No ‘dead economy’? India may surpass US as 2nd largest economy in PPP by 2038 - despite Trump tariffs

India may surpass the US to become the world’s second largest economy in PPP terms by 2038, according to an analysis by EY in its latest Economy Watch report. The projection assumes significance at a time when the US has imposed 50% tariffs on India, with the American president Donald Trump recently calling India a ‘dead economy’.

Globally, most economists and institutions have projected that India’s economy will continue its growth backed by strong domestic fundamentals. S&P and Fitch, both US-based credit rating agencies, have called India’s growth story resilient. While S&P has upgraded India’s credit rating, Fitch has affirmed it despite the US tariff headwinds.

India to be second largest economy in PPP terms

When considering market exchange rates, India is set to become the world's fourth-largest economy, surpassing Japan by 2025 (FY26), and subsequently overtaking Germany to secure the third position by 2028 (FY29).

EY’s analysis compares five largest global economies: the United States, China, Germany, Japan and India. India is currently the world’s third largest economy in purchasing power parity or PPP terms, and the fifth largest in nominal GDP rankings.

According to the EY report, the United States' real PPP economy measures $25.7 trillion in 2024, whilst India's stands at 14.2 trillion international dollars. This 11.5 trillion international dollar difference is expected to reduce substantially by 2030, with US and Indian economies reaching 28.9 and 20.7 trillion respectively, said EY.

For meaningful economic comparisons, national GDPs require conversion from local currencies into purchasing power parity (international dollar) measurements. The analysis utilises constant 2021 PPP international dollar figures from the IMF.

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Under PPP comparisons, the US economy's share is forecast at 14.7% in 2025. IMF projections through 2030 indicate India will constitute 10.0% of global output (FY31), approximately 4% below the US figure.

German and Japanese contributions to global output are anticipated at 2.7% and 2.9% respectively in 2030, over 7% lower than India's projected share of the world economy.

“In terms of growth, the Indian economy is the most dynamic, leading the world economy and all other major economies by a significant margin. Its growth is 2.3 times that of the US in 2024. In subsequent years, however, India’s growth is projected to be in the range of 3.1 to 3.6 times that of the US. If beyond 2030, India and the US maintain average growth rates of 6.5% and 2.1%, respectively, during 2028 to 2030 as forecasted by the IMF, India may surpass the US economy in terms of 2021 PPP-based international dollars in 2038,” says EY in its Economy Watch report.

The projections indicate India's GDP will reach 34.2 trillion international constant PPP dollars (2021) by 2038.

Donald Trump’s 50% tariffs on India

Do Trump’s recently imposed 50% tariffs on India threaten the Indian economy’s growth trajectory? According to EY, India's exposure to US tariffs can be assessed through various metrics, including its export-to-GDP ratio (22.2% average from FY23 to FY25), proportion of goods exported to US within total exports (10.2%), and percentage of Indian exports to US subject to increased tariffs (approximately 40.1%).

Considering India's capacity to redirect exports and stimulate domestic consumption, these tariffs might affect roughly 0.9% of India's GDP, says EY.

The definitive effect will be determined by how US consumers respond to the tariffs on Indian exports. If one-third of the impact translates to reduced demand, the overall effect could reach 0.3% of India's GDP, projects EY.

Through strategic measures like import reduction and strengthening domestic demand for exported items, the impact could be limited to 0.1% of GDP. This suggests a possible 10 basis points reduction in India's projected 6.5% growth for FY2026, potentially adjusting medium-term growth to 6.4%, the report says.

US economic performance could suffer from retaliatory measures by affected nations. Some experts suggest a possible US recession. Considering a projected decline of 30 to 50 basis points in US growth rates, EY estimates future GDP levels in 2021 PPP international dollars. Under these revised growth projections, India could still potentially exceed US GDP in PPP terms between 2037 and 2038.

“At that time, the GDP levels in both countries may be around PPP$32 trillion to PPP$33 trillion. Thus, it may be only a matter of a decade before India becomes the second-largest economy in the world,” says EY.

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