India in the World Economy: Its Rise After a Thousand Years of Decline

India’s nominal GDP is set to hit USD4 trillion in 2024-25. With Japan’s economy now valued at USD4.1trillion – reflecting a sharply weaker JPY – India is now tantalisingly close to become the world’s fourth largest economy in dollar terms within a year. Germany’s nominal GDP is valued at USD4.6 trillion and growing relatively slowly. So, it is now reasonable to expect India to replace Germany as the world’s third largest economy by 2026-27. All of these projections are based on the assumption that no unexpected shock impacts the calculations, but the threshold levels are close enough that it will now take a very big hit to significantly throw off the trajectory.

Of course, even as the world’s third largest economy, India will still be poor in per capita terms but sheer bulk does provide advantages that can be leveraged. While we celebrate India’s economic rise, it should be remembered that India was a major economic power for much of history. Therefore, it is worth revisiting the longer cycle in order to appreciate what we are currently witnessing.

According to Angus Maddison’s widely used estimates, India accounted for around 33% of the world economy in 1AD. In order to avoid the vagaries of exchange rates and relative prices, these estimates were done on a purchasing power parity (PPP) basis. At that time China’s share at 26% was the second largest while Western Europe, much of it under Roman rule, accounted for almost 11%. Obviously these are rough estimates given the long expanse of time, but it is remarkable how India’s economy was such a dominant force two thousand years ago. Indian merchants were operating from the Middle East to East Asia, and Roman policy-makers were complaining about the current account deficit with India.

A thousand years later, India was still the world’s largest with a share of 29% in 1000 AD. China’s share too had declined a tad to 23% but it was still the second largest economy. Europe’s share had fallen below 9% after the decline of the Roman empire. Africa’s economy, led by the Fatimids of Egypt, accounted for 12% of the world economy; a share that Africa has not enjoyed before or since. The global economy was dominated by supply chains running from the Fatimid empire in Egypt to the Chola empire in India through to the Song empire in China. Funded by temple-banks, India’s merchant guilds created a vast trading network across the Indian Ocean and beyond. The Cholas would make two raids on South East Asia to keep the shipping lanes open in 1017 and 1025.

Turko-Mongol invasions and plagues in the thirteen and fourteenth century cause serious damage to all the major economic nodes. By 1500, China had recovered under the Ming empire to become the world’s largest economy with a share of 25%. India’s share had by now declined to 24.5% but, with Vijayanagar empire at its height, it was still the second largest. By 1600, however, China’s share had jumped to 29%. In contrast, India’s share dropped further to 22.6% as the economic shock of the sacking of Vijayanagar, then the world’s largest city, was not compensated by the establishment of the Mughal empire. The Mughals nurtured some economic hubs but disrupted others as part of their conquests.

Importantly, the impact of the Renaissance and overseas maritime discoveries pushed the share of Western Europe to 20% by 1600. Italy and France dominated the European economy at this stage. Surprisingly, Spain and Portugal remained relatively small economies despite their global empires. The cost of managing this empire and incessant wars used up the silver and gold shipped in from the Americas.

The subsequent centuries saw the expansion of European colonisation and, from the late eighteenth century, the Industrial Revolution. However, China remained the world’s economic superpower. In 1820, China accounted for 33% of global GDP while India’s share had dropped to 16%. Colonial exploitation by the East India Company, and the incessant wars with Marathas (and others) had taken its toll. Commentators often state that China and India together accounted for half the world economy in 1820 but note that China accounted for twice as much as India at this stage. Western Europe’s share amounted to 23.6% - Britain’s at 5.2% and France’s at 5.5% (so the French economy was still a little bigger despite the loss at Waterloo).

The nineteenth century was a time of very radical shifts. China’s share dropped to 17% by 1870 and then to 9% by 1913. India’s share similarly dropped to 12% and then to below 8% at the eve of the of the First World War. India’s place in the world clearly suffered from the colonial occupation but notice that China’s decline was even more dramatic. The Opium Wars, the various internal rebellions and technological stagnation too its toll. In contrast, the share of Western Europe rose to peak at 33.5% of the world economy between 1870 and 1913. The relative trajectories of individual countries, however, are interesting. Britain’s share rose to a peak of 9.1% in 1870 and then declined to 8.3% (this excludes its colonies). That of Germany rose from 6.5% to 8.8% in the same period. Thus, Germany had a larger economy at the eve of the First World War but Britain had an empire.

Meanwhile, the United States had grown very rapidly over the previous century to become the world’s single largest economy with a share of 19% in 1913. Following the Second World War, its share rose to over 27% by 1950. The USSR with a share of 9.6% was a distant second (this would be its peak and it would gradually decline over the next four decades till it finally collapsed). Exhausted by the two wars and the steady loss of its colonies, Britain’s share had declined to 6.5% by 1950 and the number has continued to decline ever since. The shares of newly independent India and China were similar at 4.2% and 4.5% respectively. This was a drastic loss for the two civilizations that had dominated the world economy for millennia, but the Chinese perhaps felt the humiliation more keenly as the decline had happened more recently and sharply.

Perhaps the most dramatic shift of the next quarter century was the rise of Japan. It had accounted for just 3% of the world economy in 1950 but accounted for 7.7% by 1973 when the first Oil Shock hit the world economy. Also interesting in the fact that India’s place in the world economy continued to slide despite independence and Nehruvian socialism would pull down its share to 3% by the early seventies. Economic freedoms matter just as much as political freedom.

From here we will switch to IMF estimates. These are in the same ballpark as those of Maddison but can be extended to the present day (Maddison’s estimates end in 1998).

In 1980, the US was still the world’s dominant economy with a share of over 21% of world GDP. India’s share was just 3% and China, after all the chaos of the Cultural Revolution and the Great Leap was down at 2.3%. Both economies began to reform from here – China more systematically, and India initially tentatively till it became more serious after the crisis of 1991.

Improved policies led to improved performance. China’s share jumped to 7.2% by 2000 and by 2017 it equalled the US’s share of 16%. At the time of writing in 2024, it now accounts for 19.4% of the global economy and is again the world’s largest economy. The US is still the world’s largest economy in nominal dollar terms but in PPP terms its share is now down to 15.5%. Meanwhile, India’s share has been rising steadily. It rose from 4.3% in 2000 to almost 8% in 2024. In other words, it is already the world’s third largest economy in PPP terms. Recall that this was India’s share on the eve of the First World War, and still far below its pre-colonial share.

The IMF predicts that by the end of this decade, China’s share of the world economy in PPP terms will level off at 19.5% while that of the US will decline further to 14.7%. Japan’s share will come down to 3.2% while that of Britain will be at 2%. In contrast, India’s share is expected to have risen to 9.2% of the world economy by 2030. This is no small reversal in fortune for an economy that has suffered such a long cycle of relative decline. Indeed, the importance of India’s current rise can only be properly understood on a civilizational timescale.

References:

The World Economy: A Millennial Perspective, Angus Maddison, OECD 2001

IMF Datamapper, World Economic Outlook, April 2024

The Ocean of Churn, Sanjeev Sanyal, Penguin 2016