New Delhi: India has pipped Japan to become world's fourth-largest economy with a size of $4.18 trillion, the government said in its year-end economic update. Backed by robust fundamentals, the economy is set to become the third-largest by 2030, as it is likely to overtake Germany by then, the report said.

"With GDP valued at USD 4.18 trillion, India has surpassed Japan to become the world's fourth-largest economy, and is poised to displace Germany from the third rank in the next 2.5 to 3 years with a projected GDP of USD 7.3 trillion by 2030," said a government release. The US is the world's largest economy, while China is the second.

India is the world's fastest-growing major economy, the report said, adding that it is set to enter 2026 on a strong economic footing.

India's buoyant prospects will be supported by favourable agricultural prospects, benign inflation, the sustained impact of goods and services tax (GST) rationalization and robust balance sheets across the corporate sector and financial institutions, the government report said. It exuded optimism on account of these domestic growth drivers despite a challenging global trade environment.

"Supportive monetary and financial conditions" and the ongoing reforms are set to further buoy the economy, the government report said. "Ongoing reforms are likely to further enable growth prospects. Present macro-economic situation presents a rare 'Goldilocks period' of high growth and low inflation," it said

The six-quarter high real gross domestic product (GDP) growth of 8.2% for the second quarter of the fiscal year underscored resilient domestic demand amid a challenging global trade environment, the report said. The country's real gross value added (GVA) expanded 8.1%, catalyzed by the industrial and services sectors.

Noting the broad-based momentum across key sectors, the Reserve Bank of India (RBI) has revised India's GDP growth forecast for FY26 to 7.3% from the earlier estimate of 6.8%, while global and domestic institutions have also upgraded their projections on the economy on the back of its strong fundamentals, the report said.

The World Bank has projected 6.5% growth for India in FY26, while the International Monetary Fund raised its projection to 6.6% and the Asian Development Bank has hiked its 2025 forecast to 7.2%.

"India's domestic growth is on an upward trajectory owing to multiple factors such as robust domestic demand, income tax and goods and services tax rationalization, softer crude oil prices, front-loading of government capital expenditure, along with facilitative monetary and financial conditions, supported by benign inflation," the government said.

The growth trends signal a broad-based upturn in economic activity across key sectors, while inflation remained largely benign through the year, with the retail inflation rate based on the consumer price index softening from 4.26% in January 2025 to 0.71% in November 2025, offering the RBI the policy space to maintain a supportive monetary stance.

The latest labour force estimates also showed a notable improvement in the country's job market conditions, the government said. In November, the unemployment rate fell to 4.7% from 5.2% in October, the lowest level recorded since April 2025.

Services exports, a key pillar of the external sector, also recorded solid growth, reflecting India's expanding footprint in the global value chains and raising the demand for Indian software, business services and other globally-tradable services.

External sector resilience was seen in the robust foreign exchange reserves and improved current account dynamics too, the report said. Remittances remained strong, helping moderate the current account deficit alongside solid services export receipts.

On the year set to soon end, economists said that the country's growth outcomes had panned out better than expectations. Growth has benefitted from a sizeable policy stimulus, including income tax relief, GST reform, the 125-basis-point policy rate cuts and liquidity support, said Aditi Nayar, chief economist at Icra Ltd.

"A sharp dip in inflation eased pressure on household budgets, and an above-normal monsoon boosted crop output," Nayar said. "Nevertheless, concerns on the external front have remained entrenched, and are likely to impact growth outcomes in the near term unless a trade deal with the US materializes shortly."

Icra expects India's GDP growth to rise to 7.4% in FY26 from 6.5% in FY25. Thereafter, growth is expected in the range of 6-7% in FY27, with the upper end of the range likely to materialize if the trade deal with the world's largest economy is struck before the start of the next fiscal, and new constraints are not imposed on the services trade front.