Much of India’s economic debate this week has focused on whether the latest GDP numbers are real—or have been flattered by the way inflation has been measured.
According to Ministry of Statistics and Programme Implementation (MoSPI) estimates, the economy grew an impressive 7.8 per cent in the April-June quarter of 2026-2027, against nominal growth of 10.3 per cent. Critics have questioned revisions to the first two quarters of the previous financial year and the deflators used to convert current-price output into ‘real’ growth. The government, meanwhile, has defended its new 2022-2023 base-year series, Producer Price Index, and its use of double deflation.
But, on a more serious note, this may also be a temporary argument about the rear-view mirror. Regardless of how low or manageable inflation currently appears, the international economy ahead is stumbling across conditions that could produce major inflationary duress.
One does not need a deflator to know that ordinary life has become more expensive, or a professional fund manager to notice that investments have become distinctly moody. Is this a domestic correction or the result of India’s exposure to international markets that remain volatile due to geopolitics? The inconvenient answer is both.
Four shocks, one wave
The post-Covid inflationary pressure could never really settle. Global inflation had remained stable at 2.5 per cent for almost a decade before the pandemic hit and surged to 8 per cent by 2022. Before production and supply chain disruptions could fully settle, military conflicts hit the world. Russia’s invasion of Ukraine—expected to last five days—became a war of attrition now in its fifth year.
In the Gulf, the conflict that began with Hamas’ 7 October attack on Israel has now expanded across the region, weaponising shipping and energy flows through Hormuz. Energy prices travel through transport, fertiliser, food, manufacturing, electricity and almost everything households buy.
Trump’s tariffs came as the third shock. The Dallas Federal Reserve estimates that US tariffs imposed under emergency powers in 2025 raised average import costs by 12.1 percentage points and added about 0.8 percentage points to core personal-consumption inflation by year-end. A Supreme Court ruling in February 2026 reversed part of the increase, but did not end tariff uncertainty.
The IMF expects world trade-volume growth to fall from 5.1 per cent in 2025 to 2.8 per cent in 2026, partly because tariffs are rearranging trade and production links. Someone still needs to foot the bill for moving a supplier, factory or shipping route.
The IMF’s April outlook, assuming a limited Middle Eastern conflict, projected a 19 per cent increase in energy prices, global inflation of 4.4 per cent, and growth of 3.1 per cent in 2026. All scenarios pointed to some combination of higher inflation and slower growth.
Therefore, what I refer to as ‘Tsunami’ is a wave of this convergence: unfinished recovery from the pandemic, costlier energy, rerouted shipping, tariffs, war expenditure, new supply chains and expensive capital.
Debt and the trap
The second half of the story lies in attempts to stay the wave afloat by borrowing. That resulted in major economies getting trapped in their own rising debts. Since the pandemic, governments have continued borrowing for welfare, defence, green transitions, industrial policy and AI and also for returning previously accumulated debt. The Organisation for Economic Co-operation and Development (OECD) expects governments and companies to borrow $29 trillion from bond markets alone in 2026—double the amount a decade ago.
The IMF puts global public debt at just under 94 per cent of GDP in 2025 and expects it to reach 100 per cent by 2029. Its 2026 estimates of debt-to-GDP ratios reveal a broadly uncomfortable landscape: Japan at 204.4 per cent, Italy 138.4 per cent, the US 125.8 per cent, France 118.4 per cent, Canada 110.7 per cent, the UK 103.6 per cent, Germany 64.6 per cent and Australia approximately 50.5 per cent.
Plainly speaking, these cases do not face identical risks: debt maturity, currency, domestic savings, economic output and creditors—all matter. But rising yields make each country’s weakness more expensive, raising government interest bills and the benchmark for mortgages, corporate borrowing and infrastructure. The spiral—inflation then becomes a debt problem, which feeds back into slower growth.
The US here possesses an extraordinary advantage. It can create a potentially unlimited nominal supply of the currency in which its debt is denominated and in which much of the world trades. Other countries must earn or borrow those greenbacks.
This does not give America unlimited power, though. Excessive dollar printing eventually extracts a price through inflation, weakening currency or higher Treasury yields. But Washington can postpone adjustment—and distribute part of its cost internationally—in a way that no other country can. Lately, there has been a lot of discussion on how the US manipulated yen markets to manage its rising bond yields.
