Rising Global Capital Costs Challenge Emerging Economies By Anurada Thakur | Today’s news

New Delhi: High government borrowing, rising risk premiums and massive investments in artificial intelligence (AI) are pushing up the cost of capital across economies, including emerging markets like India, Economic Affairs Minister Anuradha Thakur said on Sunday.

Speaking at a late-night session of the Kautilya Economic Conclave in New Delhi, Thakur said the defining challenge for today’s economies is not just how they respond to change, but how effectively they anticipate, adapt and exploit it.

For decades, Thakur said, businesses have prioritized cost optimization, just-in-time manufacturing and integrated global supply chains.

“Resilience, adaptability and flexibility seem to be just as important now, if not more so. But they come at the cost of more capital,” she said. “The ability to remain agile, embrace innovation and be resilient is and will remain key to sustaining growth and competitiveness.”

Pointing to changes in global financial markets, she said bond markets are taking a larger share of funding, with government securities alone accounting for more than 80% of global gross domestic product. This makes the global government bond market a key determinant of the cost of capital.

As governments borrow large sums, investors expect a higher risk premium, raising term premiums and long-term returns, even in the developed world. This poses a major challenge for developing economies.

She also dwelt on the growing relationship between global trade and geostrategic interests.

“When trade is organized around security and geostrategic interests rather than comparative advantage, goods and capital move less efficiently, surpluses and deficits become a source of friction, and the cost of capital continues to rise for all,” she said.

In this age of constant motion, AI has added a new dimension to the investment cycle. Investment requirements are no longer limited to software or computing, but extend to data centers, semiconductors, reliable electricity and transmission capacity, much of which is financed through debt.

“More investment means more demand for savings, while more borrowing means financial markets have to absorb their large supply. Global returns can therefore no longer be understood solely in terms of monetary policy and the fiscal deficit. The scale of building AI is now part of that story,” she said.

Inflow of FDI, private investment

Emphasizing the massive inflows of gross foreign direct investment into India and the sectoral pattern of these inflows, Thakur emphasized that global capital is not only looking at India as a low-cost manufacturing base but as a place for capacity building.

India saw record gross foreign direct investment inflows of about $97 billion last fiscal and $29.3 billion in the June quarter, it said.

“It is a show of confidence in the fundamentals that India has demonstrated,” she said.

At the same time, private investment is now growing, after years of concerns about its subdued growth, she said, adding that investment is again leading growth. Capital formation grew at the fastest pace in more than three years in the June quarter. Private firms are pledging to invest in new projects in sectors such as energy, data centers and metallurgy, while bank loans to businesses are growing.

Reforms, fiscal discipline

Thakur highlighted the Indian government’s commitment to fiscal discipline in recent years, which has contributed to macroeconomic stability. The center’s fiscal deficit has been reduced from 9.2% of GDP in FY21 to a budgeted 4.3% this fiscal year. According to her, the fiscal anchor is also shifting towards a falling debt-to-GDP ratio. Inflation targeting has kept prices anchored, bad loans in the banking system are at multi-decade lows, foreign reserves remain strong and India has seen several rating upgrades over the past year and a half.

“Fiscal credibility, price stability and a sound banking system are fundamental to any country hoping to borrow at a reasonable cost when capital is scarce and expensive,” she said.

The government, Thakur said, has embraced reforms in the last decade with conviction. This has helped the economy grow by an average of more than 7% over the past three years while maintaining macro stability.

She listed key reforms over the past decade. These include reforms to the banking system and technology infusions, the introduction of the Goods and Services Tax and the Insolvency and Bankruptcy Act, a reduction in the corporate income tax rate, the decriminalization of more than 190 provisions across laws and new labor codes.

In addition, the government has consistently increased capital spending, which typically de-risks early-stage and long-gestation projects after which private capital can increase, she said. The center’s capital expenditure (capex) increased by approx ₹2 trillion in FY15 on the budget budget ₹12.22 trillion for FY27.

Measures can be announced, she said, but the credibility that India has gained is earned through sustained efforts.

“So we may find that measures may be announced, but the credibility that our country has earned is one that is earned through sustained effort — through physical consistency, discipline, reform and deregulation,” she said.

“We followed the path of stable reforms, prudent macroeconomic management. As I said, we hope that the rules of the game will still apply,” she said.