NDTV Explains: India And The US’ Awkward ‘AAA’ Ratings Cut, Debt Story

In baseball, that the majority quintessential of American sports activities, three strikes, or a swing-and-a-miss, imply you are out. And that, in a nutshell, is what has occurred to the US’ once-perfect ‘AAA’ credit standing.

Strike No 1 was August 5, 2011. S&P World known as out the “effectiveness, stability, and predictability of policymaking have weakened…”, and downgraded the US from ‘AAA’ to ‘AA+’.

Strike No 2 was August 1, 2023. Fitch pointed to a “regular deterioration in requirements of governance during the last 20 years, together with on fiscal and debt issues… ” and mentioned repeated last-minute, last-gasp resolutions of a rising debt merited a demotion from ‘AAA’ to ‘AA’.

Strike No 3 was Could 16, 2025. Moody’s, which had retained the best creditworthiness ranking for the US since 1917, couldn’t any longer, dropping it to ‘AA1’ due to a rising federal deficit that was 6.4 per cent in 2024 and will soar to 9 per cent by 2035.

Now, and let’s get this clear, all three scores are nonetheless very robust, and Moody’s expects the US to bounce again to ‘AAA’ within the close to future by both growing revenues or decreasing spending.

For context, India is rated a steady ‘BAA3’ by Moody’s and ‘BBB-‘ by Fitch and S&P.

Why Has This Occurred

As a result of the US is $36 trillion in debt. This debt has been rising yearly since 2002, in line with Treasury knowledge, and roughly a trillion {dollars} is added to it each three months.

As a result of successive US administrations have failed, for varied causes, to rein in debt ranges aggravated by yearly borrowings made vital due to a operating price range deficit.

As a result of, fairly merely, the US owes extra money than it makes and the annual borrowing to offset that shortfall means it now owes (curiosity included) a monstrous sum.

White Home Takes Goal At Moody’s

The White Home, unsurprisingly, rejected the scores minimize, calling the downgrade a “political determination” and slamming Mark Zandi, the chief economist at Moody’s analytics division.

“No person takes his ‘evaluation’ significantly. He has been confirmed flawed time and time once more,” Steven Cheung, a Trump spokesperson, mentioned.

Donald Trump beforehand argued that his financial agenda – based mostly on tax cuts, decreased laws, and sweeping tariffs – will carry extra manufacturing jobs and result in robust development.

‘Working An Economic system’ 101

Now, nearly each nation on the planet runs a price range deficit – i.e., it spends extra money than it makes – and, due to this fact, has to borrow and, due to this fact, has some debt due.

However the US’ debt ranges are among the many highest; as of 2025 there are solely a handful of nations that owe greater than they produce, i.e., their debt is over 100 per cent of the GDP.

April 2025 knowledge from the Worldwide Financial Fund-World Financial Discussion board positioned the US eighth – with 122.5 per cent – in a listing of 10 nations with the best public debt. And of the seven with increased ranges, one is an impoverished African nation and two are in a extreme financial disaster.

Borrowing in a disaster, like India throughout COVID, is comprehensible. The US, although, has borrowed extra for much less, together with to combat wars (Iraq and Afghanistan) and fund tax cuts for the wealthy.

So, nations operating a price range deficit borrow to maintain afloat after which need to pay again these debtors, which, within the US’ case, consists of an estimated $1 trillion from Japanese traders, $779 billion from the UK, and $765 billion from China. This works to about 25 per cent.

By the best way, nations holding these debt (and Canada has $426 billion) have mentioned they may leverage this in breaking excessive tariffs Donald Trump has slapped on their exports to the US.

As of March 2025, India holds $240 billion of US debt, in line with Treasury knowledge.

The overwhelming majority – round $15.2 trillion, or 42 per cent – of the debt is held internally.

India’s Debt Ranges

India’s exterior debt is round $718 billion in line with the Finance Ministry’s newest knowledge.

Which means India’s debt-to-GDP is round 80 per cent, putting it thirty first general. The purpose for Delhi is to carry that down by one share level yearly until it reaches 50 per cent.