America’s national debt has crossed $40 trillion in August 2026. Yet the dollar accounted for 57.13 per cent of allocated global reserves in Q1 2026, slightly higher than before. De-dollarisation, as I have repeated several times, is not happening the way it is projected by dollar-sceptics. No rival currency combines the depth of US markets, Treasury liquidity and the network effects of dollar invoicing, lending and payments.
This makes the US dollar a financial choke point with geopolitical impacts. At a differentiated cost, the United States controls the printing of the currency the international system needs. When Treasury yields rise, capital moves toward dollar assets; other currencies weaken, imports become dearer and developing countries must offer higher returns.
Look at the much-discussed case of Japan—Prime Minister Sanae Takaichi’s expansionary agenda has collided with inflation, a weak yen, and a Bank of Japan (BOJ) trying to normalise policy without increasing interest rates.
Let’s see how the trap works. Low interest rates are important for the BOJ to manage the rising debt, and it encourages investors to borrow in yen and buy higher-yielding dollar assets, in the process weakening the currency and raising the cost of imported oil, gas and food. But increasing interest rates could prop up the yen but also increase debt-service costs—in plain language, the EMI paid on accumulated public debt, which is already exceeding twice its GDP.
Japan is also the largest foreign holder of US Treasuries, with $1.1167 trillion in June 2026. Tokyo can sell those reserves to buy dollars. But a large sale would reduce Treasury prices, push American yields even higher, and reduce the value of Japan’s remaining portfolio—eventually impacting Japan’s fiscal and economic strain and perpetuating the spiral.
This explains Washington’s rare joint intervention with Tokyo recently. The Federal Reserve’s Foreign and International Monetary Authorities (FIMA) repo facility lets approved monetary authorities obtain dollars temporarily against Treasuries instead of selling them. It protects Japan from a fire sale and America from a major creditor becoming a forced seller.
It is clever crisis management but does not remove the contradiction between Japanese fiscal expansion, rising yields and dependence on dollar assets. The creditor needs the debtor’s securities to remain liquid; the debtor needs the creditor not to sell. Dollar dependence binds them together, even if uncomfortably.
Two kinds of debt crisis
Rich and poor countries experience this debt cycle differently. Advanced economies worry about increasing interest bills and shrinking fiscal space. Many developing countries confront something harsher: foreign-currency debt, falling exchange rates and refinancing at punitive rates.
The World Bank calculates that low and middle-income countries paid $741 billion more in principal and interest between 2022 and 2024 than they received in new financing—the largest net outflow in half a century. More than 3.4 billion people live in countries spending more on interest than health or education. The tsunami reaches them through daily life problems and withdrawn subsidies.
The G20’s Common Framework was launched in 2020 to coordinate Paris Club creditors, China and other bilateral lenders, followed by comparable treatment from private creditors. Yet only Chad, Zambia, Ethiopia and Ghana applied. All four have now completed official-creditor agreements, but the small number of applicants is itself an indictment, and the delay in processing debt relief is not helping the problem at large.
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India is resilient, not insulated
India has genuine buffers: high growth, substantial reserves, services exports and remittances, and a debt market supported mainly by domestic banks and insurers. Its debt ratio has fallen from the pandemic peak, but an IMF-projected 83.4 per cent of GDP in 2026 remains elevated against the pre-Covid period.
Where are the warning lights? Foreign investors withdrew more than $20 billion from Indian equities during the first four months of 2026 and India’s 10-year government-bond yield has recently approached 7 per cent.
Higher US yields reduce the attraction of Indian assets. Foreign selling pressures the rupee; a weaker rupee makes energy costlier, which is already costlier due to Hormuz shocks; imported inflation limits the RBI’s freedom to cut rates. Corporate capital becomes more expensive even when domestic Consumer Price Index looks reassuringly low.
Prime Minister Narendra Modi’s appeals to postpone gold purchases, avoid foreign travel and conserve fuel do not signal imminent crisis. They do expose the constraint: India must earn or conserve the dollars needed for essential imports.
The argument over whether India grew by precisely 7.8 per cent will continue, as it should. But statistical resilience must not become strategic complacency. India cannot prevent a global inflationary tsunami. It can, however, preserve fiscal space, reduce energy intensity, deepen domestic capital pools and push for debt-restructuring mechanisms.
GDP figures tell us how the economy travelled last quarter, but bond yields, dollar flows and disrupted sea lanes tell us what may be coming next.
Swasti Rao is a Consulting Editor (International and Strategic Affairs) at ThePrint. She tweets @swasrao. Views are personal.
(Edited by Ratan Priya)