As per Finance Ministry’s Quarterly External Debt Report (December 2024), External Debt has risen by 10.7% (from December 2023) mainly due to Valuation Effect.

• Valuation effect occurs due to the appreciation of US dollar vis-à-vis the Indian Rupee. 

Other Key Highlights of the Report

• External Debt to GDP ratio: Stood at 19.1% (December, 2024) from 19.0% (September, 2024). 
• Composition: US dollar Denominated Debt and Loans constituted the largest component. 
• Debt service (Principal repayments plus interest payments): Declined by 0.1% (September – December, 2024). 
• Long Term Vs Short Term Debt: Former recorded a marginal increase while the latter observed a marginal decline. 

About External Debt

• Meaning: Refers to the money borrowed from sources outside the country, by both the Central Government and Corporations (External Commercial Borrowings).
  • Predominantly denominated in other currencies viz., US Dollar, SDR, etc., 
• Sources: Could be foreign commercial banks, international financial institutions like IMF, World Bank, etc., or foreign governments. 

Challenges with rising External Debt 

• Repayment Burden: Since, it is usually denominated in other currencies, changes in exchange rate affects its repayment burden. 
• Rising Inflation: Prolonged inflation further increases the interest rates, slowing down growth, resulting in a higher external debt to GDP ratio. 
• Global Scenario: Global threat of stagflation may lower the demand for India’s exports affecting the debt service ratio. 

The Reserve Bank of India has come up with new guidelines regarding LCR. 

• RBI also said that banks need to assign a lower run-off factor on retail deposits.
  • Run-off factor refers to the percentage of deposits that could be withdrawn by depositors in a stress scenario.

About Liquidity coverage ratio (LCR)

• It is the amount of High-Quality Liquid Assets (HQLAs) that financial institutions must have on hand to ensure they can meet their short-term obligations in the event of market turmoil.
• The LCR is a result of updates to the Basel Accords, regulations created by the Basel Committee on Banking Supervision.
• High LCR decreases money supply by requiring banks to hold a larger proportion of highly liquid assets.

The report, which is released semiannually, assessed the impact of geopolitical risks on global financial stability. 

• According to the Report, Global geopolitical risks remain elevated, raising concerns about their potential impact on macro financial stability.

Geopolitical Risks

• Multiple threats to supply chains: Geopolitical rivalries, conflict, competition for resources, cyberattacks, etc.
• Tectonic shifts in power, economic centers and trade: New trade alliances and investment hubs are redefining global power dynamics.
• A fragmented tax environment. E.g., Minimum global tax is becoming adopted by many countries, while others are withdrawing from multilateral tax policy.
• Demographic, technological and cultural pressures on workforces: E.g., Aging populations, mass retirement, falling birth rates (in developed markets), culture wars, AI integration, etc.

Implications of geopolitical risks 

• Sovereign Risk: Increased military spending and economic downturns raise public-debt-to-GDP ratios, escalating fiscal sustainability concerns and sovereign risk.
• Financial Contagion: Geopolitical risks can spill over to other economies through trade & financial linkages, raising the risk of contagion. 
• Macroeconomic Impact: Increased geopolitical risk can lead to economic disruptions, such as supply chain disruptions and capital flow reversals.
• Investor Confidence: Geopolitical risks generally lower investor confidence, leading to market uncertainty and increased volatility.
  • E.g., The U.S.-China trade war significantly impacted stock prices in both economies.

It is released by the World Trade Organisation (WTO).

Major findings

• Under current conditions, the volume of world merchandise trade is likely to fall by 0.2% in 2025. 
  • The decline is expected to be particularly steep in North America, where exports are forecasted to drop by 12.6%.
• Severe downside risks exist, including the application of “reciprocal” tariffs and broader spillover of policy uncertainty.
• The report contains for the first time a forecast for services trade to complement its projections for merchandise trade.
• The volume of services trade is forecasted to grow by 4.0% in 2025.

Report provides a roadmap for ensuring AI (Artificial Intelligence) drives inclusive growth rather than deepening divides. 

Key Findings of the Report

• Potential of AI: Globally, AI is expected to reach $4.8 trillion in market value by 2033. 
• Impact on jobs: AI could impact 40% jobs worldwide, offering productivity gains along with concerns regarding automation and job displacement. 
• Market dominance at National and Corporate Levels: 
  • 40% of global corporate R&D spending stems from 100 firms mainly in US and China. 
  • US accounts for 70% of global AI private investment.

Way Forward on Inclusive AI

• Promoting AI Adoption in Developing countries: By redesigning AI solutions around locally available digital infrastructure, lowering the skill barriers; building international partnerships, etc. 
• Adopting Worker Centric Approach: Job workflows and tasks should be rearranged to integrate AI effectively. 
• Role of the Government: Assessment of the national AI capacities across the three leverage points of infrastructure, data and skills.