R. Suryamurthy
The escalation of military hostilities between India and Pakistan has cast a long shadow over the region’s economic prospects, prompting critical analysis of the potential ramifications for these nuclear-armed neighbours. While initial assessments might point to a contained immediate economic impact, a deeper dive, enriched by expert commentary and empirical data, reveals a more complex and potentially fragile situation, particularly for Pakistan.
Historical context reminds us that the region is no stranger to conflict, citing “three major wars since 1947 and multiple flare-ups, including in 2001, 2016, and 2019.” Historically, these crises have often de-escalated. However, the current geopolitical landscape presents a crucial divergence. The perceived decline in U.S. diplomatic engagement, especially following the 2023 withdrawal from Afghanistan, has diminished a traditional external mediator, potentially amplifying the risk of protracted tensions and the spectre of miscalculation.
Economically, the immediate fallout of a geographically limited conflict might appear negligible. Capital Economics’ Shilan Shah suggests that “if limited just to Kashmir, a period of fighting between Pakistani and Indian forces would have a small impact on the economy of either country.” This is partly substantiated by the fact that Kashmir contributes “well under 1%” to India’s substantial GDP of $3,889 billion (as of 2024), and Pakistan-occupied Kashmir (PoK) accounts for approximately “2%” of Pakistan’s $375 billion GDP. Furthermore, the minimal bilateral trade volume renders the closure of the Attari border largely “symbolic” in terms of direct economic disruption.
However, this narrow focus on direct trade obscures significant economic vulnerabilities, especially for Pakistan. S&P Global Ratings cautions that “a protracted military conflict will derail the improvements to Pakistan’s external and fiscal metrics that would support a return to macro stability.” A critical vulnerability lies in Pakistan’s agricultural sector, which contributes nearly “25%” to its GDP. This sector faces a direct threat from India’s potential leveraging of the Indus Water Treaty. As the upstream nation, India’s geographic advantage allows it to manipulate water flows, potentially devastating Pakistan’s agricultural output and its rural economy.
Moreover, Pakistan’s significant reliance on external capital inflows, including crucial IMF support as it navigates a balance of payments crisis, renders its economy acutely susceptible to instability. This sensitivity was immediately evident in the financial markets, with Pakistan’s equity market experiencing a sharp downturn of “over 5%” following the recent escalation. Conversely, India’s more robust and diversified economy demonstrated greater resilience, with its equity market remaining relatively flat. This divergence underscores the asymmetric economic risks faced by the two nations. The stark difference in their economic size is also noteworthy; in 2024, India’s GDP ($3,889billion) was approximately “10.38 times higher” than Pakistan′s ($375 billion).
For India, while the immediate economic impact might be muted, a prolonged period of regional instability carries the risk of deterring crucial foreign direct investment. S&P Global Ratings warns that “for India, a prolonged military conflict will also lead to difficulty attracting foreign investors seeking to reconfigure their international production activities amid the uncertain global economic environment.” In a global landscape seeking stable alternatives to existing supply chains, persistent tensions in South Asia could undermine India’s attractiveness as a reliable investment destination.
The geopolitical dimension, particularly the enduring alliance between Pakistan and China, introduces a significant element of uncertainty. Beijing’s strong rhetoric, labelling Pakistan its “ironclad friend and all-weather strategic cooperative partner,” as highlighted by Capital Economics, suggests the potential for external involvement. Any substantial military or economic support from China to Pakistan could escalate the conflict beyond a bilateral issue, significantly complicating regional dynamics and potentially impacting investor confidence across the region. Shilan Shah further points out that a broader conflict could even “risk reversing the nascent improvement in economic and political relations between India and China.”
Analysing key economic indicators further underscores the disparity in resilience. Between 2014 and 2024, India’s GDP per capita witnessed a “74% increase,” rising from $1560 to $2,711, significantly outpacing Pakistan’s modest “11% growth” from $1424 to $1,581 during the same period. India’s average annual real GDP growth rate between 2015 and 2025 stands at a robust “6.08%,” compared to Pakistan’s more volatile and lower average of “3.43%.” Furthermore, India has shown a marked improvement in unemployment, projected to decline from “8.9% in 2018 to 4.9% by 2025,” while Pakistan’s unemployment rate is expected to worsen, rising from “5.8% in 2018 to 8% by 2025.” Finally, while India has maintained a relatively stable average inflation rate of “4.97%” over the last decade, Pakistan has experienced a severe surge, with inflation skyrocketing to “23.4% in 2024,” resulting in a 10-year average of “10.81%.”
While initial economic data might suggest a limited immediate impact from a localised conflict, a comprehensive analysis incorporating expert opinions from S&P Global Ratings and Capital Economics, alongside a numerical breakdown of key economic indicators and geopolitical factors, paints a more concerning picture. Pakistan’s greater economic fragility, reliance on external support, and vulnerability to water resource manipulation make it particularly susceptible to the negative economic consequences of prolonged instability. For India, the risk lies in the potential dampening effect on foreign investment and the broader regional instability that could derail its economic aspirations. The current flare-up serves as a stark reminder of the delicate economic equilibrium in South Asia, where geopolitical tensions and military actions, even seemingly contained, carry the potential for significant and long-lasting economic repercussions. Sustained diplomatic efforts and a commitment to de-escalation are paramount to safeguarding the economic prospects of both nations and the wider region.