Economic Impact of Tensions between India and Pakistan

The escalating tensions between India and Pakistan are expected to have contrasting impacts on their respective economies, as outlined by Moody’s Ratings.

Pakistan's Economic Challenges

• Bailout Program: Pakistan secured a $7 billion bailout from the IMF in September last year to stabilize its struggling economy. 
• Foreign Reserves: As of the latest report, Pakistan's foreign exchange reserves have dwindled to $15.25 billion, insufficient to meet its external debt obligations in the coming years. 
• Impact of Tensions: Ongoing tensions, particularly after the Pahalgam attack, could further hinder Pakistan’s economic growth and fiscal consolidation efforts. 

India's Economic Stability

• Limited Disruption: Despite heightened tensions, India’s economic activity is predicted to remain largely unaffected, although there may be an increase in defense spending affecting fiscal strength. 
• Macroeconomic Stability: India is expected to maintain stable macroeconomic conditions with robust public investment and private consumption. 
• Growth Projections: The Indian economy is projected to grow between 5.5 to 6.5 percent in 2025, slightly lower due to potential impacts from unpredictable US tariffs. 

Geopolitical and Trade Considerations

• Water Treaty Suspensions: Post the April 22 attack, India suspended the Indus Waters Treaty, prompting Pakistan to suspend the 1972 Simla peace treaty. 
• Global Trade Concerns: Moody’s highlighted global trade concerns, indicating that tariffs could reduce trade activity, affect regional exports, and lower business confidence, specifically in the Asia-Pacific region. 

Conclusion

While periodic flare-ups are expected, a large-scale military conflict is unlikely. However, the economic impact will be more severe for Pakistan compared to India, which is poised to sustain its economic stability despite geopolitical challenges.