In actual fact, the Reserve Financial institution final 12 months mentioned a ‘strategic realignment of presidency spending’ might result in a faster-than-expected decline of the debt-to-GDP ratio – to 73.4 per cent by 2030.

And who holds India’s debt? Effectively, just like the US, a majority of it’s held internally, i.e., personal people and business organisations. A 3rd is owned by world monetary establishments, just like the World Financial institution.

Considerably, not like the US, solely 16 per cent is owned by different nations, led by Japan with 11 per cent and Russia and Germany with two every.

And, additionally not like the US, India’s fiscal deficit is comparatively contained; within the price range offered in February 2025, Finance Minister Nirmala Sitharaman mentioned that determine was 4.8 per cent for FY25.

Bear in mind Additionally To Pay Again Money owed

The ‘debt’ problem is to generate income sufficient to run the nation AND pay debtors with curiosity, which is fiendishly onerous to start with and more durable as debt ranges (are pressured to) develop.

A great measure of how properly this problem is being met is family debt-to-GDP, which was round 73 per cent for the US in end-2024. India’s determine was round 40 per cent in that interval.

In greenback phrases, that is about $18 trillion for the US and almost $700 billion for India.

The rising family debt within the US – the common American owes round $105,000, principally in bank card payments, house mortgages, and private loans – is another excuse why Moody’s has joined S&P and Fitch in slicing Washington’s credit score scores.

And, in a merciless twist for People, a scores minimize will possible make issues worse, since main lending charges are tied to the yield on Treasury bonds, which means the extra the US authorities has to pay to borrow, the extra its individuals should additionally pay.

Consider your bank card invoice. Should you maintain charging the cardboard with out managing your debt ranges – i.e., paying off substantial quantities at times – after which the financial institution hikes the rate of interest, then the long run value of utilizing that card, i.e., the curiosity you pay on every quantity you cost, may even enhance. 

That ‘One Massive, Stunning Invoice’

And that is the place Donald Trump’s claims about slashing working prices and downsizing the civil service to ‘get monetary savings’ and jumpstarting home manufacturing to create extra jobs – by levying tariffs on imported items to pressure manufacturing to shift to the US – come into focus.

These ‘cost-cutting’ efforts, led by billionaire Elon Musk and his DOGE, or Division Of Authorities Effectivity, have shut down international assist to over 100 nations and a home client safety watchdog, which is able to save lower than one per cent of the full price range.

All informed, this slashing away will drop, Trump says, round $1 trillion from the price range.

However that’s not sufficient. In actual fact, CBS News in April mentioned the Trump administration had spent $200 billion in its first 100 days – greater than the primary 100 days of 9 of the previous 10 years.

And now Trump’s ‘One Massive, Stunning Invoice’- which extends tax cuts from his first time period, and can add almost $4 trillion to debt over the subsequent decade – has been handed.

The ‘One Massive, Stunning Invoice’ may even slash healthcare for 71 million low-income People.

Debt Default Prevented?

So does this all imply the US might really default on its debt, like Sri Lanka, Russia, and Ghana did in 2022, Greece in 2015, Ukraine in 1998-2000, and Russia once more in 1998?

The US has skirted this precipice typically, fairly often.

Since 1960 the US has raised its debt ceiling – the utmost quantity it may possibly legally borrow – a staggering 78 occasions to keep away from default. The present debt of $36 trillion has breached that, once more.

If the US authorities doesn’t re-raise its ceiling, for a 79th time, then sure, the US might default on its debt, triggering a probably extreme world financial disaster, once more.

What This Means

Within the quick time period, not a lot. For instance, Indian traders holding US bonds – long-term monetary devices issued by the federal government to borrow cash – are unlikely to unduly affected, as a result of the US stays a secure and robust funding.

If something, it’d show helpful as a result of a scores downgrade might make it dearer for the US to borrow cash, i.e., lenders might now demand increased rates of interest.

The affect vis-a-vis currencies could also be combined. A weaker greenback could also be excellent news for the rupee, and uncertainty within the American forex might imply traders search for alternatives overseas.

However traders use credit score scores to evaluate the chance profile of firms and governments after they elevate financing in debt capital markets. Typically, decrease scores = increased financing prices.