India’s economy seen stable even if tensions with Pakistan rise: Moody’s

New Delhi: India’s macroeconomic stability is likely to hold firm even if tensions with Pakistan escalate in the coming days, Moody’s Ratings said on Monday. 

"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. However, higher defence spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation," Moody's said in its report titled ‘Sovereign – South Asia’.

The global ratings agency noted that India’s economic fundamentals remain sound, supported by strong public investment and healthy private consumption.

"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," it added.

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Pakistan's growth

Moody’s Ratings cautioned that sustained tensions with India could undermine Pakistan’s growth and derail its fiscal consolidation efforts, setting back progress toward 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," it said.

"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," it added.

Tensions between India and Pakistan have escalated following a deadly militant attack in Jammu & Kashmir's Pahalgam on 22 April, which killed several tourists.

Diplomatic ties have rapidly deteriorated since then. India suspended the 1960 Indus Waters Treaty, prompting Pakistan to halt the 1972 Simla Agreement and close its airspace to Indian carriers.

The flare-up marks the latest in a series of recurring confrontations between the two nuclear-armed neighbours. The Pakistani administration has also accused India of planning an imminent military strike in retaliation.

To be sure, India and Pakistan have fought four wars—1947, 1965, 1971, and 1999—primarily over the disputed region of Kashmir.

Moody’s Ratings said its geopolitical risk assessment for India and Pakistan factors in persistent tensions that have occasionally triggered 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," it added.

Also Read: Terror strike throws blanket of gloom over Kashmir's tourism landscape