India's macro conditions seen stable even if Pakistan tensions rise: Moody's

India's macro conditions seen stable even if Pakistan tensions rise: Moody's

Global ratings agency Moody’s on May 5 said it sees India's macroeconomic conditions to be stable even if tensions with Pakistan rise after the terror attack in J&K's Pahalgam.

The April 22 incident, allegedly executed by Pakistan-backed militants targeting tourists in the Baisaran meadow of Pahalgam, has prompted a series of retaliatory moves by India. 26 tourists died due to the attack.

India suspended the Indus Waters Treaty of 1960, which could severely reduce Pakistan’s water supply. In response, Pakistan suspended the 1972 Simla peace treaty with India, halted bilateral trade and closed its airspace to Indian airlines.

Sustained escalation in tensions with India would likely hit Pakistan’s economy and hamper the government’s ongoing fiscal consolidation, said Moody's.

"Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability. Pakistan’s macroeconomic conditions have been improving, with growth gradually rising, inflation declining and foreign-exchange reserves increasing amid continued progress in the IMF programme. 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," said Moody's.

The ratings agency said it comparatively sees India's macroeconomic conditions to be stable but warned that higher defence spending would potentially weigh on India's fiscal strength.

"Comparatively, 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. In a scenario of sustained escalation in localized tensions, we do not expect major disruptions to India's economic activity because it has minimal economic relations with Pakistan (less than 0.5% of India's total exports in 2024). However, higher defence spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation," it said.

Moody's said it's assuming periodic India-Pakistan flare-ups but not outright conflict.

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