India GDP Up 5.4%, Record High — Eyes Japan in 2024?

Recently, India has reported its economic growth rate for the third quarter, which stands at a year-on-year increase of 5.4%. While this figure is lower than the growth rates recorded in the previous two quarters—7.8% and 6.7% respectively—it still positions India as one of the fastest-growing major economies globally. The country is expected to maintain an annual GDP growth rate of approximately 6.6% for the entire year.

India's GDP is on track to hit new heights this year, narrowing the economic gap with Japan significantly. By 2025, there is a high probability that India's economy will surpass Japan’s, vaulting it into the status of the world's third-largest economy. This development marks a momentous occasion for Japan, as it may be relegated from its long-held position as an economic leader, potentially affecting its standing for the next several decades.

Globally, comparisons between India and China are prevalent, often referred to as the “Dragon vs. Elephant” contest. This metaphor is anchored in three major factors. Firstly, both nations boast populations exceeding 1.4 billion, making them the most populous countries in the world and the only two nations currently with populations over a billion. For the foreseeable future, it is unlikely that any other country will emerge with a population surpassing the billion mark.

The second point of comparison stems from their statuses as developing nations, wherein their economic development levels have been relatively close for a prolonged period. The third comparison is rooted in India’s democratic governance. Dubbed the largest democracy, if India were to surpass China in terms of economic output, it would serve as a testament to the superiority of democratic systems.

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However, the reality remains that China has significantly distanced itself from India in economic terms. For instance, in the previous year, China's GDP was recorded at approximately $17.79 trillion, while India’s economy was a modest $3.55 trillion—just 20% of China's size. Thus, China's economic heft is five times that of India’s, with India's current economic output paralleling China’s figures from 2007. Yet, this does not imply a mere 17-year lag in economic growth; the differences are multifaceted and deep-rooted.

Despite the long odds, India may well surpass Japan's economic standing, a possibility that appears increasingly tangible in light of current economic forecasts. This year will witness India achieving a new record in GDP growth, with projections estimating the annual GDP increase at 6.6% alongside an inflation rate hovering around 5.4%. Following a devaluation of roughly 1.5% against the US dollar, analysts predict that India’s GDP could reach approximately $3.92 trillion in 2024, tantalizingly close to the $4 trillion threshold.

Only four countries have exceeded a $4 trillion GDP: the United States, China, Germany, and Japan. When India crosses this mark, it would become the fifth nation in the world to do so. Historical precedents indicate that to challenge China successfully, India must first outpace both Japan and Germany— a path that mirrors the progression China undertook in its economic evolution.

Looking at Japan's economic trajectory, the scenario appears markedly less reassuring. Once the world’s second-largest economy for decades, Japan was overtaken by China in 2010 and is now facing another possible fall from grace to India. In 2010, Japan's GDP was approximately $5.76 trillion; however, it plummeted to $4.21 trillion last year, and this downward trend seems set to continue.

This year’s economic indicators present a troubling picture: in the first quarter, Japan experienced a GDP decline of 0.1% year-on-year; the second quarter sagged further with a 0.8% decrease, although an inconsequential recovery of 0.33% growth emerged in the third quarter. Overall, the first nine months revealed a 0.52% contraction in GDP year-on-year, indicating a potentially negative annual growth by year’s end.

Japan's economic stagnation, often referred to as the "Lost Decade" is starkly illustrated by its rarity of negative growth—mostly occurring during global financial crises. For instance, Japan recorded downturns in 1998, 2008, and 2020, with just one isolated year of negative growth in 2011. This pattern suggests that the current economic landscape remains grim, characterized by stagnation coupled with rising inflation—a scenario known in economic parlance as stagflation.

Forecasts anticipate Japan's GDP will fall even further this year, exacerbated by the dual pressures of negative growth and profound currency depreciation, which is expected to reach around 7%. While Japan's inflation rate hovers around 2.4%, its GDP, when converted into USD, is likely to dip under the $4 trillion mark, reverting to sizes reminiscent of 1992.

According to analyses, by 2025, India’s GDP is expected to swell to approximately $4.2 trillion, surpassing Japan's anticipated GDP, which may be lingering around $3.98 trillion—a mere $600 billion difference separating the two. With India maintaining robust economic growth at 6% annually despite inflation levels of around 5% and a relatively stable currency, this number could further cement India’s position ahead of Japan.

Japan’s issues are multi-faceted as well. Ominously, its population is aging rapidly with a stubbornly low birth rate, a demographic dilemma that is unlikely to reverse in the next thirty to fifty years. This prolonged phenomenon is significantly suppressing innovation and productivity within society. Furthermore, Japan faces an alarming national debt at 260% of GDP, raising substantial concerns about sustainability considering rising interest rates amid inflationary pressures.

In addition, Japan's high-tech industries face formidable challenges. While Japan has traditionally been a leader in technology, market pressures from both the U.S. and China complicate the landscape. Notably, Japan's semiconductor industry—historically a stronghold—finds itself constrained by U.S. restrictions which may stymie its growth. If the United States continues with its current posture against China without considerations for Japanese interests, Japan risks losing its technological edge entirely.

In stark contrast, India’s current economic growth presents ample room for expansion and mobilization of potential. With the strategic push for "Make in India," the Modi administration has garnered considerable attention and traction in the smartphone manufacturing sector, whereby domestic production is increasingly meeting the country's needs with significant export potential on the horizon.

Certain systemic issues plague India, including land disputes, caste-based disparities, and linguistic complexities; however, the pronounced advantages also come to fore. A strong central government authority enables delimitation of cohesive economic policies in stark contrast to less robust governments in neighboring regions, such as Pakistan, where governance issues act as significant impediments to cohesive economic planning.

The demographic dividend of India is another key factor, as touching even 30% industrialization among its 1.4 billion populace could yield staggering economic dividends. Over the past decade, India has consistently maintained a commendable annual growth rate of around 7%—a remarkable feat when compared to many other nations. The nation’s elite have proven to be both astute and globally adaptable, navigating the international terrain with adeptness that eludes Japan’s leadership. Had Japan pursued trade agreements proactively with China and South Korea earlier, it might have touched upon economic resurgence, thus proving that hindsight provides a unique lens through which to view potential missed opportunities in the past.