Fiscal demands: Rising global public debt poses risk to growth outlook

The world is keenly awaiting an early resolution to the crisis in West Asia. Reports suggest both sides are willing to engage, which is also reflected in the behaviour of the financial markets. An early resolution will provide much-needed stability to the global economy and allow individual countries to focus on structural challenges. The International Monetary Fund’s (IMF’s) latest Fiscal Monitor, released this week, highlighted one such challenge. Global gross public debt increased to about 94 per cent of gross domestic product (GDP) in 2025. Projections suggest it will reach 100 per cent by 2029, a level last seen in the aftermath of the Second World War. Increasing global public debt will have a range of implications, including for India. A prolonged conflict in West Asia will only worsen the problem.

 

As the IMF data shows, governments refinancing debt at higher interest rates have seen interest payments rise sharply over the past few years, from 2 per cent to about 3 per cent of global GDP. Given that the global debt stock is expected to increase in the coming years, interest payments may rise further. A full 1 percentage point increase in interest payments means that in the aggregate governments would spend less on areas relating to growth and development, which could affect long-term growth potential. The increase in public debt in some countries can have wider financial and economic implications. The United States (US), for example, is running a general government Budget deficit worth 7-8 per cent of GDP. The US Congressional Budget Office’s long-term projections, released in February, also showed that the Budget deficit in the world’s largest economy had increased structurally. Compared to the average of 3.8 per cent over the past 50 years, the federal Budget deficit is expected to increase to 6.7 per cent of GDP in 2036. The IMF projections paint a similar picture.

 

Given the global status of its markets, currency, and government debt, a structurally higher Budget deficit in the US would absorb a larger share of global savings, directly impacting capital flows and the cost of capital. This is particularly important for India because it runs a current-account deficit and depends on foreign savings to bridge its savings-investment gap. It has been facing a balance-of-payments deficit due to capital outflows, which is putting pressure on the rupee. Although supplementing domestic savings with international savings is considered normal for a fast-growing economy like India, the current global economic and political environment suggests that even some basic economic assumptions may need revisiting.

 

India also needs to progressively reduce its Budget deficit and debt. According to IMF numbers, India’s general government debt is expected to decline from about 84 per cent of GDP in 2025 to 77.7 per cent in 2031. Notably, the projected debt stock in 2031 will still be higher than in 2019. The general government Budget deficit is expected to decline from the current level of 7.4 per cent of GDP to 6.6 per cent in 2031. India would do well to consolidate debt and deficit at a faster pace, which will help create the space for policy response in adverse circumstances. In a world that is becoming more uncertain and unpredictable, it is important to have the policy space to preserve macroeconomic and financial stability at all times. India also needs to reduce its general government Budget deficit if it intends to lower its dependence on foreign savings. Reduced government demand for savings would free up resources for the private sector and help lower the cost of capital.