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

NDTV

23-05-2025

The US' federal debt is a staggering $36 trillion and its debt-to-GDP ratio is among the highest in the world; as of 2025 only seven countries owed more money than they earned.
In baseball, that most quintessential of American sports, three strikes mean you're out. And that, in a nutshell, is what has happened to the United States' once-perfect 'AAA' credit rating.
Strike No 1 was August 5, 2011. S&P Global called 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 "steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters... " and said repeated last-minute, last-gasp resolutions of a growing debt merited a demotion from 'AAA' to 'AA'.
Strike No 3 was May 16, 2025. Moody's, which had retained the highest creditworthiness rating for the United States since 1917, could not any longer, dropping it to 'AA1' because of a growing federal deficit that was 6.4 per cent in 2024 and could jump to nine per cent by 2035.
Now, and let's get this clear, all three ratings are still very strong, and Moody's expects the US to bounce back to 'AAA' in the near future by either increasing revenues or reducing spending.
For context, India is rated a stable 'BAA3' by Moody's and 'BBB-' by Fitch and S&P.
Why Has This Happened
Because the US is $36 trillion in debt. This debt has been growing every year since 2002, according to Treasury data, and roughly a trillion dollars is added to it every three months.
Because successive US administrations have failed, for various reasons, to rein in debt levels aggravated by yearly borrowings made necessary because of a running budget deficit.
Because, quite simply, the US owes more money than it makes and the annual borrowing to offset that shortfall means it now owes (interest included) a monstrous sum.
White House Takes Aim At Moody's
The White House, unsurprisingly, rejected the ratings cut, calling the downgrade a "political decision" and slamming Mark Zandi, the chief economist at Moody's analytics division.
"Nobody takes his 'analysis' seriously. He has been proven wrong time and time again," Steven Cheung, a Trump spokesperson, said. The connection between Mr Zandi and the cut is unclear.
Donald Trump previously argued his economic agenda, based on tax cuts, reduced regulations, and sweeping tariffs will bring more manufacturing jobs and lead to strong growth.
'Running An Economy' 101
Now, almost every country in the world runs a budget deficit - i.e., it spends more money than it makes - and, therefore, has to borrow and, therefore, has some debt due.
But the US' debt levels, though, are among the highest; as of 2025 there were only a handful of countries that owed more than they produced, i.e., their debt was over 100 per cent of the GDP.
April 2025 data from the International Monetary Fund-World Economic Forum placed the US eighth - with 122.5 per cent - in a list of 10 nations with the highest public debt. And of the seven with higher levels of debt, one is an impoverished African nation and two are in a severe crisis.
Borrowing in a crisis, like India during COVID, is understandable. The US, though, has borrowed more for less, including to fight wars (Iraq and Afghanistan) and fund tax cuts for the rich.
Countries running a budget deficit borrow to keep afloat and then have to pay back those borrowers, which, in the US' case, includes an estimated $1 trillion from Japanese investors, $779 billion from the UK, and $765 billion from China. This works to about 25 per cent.
By the way, countries holding these debt (and Canada has $426 billion) have said they will leverage this in breaking high tariffs Donald Trump has slapped on their exports to the US.
As of March 2025, India holds $240 billion of US debt, according to Treasury data.
The vast majority - around $15.2 trillion, or 42 per cent - of the debt is held internally.
India's Debt Levels
India's external debt is around $718 billion according to the Finance Ministry's latest data.
That means India's debt-to-GDP is around 80 per cent, placing it 31st overall. The goal for Delhi is to bring that down by one percentage point every year till it reaches 50 per cent.
In fact, the Reserve Bank last year said a 'strategic realignment of government spending' could lead to a faster-than-expected decline of the debt-to-GDP ratio - to 73.4 per cent by 2030.
And who holds India's debt? Well, like the US, a majority of it is held internally, i.e., private individuals and commercial organisations. A third is owned by global financial institutions.
Significantly, unlike the US, only 16 per cent is owned by other nations, led by Japan with 11 per cent and Russia and Germany with two per cent each.
And, also unlike the US, India's fiscal deficit is relatively contained; in the budget presented in February 2025, Finance Minister Nirmala Sitharaman said that figure was 4.8 per cent for FY25.
Remember Also To Pay Back Debts
The 'debt' challenge is to generate revenue enough to run the country AND pay debtors with interest, which is fiendishly hard to begin with and harder as debt levels (are forced to) grow.
A good measure of how well this challenge is being met is household debt-to-GDP, which was around 73 per cent for the US in end-2024. India's figure was around 40 per cent in that period.
In dollar terms, that's about $18 trillion for the US and nearly $700 billion for India.
The growing household debt in the US is another reason why the major ratings agency have
That 'One Big, Beautiful Bill'
And this is where Donald Trump's claims about slashing operating costs and downsizing the civil service to 'save money' and jumpstarting domestic manufacturing to create more jobs - by levying tariffs on imported goods to force production to shift to the US - come into focus.
These 'cost-cutting' efforts, led by billionaire Elon Musk and his DOGE, or Department Of Government Efficiency, have shut down foreign aid to over 100 countries and a domestic consumer protection watchdog, which will save less than one per cent of the total budget.
All told, this slashing away will drop, Trump says, around $1 trillion from the budget.
But that is not enough. In fact, CBS News in April said the Trump administration had spent $200 billion in its first 100 days - more than the first 100 days of nine of the past 10 years.
And now Trump's 'One Big, Beautiful Bill'- which extends tax cuts from his first term, and will add nearly $4 trillion to debt over the next decade - has been passed.
The 'One Big, Beautiful Bill' will also slash healthcare for 71 million low-income Americans.
Debt Default Avoided?
So does this all mean the US could actually default on its debt, like Sri Lanka, Russia, and Ghana did in 2022, Greece in 2015, Ukraine in 1998-2000, and Russia again in 1998?
The United States has skirted this precipice often, very often.
Since 1960 the US has raised its debt ceiling - the maximum amount it can legally borrow - a staggering 78 times to avoid default. The current debt of $36 trillion has breached that, again.
If the US government does not re-raise its ceiling, for a 79th time, then yes, the United States could default on its debt, triggering a potentially severe global economic crisis, again.
What This Means
In the short term, not much. For example, Indian investors holding US bonds - long-term financial instruments issued by the government to borrow money - are unlikely to unduly affected, because the United States remains a safe and strong investment.
If anything, it might prove beneficial because a ratings downgrade could make it more expensive for the US to borrow money, i.e., lenders may now demand higher interest rates.
The impact vis-a-vis currencies may be mixed. A weaker dollar may be good news for the rupee, and uncertainty in the American currency may mean investors look for opportunities abroad.
But investors use credit ratings to assess the risk profile of companies and governments when they raise financing in debt capital markets. Generally, lower ratings = higher financing costs.