India might become the world’s third largest economy in 2011 by overtaking Japan in terms of gross domestic product (GDP) measured according to the domestic purchasing power of the rupee, otherwise called purchasing power parity.
India is now the fourth-largest economy behind the US, China and Japan. Numbers from 2010 show that the Japanese economy was worth $4.31 trillion, with India snapping at its heels at $4.06 trillion. But after March’s devastating tsunami and earthquakes, Japan’s economy is widely expected to contract while India’s economy will grow between 7% and 8% this fiscal. “India should overtake Japan in 2011 to become the third-largest economy in the world at purchasing power parity,” said Sunil Sinha, head of research and senior economist at Crisil.
IMF forecasts show India and Japan neck-to-neck in 2011, but the disaster in Japan has brought the event forward. “Were it not for the earthquake and tsunami, India would have overtaken Japan in around 2013-14,” said Sinha.
The purchasing power parity (PPP) method measures the size of an economy by levelling price differences between countries that occur in the process of conversion to a single currency.
Under this method, a dollar should be able to buy the same amount of goods anywhere in the world and exchange rates should adjust accordingly.
The Economist’s Big Mac Index, which takes the price of a Big Mac burger across 120 countries to calculate the ‘real’ price of its currency, is a crude way to measure PPP. India was included in the index recently. It showed that the Indian rupee was undervalued by 53% against the US dollar in August.
Earlier, a report by consultant PwC suggested that the Indian economy would surpass the Japanese economy in 2012. The IMF expects the Japanese economy to contract 0.7% this year while India is expected to grow 8.2%. A bigger economy could also give the government additional clout and bargaining power overseas.
“A bigger economy would also mean more clout in international forums,” said Madan Sabnavis, chief economist at ratings firm Care.
India, once a recipient nation for foreign aid, could now come together with Brazil, Russia and China to form a fund to stabilise tottering economies in the Eurozone.
Globally, companies have their eyes set on India as a rapidly growing nation that is full of opportunities. The sheer scale of development needed could drive growth for many years. “India has the advantage of size. The scope of growth and excess capacity present in terms of resources would drive growth in the future,” said Sabnavis.
Economists say that while the change in the rank of a country does not mean much, it points to broad trends in the growth trajectories of nations.
“It’s a long process of development, but this shows that the markets are expanding and there is robust demand within the economy,” said Siddhartha Sanyal, chief economist, Barclays Capital.
According to the University of Pennsylvania PPP world tables, India has already moved ahead of Japan in 2010. The size of the Indian economy is expected to reach almost $5 trillion by the end of 2011.(Source:The Economic Times)