Rising India-Pak tensions could hurt Pakistan’s economy: Moody's

Global credit rating agency Moody’s has warned that a sustained rise in geopolitical tensions with India could significantly hinder Pakistan’s economic growth and efforts toward fiscal recovery.

In contrast, India is expected to weather the situation with relative macroeconomic stability.

In a report released Monday, Moody’s highlighted that Pakistan’s economy remains vulnerable to prolonged conflict scenarios. Heightened tensions could derail Islamabad’s fiscal consolidation plans and stall progress toward achieving broader economic stability.

Meanwhile, India’s limited economic ties with Pakistan and strong domestic fundamentals are expected to shield it from major disruptions, even if the diplomatic strain intensifies. The agency noted that India’s economic outlook continues to benefit from high, though moderating, growth, robust public investment, and resilient consumer demand.

Moody’s estimates India’s GDP growth at 6.5% for FY2024–25, with the government targeting a fiscal deficit of 4.4% and planning to reduce the debt-to-GDP ratio from 57.1% in FY25 to 50% by FY31 under a new annual debt framework starting FY27.

Currently, India holds a Baa3 rating with a stable outlook, while Pakistan’s rating stands at Caa2 with a positive outlook - deep in speculative-grade territory.

The latest round of tensions stems from a deadly attack on tourists in Jammu and Kashmir on April 22, which India blames on cross-border elements. Pakistan has denied involvement. In response, India suspended the 1960 Indus Waters Treaty, prompting Pakistan to shelve the 1972 Simla Agreement and close its airspace to Indian commercial flights.