Fortress India, Fragile Pakistan: Defense Plays and Debt Risks in South Asia

The India-Pakistan rivalry has long defined South Asia’s geopolitics, but its fiscal implications are now reshaping investment strategies. While India’s defense-driven infrastructure boom and fiscal discipline create opportunities, Pakistan’s debt crisis and IMF dependency pose risks for global capital. For investors, the calculus is clear: overweight India’s equity markets and underweight exposure to Pakistan’s bonds.

India’s Fiscal Resilience Fuels Defense Growth

India’s 2025 fiscal framework balances ambition with austerity. The central government’s debt-to-GDP ratio is projected to dip to 56.1% by March 2026—a disciplined glide path from its 2024 peak of 57.1%—even as it spends aggressively on defense. The 2024-25 defense budget surged 9.5% to ₹6.8 trillion ($79 billion), or 1.9% of GDP, prioritizing border infrastructure and domestic procurement. This spending isn’t just about deterrence; it’s an economic engine.

• Make in India’s Payoff: The ₹1.1 trillion allocated to domestic defense production (75% of capital spending) is fueling companies like Tata Advanced Systems (aircraft manufacturing) and Bharat Electronics (radar systems).
• Geopolitical Multiplier: The Border Roads Organization’s 30% budget boost funds projects like the Nyoma airfield in Ladakh, enhancing military logistics while creating jobs in remote regions.

Yet India’s fiscal buffers allow this spending. The central fiscal deficit is on track to hit 4.5% of GDP by 2026, well below the 2020 high of 9.5%. This stability contrasts sharply with Pakistan’s fragility.

Pakistan’s Debt Overhang: A Slow-Motion Crisis

Pakistan’s external debt now stands at $131 billion—35% of GDP—and its fiscal deficit remains stubbornly high at 8% of GDP. The IMF’s $2.3 billion lifeline in 2025 comes with harsh conditions: slash energy subsidies, raise taxes, and reduce reliance on Chinese loans. But execution is another matter.

• Credit Ratings in Freefall: Pakistan’s ratings hover near junk territory: Moody’s Caa2 (very high risk), S&P’s CCC+ (near default), and Fitch’s B- (still speculative).
• Debt Dependency: Over half its external debt is owed to China, with projects like the Gwadar Port tied to opaque repayment terms. A default could trigger a regional financial shock.

The risks are existential. Without IMF disbursements, Pakistan faces a liquidity crunch by late 2025. Investors in its bonds—whether through EM debt funds or sukuk instruments—face haircut risks if restructuring occurs.

Investment Playbook: Go Long on India’s Defenders, Short Pakistan’s Bonds

For equity investors, India’s defense and infrastructure sectors offer asymmetric upside. Companies like Larsen & Toubro (railways, defense) and Power Grid Corporation (energy projects) benefit from the ₹185 trillion in planned infrastructure spending. The Nifty 50’s 12-month forward P/E of 18x is reasonable given GDP growth of 6.4%—especially compared to Pakistan’s 2% GDP growth forecast.

Meanwhile, Pakistan’s sovereign bonds—yielding 14%—are a trap. Their CCC+ ratings mean any downgrade to Caa3 could trigger mass redemptions. Avoid anything tied to its currency, the rupee, which has lost 30% against the dollar since 2020.

The Bottom Line

India’s fiscal prudence and defense-driven growth make it a fortress in a volatile region. Pakistan’s debt overhang and IMF dependency mark it as a risk not worth taking. Investors should overweight India’s equity markets—especially defense and infrastructure stocks—and avoid anything linked to Pakistan’s bonds. In South Asia, the divide between opportunity and peril has never been clearer.