Moody’s Downgrades U.S. Credit Rating

Moody’s Investors Service, a leading global credit rating agency, downgraded the credit rating of the financially powerful United States last month. Despite this, there was no crash in global stock markets, nor did newspapers fill their columns with commentary. However, this development has dealt a blow to America’s unparalleled economic dominance and may signal the beginning of the end of that era. Here is an analysis in this context.

About a month and a half ago, on May 16, Moody’s Investors Service downgraded the U.S. credit rating from the highest Aaa to Aa1. The primary reason cited was the rapidly increasing U.S. government debt and the persistently growing fiscal deficit.

The U.S. now faces a debt mountain equal to 120% of its GDP. Rising deficits and debt both raise serious concerns about America’s economic health. Projections suggest that over the next ten years, the U.S. fiscal deficit could reach 9% of GDP. As a result, the cost of borrowing for the country may continue to rise, potentially eroding investor confidence.

This could bring a potential recession in the U.S. economy sooner than expected. Currently, the U.S. dollar holds its place as the world’s reserve currency, but these developments could weaken its dominance and global trade influence in the coming years. This will inevitably impact international trade and investment.

At present, the world is overshadowed by the threat of war. The ongoing Russia-Ukraine conflict and the recent Israeli attack on Iran could mark the onset of a third world war. Iran is unlikely to remain silent after this attack and is expected to retaliate, which could spark a larger conflict. In such a scenario, the global economy could spiral further into crisis or recession.

From India’s perspective, America’s economic superpower status makes it a key partner, with extensive trade relations. Therefore, this downgrade could have far-reaching consequences not just for India, but also for other developing countries and the global economy.

India, in particular, relies heavily on foreign investment and loans for infrastructure development. With the U.S. credit rating downgraded, India’s borrowing costs are likely to rise, making access to international capital markets more expensive. When any institution, company, or country faces a credit rating downgrade, it can have multiple consequences. For developing markets like India, capital inflows may slow, leading to currency depreciation, rising interest rates, and potentially slower economic growth.

India’s own credit rating is already below that of many developed economies. While the U.S. downgrade will not directly affect India’s rating, it presents several challenges for India’s efforts to improve its own standing in the global economy.

The “Atmanirbhar Bharat” (Self-Reliant India) initiative aims to strengthen the Indian economy. In this context, the U.S. downgrade could present new opportunities for India, as many countries may now consider investing in India. While these countries may exercise caution regarding U.S. investments, India’s robust economy could attract them. India offers diverse investment opportunities—not just in infrastructure, but also in manufacturing, IT, pharmaceuticals, and financial services—making it a likely beneficiary of rising global investment interest.

From this perspective, India’s economy is emerging on the global stage, with numerous growth opportunities. As the world’s most populous country, India’s expanding middle-class market is a major attraction for investors.

Globally, in recent years of instability and uncertainty, economic analysts may have missed the significance of America’s declining economic position. If we look at economic history, major changes often do not occur with a bang, but rather unfold quietly and inevitably, sometimes presenting themselves as crises.

Despite the downgrade of a major global economy’s credit rating, there have been no emergency meetings. The U.S. Federal Reserve has not reacted strongly, nor has there been a noticeable shift in investor confidence. Overall, neither America nor the world seems shaken by this event. However, the U.S. economic situation in recent years, the substantial tariffs imposed by President Donald Trump, and some inexplicable economic decisions have certainly undermined America’s economic dominance. This is a moment for self-reflection.

In the future, it is crucial to avoid making populist economic decisions just for electoral gains. While the U.S. may seem like an ally, it is important to remember that its global role sometimes involves supporting or appeasing adversaries. Many developing countries today are on the path of fiscal indiscipline. Brazil and South Africa, for example, have had to borrow at very high interest rates, weakening their economies. Even developed countries like Germany and Canada now have debt levels that are dangerously high compared to their GDP.

Although India’s economic situation is not as dire, this should be taken as a serious warning. Many Indian states, and sometimes the central government, have ignored fiscal discipline for the sake of populism. Therefore, rather than neglecting fiscal prudence, policymakers must focus on strengthening the economy in the near future—this is the key lesson from recent events.

(The author is a senior economic journalist based in Pune and a former bank director.)