UNCTAD: Global Financial Volatility and Climate Costs Threaten Developing Economies
SDG 8: Decent Work and Economic Growth | SDG 17: Partnerships for the Goals
Ministry of Finance | Reserve Bank of India (RBI)
The UNCTAD Trade and Development Report 2025 issues a stark warning that financial volatility and geopolitical uncertainty are leaving the global economy “on the brink,” with profound and disproportionate impacts on developing nations. Global growth is projected to slow to 2.6% in 2025 (down from 2.9% in 2024).
Key Global Findings on Trade and Finance:
Limited Financial Diversification: More than 90% of global trade depends on bank finance, making it critically vulnerable to financial shocks and shifts in investor sentiment.
Dollar Dominance Risk: The US dollar remains central to global finance, linking developing economies to financial cycles over which they have limited influence.
High Borrowing Costs: Developing nations commonly face external borrowing rates of 7% to 11%, significantly higher than advanced economies, curtailing their ability to finance long-term development.
Climate-Related Financial Burden: Countries exposed to extreme weather now pay an estimated $20 billion more each year in interest premiums because lenders perceive them as riskier.
Commodity Financialization: For several major food trading companies, more than 75% of income now stems from financial operations rather than the physical movement of goods.
India-Specific Economic and Policy Context
The report notes India’s strong economic performance amidst global challenges, but identifies clear vulnerabilities requiring policy action:
Growth and Stability: India is projected to grow by 6.4% in 2025 and 2026, maintaining its position as the world’s fastest-growing major economy. This stability is supported by robust public capital expenditure, easing financing conditions, and the Reserve Bank of India’s (RBI) monetary easing cycle (100 basis points repo rate cut between February and October 2025).
Services Trade Leadership: India recorded a 10% year-on-year growth in services exports during the second quarter of 2025, driven by finance, intellectual property, telecommunications, computing, and information services.
Trade Headwinds: Tariffs imposed by the United States on critical manufacturing exports (like apparel and electronics) could reduce India’s GDP growth by up to 0.3 percentage points.
Financial Vulnerability: India faces high external borrowing costs, with the 10-year treasury yield averaging 6.9% from 2015–2025. However, India ranks high in trade partnership diversity and is among the top contributors to South–South FDI flows.
Policy Relevance
The UNCTAD report mandates urgent policy interventions for India. The combination of high domestic growth and strong external financial and trade risks requires the government to:
Strengthen Domestic Ecosystems: Enhance local financial infrastructure, capital markets, and digital payment systems to reduce reliance on the volatile dollar-denominated financial system.
Green Resilience: Promote Green Structural Transformation to align development and climate goals, building resilience against the climate-related shocks that drive up borrowing costs.
Curb Illicit Flows: Implement measures to combat tax avoidance and improve domestic resource mobilization to create fiscal space to address these external fragilities.
Follow the full report here: UNCTAD: Finance can put trade at risk, leaving the global economy “on the brink” – with developing countries hardest hit