How Rising Tensions Between India and Pakistan Could Impact Their Economies
Economic Implications of India-Pakistan Tensions
New Delhi: According to Moody's Ratings, the ongoing tensions between India and Pakistan are unlikely to cause significant economic disruption in India. However, they may pose challenges for Pakistan, particularly affecting its foreign exchange reserves and overall economic growth.
In a report titled 'Escalating Pakistan-India tensions would weigh on Pakistan's growth', Moody's noted that India's economic ties with Pakistan are minimal, accounting for less than 0.5% of India's total exports projected for 2024.
Following a tragic incident on April 22, where 26 individuals lost their lives due to a terrorist attack in Pahalgam, Jammu & Kashmir, India has identified five terrorists involved, including three from Pakistan, and has vowed to take action against them.
Moody's emphasized that ongoing tensions with India could hinder Pakistan's economic growth and complicate its fiscal consolidation efforts, ultimately affecting its journey towards macroeconomic stability.
Despite some improvements in Pakistan's economic conditions, including rising growth and declining inflation, the report warns that sustained tensions could limit Pakistan's access to external financing and put pressure on its foreign exchange reserves, which are currently insufficient to meet upcoming external debt obligations.
The International Monetary Fund (IMF) is set to meet with Pakistani officials on May 9 to discuss a new USD 1.3 billion funding arrangement as part of its climate resilience loan program, alongside an ongoing USD 7 billion bailout package.
India is reportedly urging global financial institutions, including the IMF, to reassess the financial assistance provided to Pakistan.
Moody's predicts that India's economic landscape will remain stable, supported by strong public investment and robust private consumption, despite potential increases in defense spending that could affect fiscal strength.
The agency's geopolitical risk assessment indicates that while tensions may lead to localized flare-ups, they are not expected to escalate into a full-scale military conflict.
Moody's has assigned a 'Caa2' rating to Pakistan, indicating a high risk of default, while India holds a 'Baa3' rating, the lowest within the investment-grade category.
In light of the April 22 attack, India has vowed to impose severe consequences on those responsible, leading to a deterioration in diplomatic relations between the two nations.
India has taken several punitive measures, including suspending the Indus Waters Treaty of 1960, which could significantly impact Pakistan's water supply, and halting trade and diplomatic engagements.
In retaliation, Pakistan has suspended the 1972 Simla peace treaty, ceased bilateral trade, and closed its airspace to Indian flights.
Recently, India has banned imports from Pakistan and halted mail exchanges, further escalating tensions.
Global powers, including the United States and the European Union, have urged both nations to de-escalate the situation while condemning the terrorist attack.
In the period from April to January 2024-25, India's exports to Pakistan amounted to USD 447.65 million, while imports were a mere USD 0.42 million, primarily consisting of niche products.