India has world’s best digital financial setup, positioned to soar: Nobel laureate Michael Spence 

High global debt levels, steep market concentration, and lofty valuations could trigger a major financial shock, potentially leading to a US recession with widespread global spillovers, Nobel laureate and economist Michael Spence told The Economic Times.

Spence, who won the Nobel Prize in Economics in 2001 for his pioneering work on market signalling, highlighted growing vulnerabilities in the global financial architecture. He noted that extensive infrastructure is currently being financed through debt rather than equity, leaving systems vulnerable to sudden shifts in investor sentiment.

"I don’t think there’s going to be a catastrophic collapse, but there could be a pretty big shock," Spence told The Economic Times. He added that if market valuations drop alongside high debt burdens, "a whole lot of chaos" could emanate from the financial system.

He further noted that interest rate hikes by the US Federal Reserve are driving up the US dollar, exerting inflationary pressures on emerging markets due to currency depreciation and dollar-denominated energy costs. As a defensive measure, many developing nations may be forced to raise their own interest rates, Spence told The Economic Times.

Addressing national growth trajectories, Spence characterised India as a "rapidly rising middle-income country" operating close to the highest potential growth rate among major economies. While physical infrastructure still has room for improvement, he described India's digital financial framework as world-leading.

"On the digital economy side, especially the digital financial thing, India is not only first class, it’s the best in the world," Spence told The Economic Times, pointing to the country’s biometric identification framework, the Unified Payments Interface (UPI), and robust data-mobility systems that empower consumer consent. Spence noted that other emerging nations are already seeking to replicate India's architecture, which India has offered to share down to the source code.

Comparing economic paths, Spence stated that while China remains 10 to 15 years ahead with a per capita income around $14,000, its heavy reliance on foreign demand and an export surplus equal to roughly a third of global manufacturing presents rising international friction. In contrast, India’s domestic consumption engine — accounting for roughly 65% of GDP compared to China’s 40% — provides a more stable foundation for sustained expansion.

On artificial intelligence, Spence anticipated that broader macroeconomic productivity benefits will materialise over a five-to-ten-year horizon as businesses adapt their models and skill bases. While China and the US currently lead frontier AI development, Spence expressed confidence in India's long-term technology trajectory.

"India can’t afford this massive amount of infrastructure required to play in that game [today]. But 10 years from now, when the per capita income is $10,000-plus... India will be the next major player in this," Spence told The Economic Times.

Discussing global trade and geopolitics, Spence remarked that the world economy is shifting toward "variable geometry" — a non-cooperative model where countries form fluid, issue-based alliances rather than relying on full interdependence. However, he cautioned that low-income countries without significant bargaining leverage risk being left behind in this framework.

Commenting on US political strategy and former President Donald Trump's unpredictable approach to diplomacy, Spence referenced game-theory concepts developed by Thomas Schelling.

"There are game theory incentive structures where being incredibly convincing that you’re crazy means that you are willing to do something that is somewhat self-destructive that will affect the choices that other people make in a way that’s beneficial to you," Spence told The Economic Times, adding that it remains unclear whether such tactics are intentional or merely a spillover of Trump's personal style.