India can absorb the heat, Pakistan’s economy can't handle, says Moody’s on rising tension

With diplomatic relations between India and Pakistan deteriorating rapidly after the April 22 terror attack in Pahalgam, global rating agency Moody’s has warned that any sustained escalation in tensions could severely undermine Pakistan’s already fragile economic stability.

The report, cited amid heightened geopolitical posturing, stated that a prolonged confrontation with India would weigh on Pakistan’s growth and jeopardise its fiscal consolidation goals. Moody’s cautioned that further flare-ups could impair access to external financing and put additional pressure on Pakistan’s foreign-exchange reserves — which, at just over $15 billion, remain far below what is required to meet external debt obligations in the coming years.

In contrast, India’s reserves are robust, exceeding $688 billion. The macroeconomic conditions in India, Moody’s noted, remain stable due to strong public investment and resilient private consumption, despite the possibility of higher defence spending slowing its fiscal consolidation.

While India suspended the Indus Waters Treaty and Pakistan retaliated by halting bilateral trade, air access, and withdrawing from the 1972 Simla Agreement, analysts stress that India’s economic exposure to Pakistan is negligible — less than 0.5% of India’s exports in 2024. As a result, even if tensions rise, Moody’s does not foresee any major disruption to India’s economic trajectory.

For Pakistan, however, the situation is far more precarious. After teetering on the edge of sovereign default in 2023, Pakistan secured a $3 billion IMF bailout and support from allies like China, Saudi Arabia, and the UAE. The country is still dependent on ongoing financial support. Last month, the IMF reached a staff-level agreement for a $1.3 billion climate resilience loan and a $1 billion disbursement under its $7 billion bailout.

Despite modest improvements in inflation and growth, Pakistan’s economy remains vulnerable, with nearly 50% of government revenue earmarked for interest payments and public debt at a staggering 70% of GDP.

A military conflict, even if contained, would be catastrophic. As Pakistan’s economy limps forward under IMF conditionalities and loan rollovers, another external shock — especially one triggered by escalating hostilities with India — could undo the fragile gains made in the past 18 months and plunge the country back to the brink.