Tensions With Pakistan To Hit India’s GDP Growth? Moody’s Sounds Alarm, Cuts GDP Growth Forecast For 2025

Flagging concern about rising geopolitical uncertainty and international trade restrictions, Moody's on Tuesday cut India's GDP growth projection for 2025 down to 6.3% from its earlier forecast of 6.5%. The international credit rating agency had also raised concerns about India-Pakistan relations and added that sustained tensions between the two countries may lead to potential downward risks for India's GDP growth forecast, reported Economic Times on Tuesday.

Potential Impact Of US Policy Uncertainty

Persistent US policy uncertainty can lead to a broader geopolitical uncertainty, trade tensions, and financial market volatility, reported ET, citing Moody's Global Macro Outlook 2025-25.

Global investors, analysts, and investment houses are assessing the situation and recalibrating their strategy to deal with heightened volatility. The recent surge in India-Pakistan tensions is likely to emerge as a potential drag on India's growth prospects.

India-Pakistan tensions: Potential Impact on Islamabad

Apart from highlighting the potential risk of heightened tensions on India's economic growth, Moody's underlined that India-Pakistan tensions could adversely affect Islamabad's ability to access financing and pressure its foreign-exchange reserves, reported news agency ANI citing Moody's report on Monday.

Pakistan's foreign exchange reserves remain well below what is required to meet its external debt payment needs for the next few years, the global rating agency noted in a report on Monday.In India, the macroeconomic conditions are stable, bolstered by moderating but still high levels of growth and strong public investment and healthy private consumption, Moody's said in the report.

In a scenario of sustained escalation in localised tensions between the countries, Moody's does not expect major disruptions to India's economic activity because it has minimal economic relations with Pakistan. Less than 0.5 per cent of India's total exports in 2024 was to Pakistan.

Higher Defence Spending May Potentially Impact India's Fiscal Strength

While eliminating the risk of wider disruptions to India's economic activity due to ongoing tensions with neighbouring country, Moody's mentioned that a higher defence sending could dent its economic growth and fiscal consolidation, as per the news agency.

"Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times led to Limited military response," ANI quoted Moody's.

."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," it added.

India-Pakistan Tensions

There has been a significant increase in diplomatic tensions between India and Pakistan after a group of terrorists killed 26 individuals and injured many at a tourist location in Jammu and Kashmir's Pahalgam. In a strong diplomatic reaction to the terrorist attack, India suspended its Indus-Water treaty with Pakistan and cancelled all kinds of visas for Pakistani nationals.

Pakistan in retaliation, shut its airspace for Indian aircraft and even cancelled trade with India. Amid heightened tensions between the two countries, Indian government has announced a nationwide civil defence mock drill on May 7, 2025. The Ministry of Home Affairs has instructed 244 districts to conduct exercises which will include electricity blackouts, air raid sirens, evacuation drills, and public training sessions.