Escalating Tensions with Pakistan Won’t Derail Indian Economy, Says Moody’s

Moody’s Ratings on Monday stated that India’s macroeconomic stability is expected to hold firm even if tensions with Pakistan escalate in the near future. In its latest report titled ‘Sovereign – South Asia’, the global ratings agency noted that India's limited economic linkages with Pakistan would shield its economy from any major disruption, even in the event of a sustained escalation.

"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 said.

The agency also reaffirmed that India’s economic fundamentals remain robust, 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 added.

Meanwhile, Moody’s cautioned that Pakistan's economic outlook remains more vulnerable in the face of escalating tensions. While recent trends showed improvement—such as rising growth, falling inflation, and increasing foreign exchange reserves—these gains could be threatened by further instability.

"Pakistan’s macroeconomic conditions have been improving amid continued progress in the IMF programme, but a persistent increase in tensions could impair Pakistan’s access to external financing and pressure its foreign exchange reserves, which remain well below what is required to meet its external debt payment needs for the next few years," Moody’s warned.

Tensions between the two nations intensified following a deadly militant attack in Jammu & Kashmir's Pahalgam on April 22, which killed several tourists. The diplomatic fallout has been swift, with India suspending the 1960 Indus Waters Treaty and Pakistan retaliating by pulling out of the 1972 Simla Agreement and closing its airspace to Indian aircraft.

The situation marks the latest chapter in the volatile relationship between the two nuclear-armed neighbours, who have fought four wars since 1947—largely over the Kashmir dispute. Pakistan has accused India of planning imminent military retaliation, further deepening concerns of escalation.

Moody’s clarified that its risk assessment for both countries accounts for such flare-ups, which it assumes will remain limited in scale. "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," it said.

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