Rising Defence Spending Amid Pakistan Tensions Could Weaken India’s Fiscal Strength: Moody’s
Tensions with Pakistan are not expected to cause any major disruptions to India’s economic activity, but higher defence spending could weigh on India’s fiscal strength and slow fiscal consolidation, Moody’s Ratings said on Monday.
“Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses,” the ratings agency said.
It added that a sustained escalation in tensions with India is likely to weigh on Pakistan’s growth and hamper the country’s ongoing fiscal consolidation, setting back its progress in achieving macroeconomic stability.
Comparatively, Moody’s said macroeconomic conditions in India would remain stable, bolstered by moderating but still high levels of growth, strong public investment, and healthy private consumption.
The ratings agency’s report comes amid increasing tensions between India and Pakistan over the Pahalgam terror attack. Following the attack, India suspended the Indus Waters Treaty of 1960. In response, Pakistan suspended the 1972 Simla peace treaty with India, halted bilateral trade, and closed its airspace to Indian airlines.
Moody’s Ratings expects that flare-ups will occur periodically, but will not lead to an outright, broad-based military conflict.
It added that a persistent increase in tensions could impair Pakistan’s access to external financing and pressure its foreign exchange reserves, which remain well below the level required to meet its external debt obligations over the next few years.
In its April update, Moody’s Ratings projected the Indian economy to grow in the range of 5.5–6.5 per cent during calendar year 2025 — a shade lower than its February projection of 6.6 per cent — as the ratings agency factored in the “unpredictable” US tariffs, which it said would hit business planning, stall investment, and “raise the risk of a global economic recession”.
The agency’s report on ‘Tariffs and Trade Turmoil’ said the tariffs would weigh on global trade activity, reduce demand for regional exports, and undermine business confidence, leading to reduced investment in the Asia-Pacific region.
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