India's nominal GDP is expected to reach USD 4 trillion in 2024-25. Reflecting the rapid depreciation of the yen, Japan's economy now stands at $4.1 trillion, and India is now on track to become the world's fourth largest economy in dollar terms within a year.
Germany's nominal GDP is valued at $4.6 trillion and is growing relatively slowly. It is therefore reasonable to expect that India will replace Germany as the world's third largest economy by 2026-27. All of these predictions are based on the assumption that unexpected shocks do not affect the calculations, and the threshold level indicates that it would take a very large shock to significantly derail the trajectory.
Of course, even though India is the world's third-largest economy, it is still poor in terms of per capita terms, but its huge volume offers advantages that can be leveraged. While we celebrate India's economic rise, we must not forget that India was a major economic power for most of its history. It is therefore worth revisiting longer cycles to understand what we are currently witnessing.
According to a widely used estimate by Angus Maddison, India accounted for about 33 percent of the world economy in 1 AD. These estimates were made on a purchasing power parity (PPP) basis to avoid fluctuations in exchange rates and relative prices. At the time, China had the second-largest share at 26 percent, followed by Western Europe, most of which was under Roman rule, at almost 11 percent.
Obviously, these are rough estimates considering a long period of time, but it is remarkable how the Indian economy was such a dominant force 2000 years ago. Indian merchants were active from the Middle East to East Asia, and Roman policymakers were dissatisfied with the current account deficit with India.
A thousand years later, India was still the largest in the world, with a 29 percent share in 1000 AD. Although China's share declined slightly to 23%, it remained the second largest economic power. After the decline of the Roman Empire, Europe's share fell below 9%. The African economy, led by Egypt's Fatimids, accounted for 12 percent of the world economy. It is a share that Africa has never enjoyed before or since.
The world economy was dominated by supply chains that ranged from the Fatimid Empire in Egypt to the Chola Empire in India to the Song Empire in China. With funding from the Temple Bank, Indian merchant guilds built vast trade networks across the Indian Ocean and beyond. The Cholas ended up raiding Southeast Asia twice in 1017 and 1025 to keep shipping routes open.
Turkish and Mongol invasions and epidemics in the 13th and 14th centuries severely damaged all major economic nodes. By 1500, China had rebuilt under the Ming Empire and had become the world's largest economy, with a 25% share. India's share had fallen to 24.5 percent by this time, but it remained in second place as the Vijayanagar Empire was at its peak.
But by 1600, China's share had jumped to 29 percent. In contrast, India's share fell further to 22.6% as the economic shock from the sacking of Vijayanagar, then the world's largest city, was not offset by the establishment of the Mughal Empire. The Mughals cultivated some economic centers, but destroyed others as part of their conquest.
Importantly, the influence of the Renaissance and overseas maritime discoveries pushed Western Europe's share to 20 percent by 1600. At this stage Italy and France dominated the European economy. Remarkably, despite their global empires, Spain and Portugal remained relatively small economies. The cost of administering this empire and constant warfare depleted the silver and gold shipped from the Americas.
Over the next few centuries, European colonization expanded, and the Industrial Revolution began in the late 18th century. However, China remained the world's economic power. In 1820, China accounted for 33 percent of world GDP, while India's share had declined to 16 percent. Colonial exploitation by the East India Company and constant wars with the Marathas (and others) took their toll.
Critics often say that China and India together accounted for half of the world economy in 1820, but point out that at this stage China was twice as large as India. Western Europe's share amounted to 23.6 percent, with Great Britain at 5.2 percent and France at 5.5 percent (so despite the losses at Waterloo, the French economy was still a bit larger).
The 19th century was a time of very fundamental change. China's share fell to 17% by 1870, and then to 9% by 1913. India's share likewise declined to 12 percent, and on the eve of World War I to less than 8 percent. Note that while India's standing in the world was clearly hurt by its colonial occupation, China's decline was even more dramatic. The Opium Wars, various domestic rebellions, and technological stagnation took their toll.
In contrast, Western Europe's share peaked at 33.5% of the world economy between 1870 and 1913. But the relative trajectories of individual countries are interesting. Britain's share rose to a peak of 9.1% in 1870, but then fell to 8.3% (this does not include the colonies). In Germany, it rose from 6.5% to 8.8% over the same period. Thus, on the eve of World War I, Germany had a larger economy, but Britain had an empire.
Meanwhile, the United States grew rapidly in the last century, becoming the world's largest economy with a 19 percent share in 1913. After World War II, that share rose to more than 27 percent by 1950. The share was the second largest by a wide margin at 9.6 percent (this was the peak and would gradually decline over the next 40 years before finally collapsing).
Exhausted by two wars and steady losses of colonies, Britain's share had fallen to 6.5 percent by 1950, and its numbers have continued to decline ever since. Newly independent India and China had similar shares at 4.2% and 4.5%, respectively. This was a dramatic loss for two civilizations that had dominated the world economy for millennia, but the Chinese probably felt the humiliation more acutely because the decline had been recent and rapid.
Perhaps the most dramatic change of the next quarter century was the rise of Japan. In 1950, it accounted for only 3% of the world economy, but in 1973, when the first oil shock hit the world economy, it accounted for 7.7%. Also interesting is the fact that despite India's independence, India's position in the world economy continued to decline, with Nehruvian socialism reducing its share to 3 percent by the early 1970s. Economic freedom is just as important as political freedom.
Now let's move on to the IMF's estimates. These are similar to Madison's estimates, but can be extended to the present (Madison's estimates end in 1998).
In 1980, the United States remained the world's dominant economy with a share of over 21 percent of global GDP. India's share remained at just 3%, and after the turmoil of the Cultural Revolution and the Great Leap Forward, China's share fell to 2.3%. The economies of both countries began reform from this point. China was more organized and India was initially tentative but became more serious after the 1991 crisis.
Improved performance due to policy improvements. By 2000, China's share had soared to 7.2%, and in 2017 it matched the US share of 16%. As of 2024, the time of this writing, the country is once again the world's largest economy, accounting for 19.4% of the global economy.
The US remains the world's largest economy in nominal dollars, but its share in PPP terms has now fallen to 15.5%. On the other hand, India's share is steadily increasing. He went from 4.3% in 2000 to almost 8% in 2024. In other words, it is already the third largest economy in the world on a PPP basis. Remember, this was India's share on the eve of World War I and was still far below its pre-colonization share.
The IMF predicts that by the end of this decade, China's share of the global economy on a PPP basis will remain unchanged at 19.5%, while the US share will further decline to 14.7%. Japan's share will drop to 3.2%, and the UK's share will be 2%.
Graph: PPP as a share of world GDP (%)
In contrast, India's share is expected to rise to 9.2% of the global economy by 2030. This is no small reversal of fortune for an economy that has suffered from such a long cycle of relative decline.
In fact, the significance of India's current rise can only be properly understood on a civilizational time scale. While we rightly celebrate the recent upturn in fortunes, it is also important to remember that India has a long way to go before it regains its historic place in the world.
– The World Economy: A Millennial Perspective, Angus Maddison, OECD 2001
– IMF Data Mapper, World Economic Outlook, April 2024
– Sea of Churn, Sanjeev Sanyal, Penguin 2016
