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BW Businessworld

India Replaces Japan As World's 3rd Largest Economy

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India is now the world's third largest economy in terms of purchasing power parity, ahead of Japan and behind the US and China which hold the top two spots. This was revealed by the 2011 round of the World Bank's International Comparison Programme (ICP) released on Tuesday (29 April).

"The United States remained the world’s largest economy, but it was closely followed by China when measured using PPPs. India was now the world’s third largest economy, moving ahead of Japan," the report said.

"India was now (2011) the world's third largest economy, moving ahead of Japan," said the World Bank report. The ranking is based on purchasing power parity (PPP) in dollar terms.

PPP is adjustment of exchange rates to find the purchasing power of one unit of a currency in a foreign
economy. For example, if the price of a hamburger in France is €4.80 and in the US is $4.00, the PPP for hamburgers between the two economies is $0.83 to the euro from the French perspective (4.00/4.80) and €1.20 to the dollar from the US perspective (4.80/4.00). To compare the cost of hamburgers purchased in the two economies, the expenditure on it in France can be expressed in dollars by dividing it by 1.20 or the expenditure on hamburgers in the US can be expressed in euros by dividing by 0.83.

It highlights the fact that the largest economies were not the richest, as shown in the ranking of GDP per capita. The middle-income economies with large economies also had large populations, setting the stage for continued growth, it added.



The report says India "went from the 10th largest economy in 2005 to the third largest in 2011.

While India's gross domestic product (GDP) on this basis was $5.75 trillion in 2011, Japan's was $4.37 trillion. In contrast, this country was only the world's 10th biggest economy in 2005, when the World Bank had issued an earlier report under its International Comparison Programme. At the time, India's economic size was $2.34 trillion; Japan was at third rank, at $3.87 trillion. America and China came first and second, respectively.

India went ahead of Japan because its currency was valued at 15.11 a dollar on a PPP basis in 2011, while the East Asian nation's currency was pegged at 107.45 to a dollar. In 2005, Japan's currency was 129 to a dollar, while the rupee was 14.67 a dollar.

Two years earlier, the International Monetary Fund came out with a similar prognosis. It had put India slightly ahead of Japan in PPP terms, valuing India's GDP at $4.46 trillion in 2011, marginally higher than Japan's $4.44 trillion. In contrast, the World Bank report says on per capita GDP, India is 129th among 177 nations in PPP terms. Our per capita GDP was $4,735 in 2011.

National Statistical Commission Chairman Pronab Sen said the latter measure was the important one. "PPP is a cost of living index. What matters more is the per capita GDP, on which the real conditions depend."

In terms of per capita GDP, Japan was at 33rd position. China was at the 99th rank. Even America did not have the highest per capita income; it was 12th in the ranking. Qatar had the highest per capita income, at $146,521 in 2011, around 31 times that of India.