Tensions Rise, Trade Restricted: Moody’s Sees India Stable, Warns Of Setback For Pakistan's Economy

As geopolitical strains intensify between India and Pakistan, Moody’s Ratings has indicated that the ongoing hostilities are unlikely to cause any substantial disruption to India’s economy.

In a recent commentary titled 'Escalating Pakistan-India tensions would weigh on Pakistan's growth', the agency highlighted that India’s minimal trade exposure to Pakistan, less than 0.5 per cent of total exports in 2024, acts as a buffer against any significant fallout from the conflict, reported PTI.

India's economic resilience, according to Moody’s, is further reinforced by steady growth, robust public investments, and healthy consumer spending. “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,” the rating agency stated. However, it also warned that prolonged military tensions could put strain on India's fiscal consolidation due to a potential increase in defence expenditure.

Pakistan Faces Economic Strain and IMF Scrutiny

While India’s economy may largely remain shielded, the same cannot be said for its neighbour. Moody’s pointed out that a continued rise in hostilities would deal a serious blow to Pakistan’s growth momentum and derail its progress toward macroeconomic stability. “Sustained escalation in tensions with India would likely weigh on Pakistan's growth and hamper the government's ongoing fiscal consolidation,” the agency noted.

Pakistan, currently showing signs of improvement with declining inflation, gradual economic recovery, and rising forex reserves, could see this progress jeopardised if tensions persist. Concerns have also emerged over Pakistan’s access to foreign financing. “A persistent increase in tensions could also 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 said.

The timing is critical, as the IMF Executive Board is set to meet Pakistani officials on May 9 to review a fresh $1.3 billion loan under a climate resilience initiative, alongside an ongoing $7 billion bailout package.

The media agency pointed out that as per sources, India is expected to urge multilateral agencies, including the IMF, to reassess funding support extended to Islamabad.

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Diplomatic Fallout and Retaliatory Measures Escalate

Tensions have escalated sharply following the April 22 terror attack in Pahalgam, Jammu & Kashmir, which resulted in the death of 26 tourists. India has attributed the assault to five terrorists, including three Pakistani nationals, and vowed to take stringent action against those responsible. “Citing cross-border linkages to the April 22 attack, India has promised severe punishment to those involved in the strike,” the report said.

In the days following the attack, India has suspended the 1960 Indus Waters Treaty, halted diplomatic exchanges, shut down the Attari border crossing, and banned imports of goods linked to Pakistan. These included niche items such as Himalayan pink salt, figs, herbs, and a few chemicals. India also closed its ports to Pakistani ships and ceased mail exchanges. In retaliation, Pakistan ended the 1972 Simla Treaty, suspended bilateral trade, and shut its airspace to Indian carriers.

Global Reactions and Risk Assessments

The intensifying diplomatic rift has triggered international concern, with the US and the European Union urging both nations to show restraint while condemning the Pahalgam attack. Meanwhile, Moody’s has maintained its ‘Caa2’ rating on Pakistan, suggesting very high credit risk and poor debt quality, while India holds a ‘Baa3’ rating, considered the lowest investment-grade classification.

Moody’s geopolitical outlook incorporates periodic flare-ups between the two countries but rules out the likelihood of a full-scale conflict. “We assume that flare-ups will occur periodically, as they have (been) throughout the two sovereigns post-independence..., but...it will not lead to an outright, broad-based military conflict,” it said.

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