On Monday, global credit agency Moody's announced that India's macroeconomic climate is likely to continue being sound even in case of rising tensions with Pakistan following the horrific act of terror committed at Pahalgam when 26 civilians were killed.
But in its report, the agency focused on the point that prolonged tension with India had the potential to hurt Pakistan severely by hampering its ongoing drive to stabilize its fiscal situation.
The report highlighted that any additional geopolitical tensions would constrain Pakistan's access to foreign financing, putting more pressure on its already weak foreign-exchange reserves. With reserves at barely more than $15 billion, Pakistan is in a serious position to service its external debt in the near term.
Conversely, India has a strong reserve base of more than $688 billion. Moody's said that India's macroeconomic prospects are stable, underpinned by solid public investment and resilient private consumption, though increasing defence expenditure may slow fiscal consolidation.
The report went on to add that India's macroeconomic conditions will continue to stay stable even as a result of continued localized tensions, courtesy its negligible economic engagement with Pakistan—less than 0.5% of total Indian exports during 2024. Though expanded defence expenditures could impact India's fiscal stance, the nation won't witness its economic activity in any significant disruptions as a consequence of such tensions.
Meanwhile, Pakistan is still in a weak economic position. Having been on the verge of a sovereign default in 2023, it had to be bailed out by a $3 billion IMF loan to stay afloat. The nation continues to be largely dependent on such financial assistance and is trying to arrange another $1.3 billion loan for climate resilience.
Moody's sees tensions between Pakistan and India lasting but not intensifying into all-out military action.
"Our view of the geopolitical risk environment for Pakistan and India captures a pattern of recurring tensions, sometimes eliciting ad hoc military reaction," the report stated. "We anticipate that this will repeat at intervals from time to time but that such events will not culminate in an extensive large-scale military war.".
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