Geopolitical And Trade Disruptions Pushing Global Economy To Debt Crisis

Chennai: As global public debt is projected to climb to around 100% of global GDP by 2029, a debt crisis is looming large over the global economy with central banks finding it difficult to tame inflation and steer growth amid the current geopolitical and trade disruptions. The higher bond yields in advanced economies will put pressure on emerging economies, including India, and trigger capital outflows and pressure on currencies. This can lead to curtailment of social welfare spending, climate-related expenditure and higher taxes.

Global sovereign debt has risen to unprecedented levels, with global debt reaching nearly 97% of GDP during the pandemic following massive fiscal stimulus, social spending and government subsidies. Although there was a brief correction, global monetary tightening pushed borrowing costs higher and debt levels began rising again. Global debt is now expected to touch 100% of GDP.

“Advanced economies account for a significant share of this increase. The US remains one of the biggest contributors, while Japan has debt levels close to 250% of GDP. Among emerging markets, China has been a major contributor to the rise in debt,” said Annie Mahajan, Senior Economist at CareEdge Global Ratings.

The key concern today is that borrowing costs are much higher than they were during the global financial crisis. US long-term bond yields are averaging close to 5%, while yields have also risen across other advanced economies. Markets are increasingly worried about fiscal risks, with ageing populations adding to healthcare and social spending pressures.

Bringing debt under control is proving difficult because governments in advanced economies face strong political resistance to spending cuts and pension reforms.

Geopolitical conflicts, trade disruptions, protectionism and the West Asia crisis are adding to the challenge. Inflation risks have returned, limiting the ability of central banks to keep interest rates low. With yields rising, growth slowing and deficits widening, debt ratios could increase further.

Refinancing using short-term debt too is increasing costs. “The ability to avoid a crisis will depend on whether debt supports growth and how effectively institutions respond,” said Mahajan. Reviving growth is critical to preventing today's high debt levels from turning into a full-blown global debt crisis.

For India, however, higher global bond yields could trigger capital outflows and currency pressure, while weaker global demand could hurt growth. India's large domestic economy provides some protection, but external risks are likely to become more pronounced.

India also faces a significant interest burden. Although fiscal consolidation is underway, interest payments remain a major expenditure item, limiting the government's room for developmental and welfare spending. Higher revenues, faster disinvestment and better fiscal management by states will be crucial to bringing debt down.