Should the current armed hostilities between India and Pakistan lead to a prolonged conflict, Pakistan will find it significantly more difficult to sustain it from an economic and financial perspective. India’s economy is about ten times larger than Pakistan if GDP is converted at purchasing-power exchange rates, and its structural economic growth rate is about twice as large. This provides India’s with a far larger economic base and economic resources to support a prolonged armed conflict.
> India is one of the fastest-growing emerging economies in the world with real GDP projected to average 6-7% in 2025-6, compared to IMF projections for Pakistan of 3-4%. The economic outlook for Pakistan is also much more fragile given Pakistan’s more fragile financial position.
> India’s economy is about 10 times larger than Pakistan if GDP is converted at purchasing-power exchange rates. India’s gross domestic product is set to reach $17.6 tr in 2025, compared to Pakistan’s $1.7 tr. By comparison, U.S. GDP at PPP exchange rates is projected to reach $40 tr.
Although both Pakistan and India have high levels of government debt, India’s is much better positioned to raise additional revenue or increase debt issuance than Pakistan, given it far greater financial flexibility in the event of a prolonged conflict. India’s much larger size also means that one percentage point increase in fiscal deficits allows India to finance ten times as much expenditure as Pakistan. Moreover, Pakistan has a narrower revenue and tax base, and its fiscal deficit is tangibly larger than India’s. India also benefits from higher structural economic growth, which provides it with greater spending and revenue flexibility. Finally, most India’s government debt is held by residents and is denominated in local currency, which significantly limits financial risks.
> India’s government debt exceeds 80% of GDP, which is very high by emerging market standards. The fiscal deficit is projected at a little less than 5% of GDP. Although Pakistan’s government debt ratio is lower, amounting to only 70% of GDP, the financial risks attaching to it are greater. The deficit is projected at 6-7% of GDP. Pakistan’s tax base is also smaller than India’s. India collects more than 20% of GDP of revenue, out of which more than 18% of GDP consist of taxes. Pakistan collects 15% of GDP, out of which 12-13% of GDP are tax revenues.
> Pakistan’s public sector is also far more dependent on external financing than India’s with Islamabad’s external amortization accounting for 50% of the country’s external financial needs in 2025 or 2% of GDP. By comparison, India’s government foreign-currency financing needs amount to a mere 0.3% of GDP. India also has more ready access to international private capital markets.
The picture is similar in terms of the two economies’ external financial position. Pakistan’s greater dependence on official financing also makes it more sensitive to foreign financial pressure, including pressure from its external creditors. This may lead Islamabad to face increased diplomatic pressure from its lenders, who are not to keen to provide financial support which, instead of going toward macro-stabilization, is spent on a costly armed conflict. In case of a prolonged conflict, Pakistan’s economic and financial outlook would like deteriorate to a point where Pakistan’s IMF program moves off-track. This would to a sharp decline in multilateral and likely in official bilateral lending, which Pakistan is highly dependent on. India faces far fewer external financial pressure points on account of its far more manageable external financing needs and its ability to tap private sector financing, if necessary.
> India’s international financial position is quite manageable, Pakistan’s is very fragile. This is not surprising given that Pakistan is under IMF supervision considering significant balance-of-payments needs. Pakistan’s external financial position is highly dependent on multilateral and official bilateral financing as well as continued compliance with the IMF program. It was only the new government’s willingness to sign up to a new IMF program following last year’s election that helped Pakistan avoid a broader financial crisis. However, Pakistan foreign-exchange reserves are much lower than India’s in terms of import cover (and external financing requirements). Pakistani FX reserves cover only two months’ worth of imports, compared to India eight months.
> India’s external debt is less than 20% of GDP, compared to 30% of GDP. As such, the difference is not that significant. About 40% of Pakistan’s balance-of-payments financing needs are covered by official borrowing, which shows how dependent Pakistan is on the continued goodwill of official lenders. The Pakistani government, as opposed to India’s, has no access to international capital markets due to heightened sovereign credit risk. Pakistan’s credit rating is in the CCC range, compared to India’s, which is in the BBB range. India’s investment-trade compared to Pakistan sub-investment grade rating would allow it to access international capital markets if necessary. Pakistan does not have that option. India’s external financing flexibility is far greater than Pakistan’s.