Global debt is rising at an alarming pace, exceeding $323 trillion or over 3.3 times the global GDP. According to the Organisation for Economic Cooperation and Development, the outstanding government and corporate bonds alone exceeded $100 trillion in 2024. Interest costs as a share of output rose from the lowest to the highest in the past four years. At last count, OECD members’ spending on interest touched 3.3 percent of GDP, higher than on defence. If the world’s largest economy, the US, is under severe financial burden with debt surpassing $34 trillion, the Eurozone is grappling with rising deficits as an unsustainable debt burden continues to be a drag on its growth. Likewise, China’s debt-to-GDP ratio has surged past 330 percent. Clearly, the rising global debt burden threatens fiscal and monetary stability and demands urgent regulatory action.
Ironically, one of the reasons for the spectre of a debt spiral emerged from the world’s central banks, whose monetary tightening has pushed up borrowing costs. While interest rates are now being cut, borrowing costs remain higher than before 2022’s rate increases. While public debt is vital for development, too much or too fast growth in it can impede progress. Last October, the IMF warned that the global public debt was probably worse than it looked and called for carefully designed fiscal adjustments. It noted that the fiscal outlook for many countries might be worse than the usual due to spending pressures, optimism bias of debt projections and large unidentified debts. The UN’s recent debt management conference renewed calls for global financial reforms to ensure that debt supports development rather than undermining it.
Unlike many other emerging economies, India is not excessively dependent on foreign currency borrowing; but it would not be immune from the shocks should a global debt crisis erupt. Helpfully, the government has begun focusing on orderly debt reduction as against the traditional practice of lowering fiscal deficit alone. That said, the interconnected nature of financial systems demands more attention and regulators must strengthen capital buffers of institutions to safeguard against potential sovereign defaults, liquidity crises and significant asset value declines. They must address systemic vulnerabilities with foresight, and stand ready with tools such as debt relief and liquidity support to address volatility due to rising dollar-denominated debt and weakening currencies.