India’s Economic Stability Unshaken Amid Rising Tensions With Pakistan: Moody’s

India’s macroeconomic stability is expected to remain intact even if geopolitical tensions with Pakistan continue to escalate, global ratings agency Moody’s said in a report released on Monday.

In its latest publication, ‘Sovereign – South Asia’, Moody’s emphasised that India’s limited economic engagement with Pakistan reduces the likelihood of major economic disruption.

“In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India’s economic activity,” the report stated.

Fiscal Pressures From Defence Spending

However, Moody’s warned that increased military spending could place added pressure on India’s public finances.

“Higher defence spending would potentially weigh on India’s fiscal strength and slow its fiscal consolidation,” it noted, highlighting a potential challenge despite India’s otherwise robust fiscal framework.

The agency underlined India’s sound economic fundamentals, supported by strong public investment and resilient private consumption.

“Comparatively, the macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth,” it said.

Pakistan Faces Heightened Vulnerabilities

In contrast, the report cast a more cautious outlook on Pakistan. Moody’s observed that persistent tensions could jeopardise the country’s fragile economic recovery and fiscal consolidation.

“Pakistan’s macroeconomic conditions have been improving, with growth gradually rising, inflation declining and foreign exchange reserves increasing,” it acknowledged.

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However, it warned that continued conflict could derail this progress.

“A persistent increase in tensions could also impair Pakistan’s access to external financing and pressure its foreign exchange reserves, which remain well below the required level to meet external debt payments,” Moody’s added.

Rising Geopolitical Strain

Tensions between India and Pakistan have surged following the deadly 22 April terror attack in Pahalgam, Jammu & Kashmir, which resulted in multiple civilian casualties.

In response, India suspended the 1960 Indus Waters Treaty, prompting Pakistan to withdraw from the 1972 Simla Agreement and close its airspace to Indian aircraft.

This escalation is the latest in a pattern of recurring friction between the nuclear-armed neighbours, who have fought four wars—1947, 1965, 1971, and 1999—primarily over Kashmir.

The Pakistani government has further accused India of planning imminent military retaliation.

Geopolitical Risks Factored In

Moody’s concluded that it already incorporates periodic flare-ups into its geopolitical risk assessments for both countries.

“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.

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