Defence spend amid Pak tensions may hit India's fiscal strength: Moody's

Moody's Ratings says India's economy remains resilient despite Pak tensions, but increased defence expenditure could weigh on fiscal strength and delay consolidation

Escalating tensions will hit Pakistan's economy hard and impair the cash-strapped country’s access to external financing, in contrast to India which is expected to remain mostly unscathed, Moody’s Ratings said on Monday.

 

In September last year, Pakistan secured a $7 billion bailout programme from the IMF as the country continued to struggle to bring its economy back on the rails. Its foreign exchange reserves shrunk to $15.25 billion last month, which is below what is required to meet its external debt payment needs for the next few years.

 

Soon after the terror attack in Pahalgam, which claimed the lives of 26 tourists, India asked global multilateral agencies, including the IMF, to reconsider the loans provided to Pakistan.

 

 

The ratings agency said in its report 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.

 

“Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses,” the agency said.

 

It said that sustained escalation in tensions with India are likely to weigh on Pakistan’s growth and hamper the country’s ongoing fiscal consolidation, setting back its progress in achieving macroeconomic stability.

 

Comparatively, Moody’s said that the macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth amid strong public investment and healthy private consumption.

 

Following the April 22 attack, India suspended the Indus Waters Treaty of 1960. In response, Pakistan suspended the 1972 Simla peace treaty with India.

 

Moody’s Ratings expected that flare-ups will occur periodically, but they will not lead to an outright, broad-based military conflict.

 

In its April update, Moody’s Ratings had projected the Indian economy to grow in the band of 5.5 to 6.5 per cent during the calendar year 2025, a shade lower than its February projection of 6.6 per cent as the ratings agency factored in the “unpredictable” US tariffs which it said will hit business planning, stall investment and “raise the risk of a global economic recession”.

 

The agency’s report on ‘Tariffs and trade turmoil’ said that the tariffs will weigh on global trade activity, reduce demand for regional exports and undermine business confidence, leading to reduced investment in the Asia-Pacific region.