India pips Japan, becomes world's third largest economy in terms of PPP

Washington: China is set to overtake the US as the world's number one economy, while India has jumped into third place ahead of Japan, according to a new study from the world's leading statistical agencies.

The 2011 International Comparison Program (ICP), which involves the World Bank, assesses economies based on purchasing power parity (PPP), an estimate of the real living costs. The results revealed on Wednesday paint a new and different picture of the global economy compared with the last update in 2005.

The research puts China's GDP (gross domestic product) at 87 percent of the US in 2011 and says the Chinese and Indian economies have more than doubled relative to that of the US. In the 2005 study, the ICP believed China's economy was less than half the size of the US, at 43 percent.

"The United States remained the world's largest economy, but it was closely followed by China when measured using PPPs. India was now the world's third largest economy, moving ahead of Japan," the report said.

It added: "The results indicate that only a small number of economies have the greatest shares of world GDP. However, the shares of large economies such as China and India have more than doubled relative to that of the United States."

The ICP program is the largest global statistical operation, covering 199 economies from eight regions. It said that changes to its methodology help explain the estimates for the size of China's economy.

Rapid growth has led many economists to anticipate that China, the world's second biggest economy, would move into the number one position over the next few years. The latest findings from the ICP could fuel a debate on whether that is likely to happen sooner rather than later.

The Financial Times used the ICP figures to predict that China could overtake the US as the world's largest economy as soon as this year - at least five years earlier than previously forecast.

Reliable?

Because economies estimate their GDP at national price levels and in national currencies, those GDPs are not comparable, the ICP said. To be compared, they must be valued at a common price level and expressed in a common currency, the ICP said, explaining why it uses PPPs.

"The ICP is quite well-known and my take on this is that purchasing power parity measures are quite tricky to undertake and a lot of assumptions go into them," said Frederic Neumann, the co-head of Asia economic research, at HSBC in Hong Kong.

"It is true that China and India are certainly very large in size," Neumann added. "At the same time these [PPP] measures shouldn't be the be-all and end-all of international comparisons. When, for example, we measure international purchasing power expressed in dollars, which matters in international trade, the U.S., Europe and Japan continue to be the dominate economies in the world."

China's economy grew an annual 7.4 percent in the first quarter of this year, slowing from a 7.7 percent increase in the final quarter of 2013. Still, its economic growth continues to outpace that of developed world economies.

An advanced reading due for release later on Wednesday is expected to show the US economy expanded an annual 1.2 percent in the first three months of this year.

The findings of the ICP report meanwhile might come as welcome news in India, an economy that came under heavy fire last year for not doing more to address a wide-current account deficit and implement long-term structural reforms.

India was the tenth largest world economy in the 2005 ICP study.

The 2011 report lists the world's 10 biggest economies in the following order: U.S., China, India, Japan, Germany, Russia, Brazil, France, the U.K., and Indonesia. The ICP noted that changes in its methodology and country coverage made comparisons with the previous results difficult.

"This study is a useful reminder of how rapid really the progress has been in China and India and that the domestic economies are larger than first meets the eye," said HSBC's Neumann.