Global credit ratings agency Moody’s stated on Monday that India’s macroeconomic outlook remains stable, even in the face of rising tensions with Pakistan following the horrific terror attack in Pahalgam that resulted in the death of 26 civilians.
In contrast, Moody’s warned that any sustained escalation of hostilities with India would have adverse consequences for Pakistan’s already fragile economy. The report emphasized that such a scenario could undermine Pakistan’s efforts toward fiscal consolidation and exacerbate the country’s ongoing financial vulnerabilities.
The agency highlighted that as geopolitical tensions increase, Pakistan could face further obstacles in accessing external financing. This could intensify the strain on its foreign-exchange reserves, which currently stand at just over $15 billion—an amount significantly below what is needed to meet the country’s external debt commitments in the coming years.
Meanwhile, India is in a far stronger position. According to Moody’s, the country has foreign exchange reserves exceeding $688 billion, providing a considerable buffer against economic shocks. The report noted that India’s macroeconomic conditions continue to be supported by strong public investment and resilient private consumption, helping maintain overall stability. Although higher defence spending may slow down fiscal consolidation, the broader economic fundamentals remain intact.
The report further elaborated that India is likely to experience limited economic impact from rising tensions with Pakistan, given the minimal trade relations between the two countries. As of 2024, less than 0.5 percent of India’s total exports were directed to Pakistan.
“In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India’s economic activity because it has minimal economic relations with Pakistan. However, higher defence spending would potentially weigh on India’s fiscal strength and slow its fiscal consolidation,” Moody’s observed.
Pakistan, on the other hand, continues to grapple with severe financial pressures. The report recalled that the country narrowly avoided a sovereign default in 2023 after securing a $3 billion loan from the International Monetary Fund (IMF). Despite this, Pakistan remains heavily reliant on international assistance and is currently attempting to obtain an additional $1.3 billion loan aimed at enhancing climate resilience.
While acknowledging the risk of flare-ups between the two nations, Moody’s downplayed the likelihood of a full-scale war. The agency indicated that its geopolitical risk outlook for India and Pakistan factors in recurring tensions, which have occasionally resulted in limited military responses but not large-scale armed conflict.
“Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses. We assume that flare-ups will occur periodically, as they have throughout the two sovereigns’ post-independence history, but that they will not lead to an outright, broad-based military conflict,” the report stated.
