New Delhi – India is poised to become the world’s third-largest economy by the end of 2026, potentially surpassing predictions, according to economist Arvind Panagariya. The projection, based on a sustained average growth rate of 10.2% in current dollar terms over the past two decades, suggests India’s GDP could reach $5 trillion in 2026 and $5.5 trillion in 2027.
Panagariya, formerly the vice-chairman of NITI Aayog, presented these findings during the 18th CD Deshmukh lecture organized by the Reserve Bank of India. His analysis indicates that India is on track to avoid the “middle-income trap” that has historically hindered the economic progress of nations in Latin America and Southeast Asia. This potential success is attributed to favorable demographics, improvements in economic governance and civil administration, and recent trade agreements.
The assessment aligns with Prime Minister Narendra Modi’s ambition to transform India into a developed economy by August 15, 2047 – the centenary of Indian independence. Recent infrastructure development and the government’s willingness to implement large-scale economic reforms are cited as key factors supporting this trajectory.
However, realizing this potential requires focused efforts to facilitate the growth of economic units within the country, Panagariya emphasized. He argued that the growth of small habitations, farms, and enterprises are intrinsically linked, and reforms aimed at expanding businesses in industry and services would generate employment and encourage internal migration.
Geopolitical factors also contribute to India’s advantageous position. Panagariya noted that India is increasingly favored by the United States and European nations, alongside strong relationships with Japan, South Korea, and Southeast Asian countries. This favorable international climate is expected to attract multinational corporations, creating opportunities for Indian goods and services globally.
The 16th Finance Commission, led by Panagariya, recently shifted the logic of fiscal federalism, moving away from a system based on entitlement and population towards one prioritizing efficiency, productivity, and performance. This change, implemented in the Union Budget 2026, adjusts the distribution of tax revenue among states, favoring those with higher GDP contributions – primarily in the south and west – while subjecting debt-heavy states to greater scrutiny. The commission has maintained the states’ overall share in the divisible tax pool at 41% but altered the formula for allocation.
Preliminary calculations suggest that states like Karnataka, Kerala, Gujarat, Haryana, Tamil Nadu, and Maharashtra are expected to benefit from the new fiscal formula, with Karnataka potentially receiving an additional Rs 7,300 crore annually. The long-term implications of this shift in fiscal policy remain to be seen.
