India is set to overtake Japan - and, yes, California - and become the world's fourth-largest economy

MW India is set to overtake Japan - and, yes, California - and become the world's fourth-largest economy

By Jules Rimmer

The Indian government's own data suggest it has moved up the rankings at the expense of Japan, but the stock market has failed to keep pace in 2025

The Indian market has been a huge outperformer among emerging markets in recent years, but 2025 has been altogether different.

According to the Indian government's own data, its economy has now achieved a gross domestic product of $4.18 trillion, narrowly surpassing that of Japan. It also now exceeds the U.S. state of California, which Gov. Gavin Newsom recently boasted was the world's fourth-largest economy.

While the World Bank and the IMF have yet to formally acknowledge the change in the pecking order and still show India fifth on their tables, India's rapid pace of growth (its second-quarter GDP motored along at a lick of 8.2%) essentially guarantees that the overtaking of Japan (forecast to advance at a more pedestrian 1.3% in 2026) is just a matter of time.

The government report predicts the rapid pace of economic expansion will continue and the "present macro-economic situation presents a rare goldilocks period of high growth and low inflation."

India's economic progress in 2025 has, though, not been matched by its stock market. The benchmark domestic index has delivered just 9.72% so far in 2025, vastly underperforming the 30% increase for the MSCI emerging-markets index. The most widely traded New York-listed Indian exchange-traded fund INDA has only risen by 2% in 2025.

From the archives (April 2023): India is now the world's most populous country. But this demographic metric is more important for its economy.

This year's laggardly behavior contrasts sharply with a long period of outperformance versus other emerging markets EEM that saw the fund beat its benchmark by 70% since 2020. Some of this weaker showing could be attributed to expensive valuations.

In their emerging-markets outlook for 2026, Aubrey Capital fund managers John Ewart and Andrew Dalrymple noted that "India has traded at a premium for a decade." Its price-to-earnings ratio, for instance, at 24 times is the most expensive in emerging markets and is second only to the U.S.'s at almost 27 times.

Specialist emerging-markets asset managers Aubrey Capital also point out that, this year, the investing trend has been oriented toward technology and cheaper markets. Trade disputes with America and the row over Russian oil imports also detracted from India trading sentiment.

For Ewart and Dalrymple, though, "the scale of opportunity remains compelling and the country is the most exciting long-term investment opportunity in our universe." Inflation is near historic lows, and there is scope for the Reserve Bank of India to cut rates.

Having cruised past Japan (and California), India will now have the No. 3 spot, currently occupied by Germany, in its crosshairs. The government's review predicts it will surge past Germany, presently assessed at around $5 trillion in size, within the next three years on its current trajectory.

That would, of course, still leave it a long way behind both China, whose economy is valued around $19 trillion, and the U.S., up at around $30 trillion.

-Jules Rimmer

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December 30, 2025 11:55 ET (16:55 GMT)

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