its growth forecast for FY 2025-26 upwards to 7.3 per cent from 6.8 per cent. This adjustment accounts for enduring domestic demand, income tax and GST rationalisation, softer crude oil prices, accelerated government capital spending, and accommodative monetary policies. Contained inflation further enables this outlook.

Consumer Price Index inflation registered 4.26 per cent in January, easing progressively through the first half of the year and plummeting to multi-year lows later. Headline inflation softened dramatically, hitting historic lows of around 0.25 per cent in October, largely due to corrections in food prices. This disinflation exceeded expectations.

In response, the RBI cumulatively reduced the repo rate by 1.25 percentage points this year, from 6.5 per cent to 5.25 per cent. These cuts balance growth support with inflation control, backed by favourable prospects for both headline and core inflation. Monetary easing thus reinforces economic stability.

India's external sector demonstrates notable resilience. Services exports grew healthily, complemented by a 10.7 per cent year-on-year rise in remittance inflows during the second quarter of FY 2025-26. Consequently, the current account deficit narrowed to 1.3 per cent of GDP from 2.2 per cent in the same period last year.

With services exports sustaining their pace and remittances remaining robust, the current account deficit should stay manageable throughout 2025-26. This external strength bolsters overall macroeconomic confidence. Prime Minister Narendra Modi has highlighted this momentum, noting global bets on Delhi's trajectory amid international tensions.

IMF forecasts reinforce the optimism, valuing India's 2026 economy at $4.51 trillion, marginally above Japan's projected $4.46 trillion. Domestic and global institutions have upgraded their assessments, citing strong fundamentals and broad-based sectoral momentum. Ongoing reforms promise to unlock further potential.

This 'Goldilocks' period thus signals a pivotal defining moment for India, blending accelerated expansion with price stability. As the nation eyes third-largest status, its economic narrative shifts from emerging contender to global powerhouse, navigating trade frictions with agility and internal vigour.

Agencies