India-Pakistan tensions could strain fiscal deficit if conflict escalates

Economists say India's fiscal deficit may widen if tensions with Pakistan persist, although the broader economic impact is expected to be limited if conflict remains contained

Any further escalation in the India-Pakistan conflict—following strikes on terrorist camps in Pakistan early Wednesday—could strain India’s fiscal deficit, particularly if tensions persist, economists have cautioned. However, they also noted that if the situation remains contained, the broader economic impact is expected to be limited.

 

“On the fiscal side, there could be a diversion of resources at the expense of capital expenditure. Higher fiscal deficit, however, would not make a material difference to fiscal prudence,” an economist at a public sector bank said.

 

The government has set a target of bringing down the fiscal deficit to 4.4 per cent of GDP in FY26 from the revised 4.8 per cent of GDP in financial year (2024-2025) FY25 and bring down the debt-to-GDP ratio to 50 per cent by FY31 with one percentage point deviation on either side.

 

Economists believe, if things remain contained, then no major impact on the economy is likely.  

 

“We have had such episodes in the past as well in response to unwanted incursions on Indian soil in the past ten years. They have not impacted as long as such incidents remain contained,” a senior economist at a research firm said.

 

Moody’s Ratings, on Monday had said that tensions with Pakistan are not expected to cause any major disruptions to India’s economic activity but higher defence spending would potentially weigh on its fiscal strength and slow its fiscal consolidation. Moody’s Ratings expected that flare-ups will occur periodically, but they will not lead to an outright, broad-based military conflict. 

 

The Budget for FY26 allocated ₹6.81 trillion to the Ministry of Defence, reflecting a 6.26 per cent increase over the Revised Estimate of FY25 and a 9.53 per cent rise compared to the Budget Estimate of FY25.

 

It accounts for 13.45 per cent of the overall FY26 national budget, the highest among ministries, and represents 1.91 per cent of the GDP.

 

While economists feel that developments have to be monitored over the next few days, if tensions escalate, it could cast a shadow on private capital expenditure.

 

“The stock markets have factored it. We have to see what kind of retaliation happens. Additional expenditure may boost the GDP, though it would not be good for the fiscal deficit,” another economist at a consultancy firm said.

 

Besides fiscal deficit, experts cautioned that artificial scarcity leading to price rise at a time when food inflation has begun to see a decline is also a possibility if the conflict deepens.

 

“At a time when India has been in the limelight with many things going in its favour, this could derail the sentiment. Government is taking on a lot more than it had factored in,” the economist quoted above added.