Grand Strategy: India must transition from fourth largest economy to an economy of consequences

The challenge with India’s current ranking as the world’s 4th-largest economy is that it reflects primarily the size of market

India will become the fourth largest economy in the world at the end the year and is poised to become the 3rd largest in the coming years—a milestone for us to be proud of as a nation. While the low GDP per capita remains a concern, the country’s growing economic strength will have significant foreign policy implications. It will enable India to allocate more resources towards defense, security, and expand its diplomatic engagements. But the question we must ask is whether the Indian economy can eventually influence the global economic order and shape international economic outcomes.

India’s Gross Expenditure on R&D (GERD) has hovered around 0.6-0.7% of its GDP. (File photo)

The challenge with India’s current ranking as the world’s fourth-largest economy is that it reflects primarily the size of the market, workforce and economic transactions by a huge population, rather than innovative strength or impact on global economic order. While India is a four trillion USD plus economy, that is puny in the global scheme of things, and its ability to influence world economy is punier. What is missing is a decisive technological lead, strong manufacturing capabilities, substantial investment in research and development, and a robust pipeline of important patents for its industry and scientists. Let me explain why this matters.

The reason why the United States (with a GDP of around 30 trillion USD) and China (approximately 19.5 trillion USD) are so far ahead of India, among other factors, is that their economies are driven by more than just the volume of economic activity. While India’s large population—much of it young—is engaged in basic economic activities, the US and China have built their advantage through innovation, technological leadership, high-value industries, and a focus on quality and efficiency over and above the ability of their population to engage in economic activities. Put differently, while much of our workforce engages in basic economic activities, that of the US and China are engaged in high-skilled economic activities aided by the adoption of technology and innovation.

Therefore, simply measuring size or volume of economic activity doesn’t capture the full picture of economic strength, economic strength is also determined by the kind of economic activity the population is engaged in. In any case, there is a limit to India’s ‘volume-based’ economic activity and the GDP produced by it – while the Indian economy will continue to grow, the growth will be modest and will be based on the volume of the economic performance by its population. While this is true for both the US and China, the key difference lies in how the value of goods and services produced in these countries depends not only on the size of their populations but also on the type of technology used, the nature and depth of their manufacturing industries, and substantial investments in R&D. Let’s not confuse volume with efficiency. A related challenge of relying on volume is that India’s demographic advantage creates a skewed incentive: with a large consumer market and inexpensive labour, Indian investors often seek quick returns by targeting the domestic market through cheap labour, rather than investing in technology, skill development, or future-oriented sectors. As more and more production becomes automated and tech-dependent, the importance of labour abundance diminishes unless it is high-skilled.

The problem with India is three-fold. First, unless it can introduce advanced technologies into its economy, its growth will remain modest. Although India is the world’s fastest-growing major economy, and as per World Economic Outlook of the IMF it will grow at 6.2% this year, this rate reflects the percentage increase from the previous year, since GDP growth is measured as the change in the value of all goods and services produced compared to the previous year. So, if India’s economy in 2025 is $4.19 trillion and grows at 6.2%, it will increase to approximately $4.45 trillion in 2026. 6% of a modest number will still be modest. The second challenge is that with an economy lacking significant technological leadership, deep manufacturing capabilities, substantial R&D investment, and a strong patent portfolio, India will be unable to influence the global economic architecture or major geopolitical developments significantly. The gap between the world’s largest economies—such as the US, China, and Germany—and India is largely due to the country’s limited access to advanced technology, manufacturing expertise, and R&D infrastructure.

Let’s examine these two issues in detail. China’s dominance in manufacturing and R&D is widely recognized, and India’s weaker position in these areas has significant strategic implications. Consider this. Despite Delhi’s decision to diversify and reduce dependencies on China, India remains critically dependent on Chinese imports for key sectors, including electronics, organic chemicals, heavy machinery, and components for solar power and pharmaceuticals. This heavy reliance creates a significant strategic vulnerability. During times of crisis , for instance, Beijing could potentially leverage its dominance in these supply chains to exert economic pressure or disrupt critical industries. This dynamic forces India to diversify its supply chains and build domestic capacity. But to build domestic capacity, India needs to invest in R&D which has been abysmal.

India’s Gross Expenditure on R&D (GERD) has hovered around 0.6-0.7% of its GDP, a figure significantly lower than the world average of 1.8% and far behind competitors like the US (3.5%) and China (2.4%). This is compounded by the fact that the private sector in India contributes only about 37% of India’s total GERD, compared to over 70% in most leading economies. This low investment in R&D reflects in manufacturing capacity: While India accounts for 2.8 per cent of global manufacturing, China is at 28.8 percent.

Yet another indication of strong investment in the science and tech field is the low number of patents filed in India and the number of peer reviewed high impact scientific publications coming out of Indian institutions. while patent filings in India have indeed gone up over the years, a large number of them are still filed by foreign entities. Low patent filings eventually translate to low commercialisation of scientific research. While in India we often complain about brain drain, with skilled Indian scientists and engineers migrating abroad for better opportunities, funding, and infrastructure - thereby severely depleting the domestic talent pool - the reality is that unless these conditions are improved in India, talented individuals will continue to leave.

The third issue pertains to competing with China even with India’s demographic advantages. Historically, Asian economic success stories have been driven by export-led growth. However, this strategy will face increasing hurdles in the years ahead, as China’s massive excess capacity makes export competition a zero-sum game. If India cannot compete with China on exports to global markets due to this surplus, it will focus more on its domestic market. But prioritizing domestic market at the expense of exports could in turn limit overall economic growth. This is a major developmental dilemma India needs to tackle.

If India’s national strategy of “Viksit Bharat 2047”, which seeks to transform the country into a developed economy by the country’s 100th year of independence, is to succeed, we must focus on adopting new technologies, expand our manufacturing capacity, and strengthen its industrial base. Size and volume will only take us thus far. More importantly, to truly become Viksit Bharat by 2047, India must improve its per capita income of its citizens.

(Happymon Jacob is the Founder and Director of the Council for Strategic and Defense Research and the Editor of INDIA’S WORLD magazine.)