War will hurt Pak economy, India’s will remain stable: Moody’s

In a May 5 report, Moody’s Ratings has confirmed the world’s worst kept secret. Pakistan is in no position to engage in a conflict and the continuing suspense over India’s response to the terrorist attack at Pahalgam is draining its resources and keeping its military and government on tenterhooks.

”Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability,” the Moody’s report has said. The staid language hides the warning embedded in the comment that Pakistan’s economy will be seriously stressed in a conflict.

Pakistan watchers believe that a conflict or war with India that goes on for a length of time will impose severe pressures on military capacities and also force the country to divert resources.

Pakistan Army chief Gen Asim Munir’s act of sanctioning a grave act of terrorism might have been intended to take the gaze of internal setbacks and bring Kashmir back to the international stage, but it might be a shortsighted move as tensions with India have ratcheted up just when things were improving.

“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,” the reports states.

“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 report concludes.

On the other hand, 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. “In a scenario of sustained escalation in localized tensions, we do not expect major disruptions to India’s economic activity because its has minimal economic relations with Pakistan (less than 0.5% of India’s total exports in 2024),” Moody’s has said.

India could have to incur higher defence spending and that might impact fiscal consolidation. Bu this is to be expected in a conflict situation and India’s economy has the strength to sustain the higher spending and not lose momentum.

The report noted a Pakistan minister’s comment about an imminent military strike as retaliation for the 22 April deadly attack. “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,” the report states.

“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,” the report notes.

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