Sustained escalation of tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back its progress in achieving macroeconomic stability, according to Moody’s.

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, the rating agency said.

In comparison, 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, said Moody’s. “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 (less than 0.5% of India's total exports in 2024),” the rating agency said. However, higher defence spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation, Moody’s cautioned.

On April 30, Pakistan information minister Attaullah Tarar claimed that India was planning an imminent military strike on the neighbouring country in retaliation for the April 22 deadly terrorist attack on tourists in Jammu & Kashmir. Following the attack, India and Pakistan's diplomatic relations have deteriorated. 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.

“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 Moody’s.