India and Pakistan have been effectively at war since last Wednesday. And the war takes its toll on all involved: both the aggressors and their targets. The ongoing military conflict between India and Pakistan will indeed leave an adverse impact on the latter’s fragile, recovering economy, but it will not spare India’s either.
The heavy costs of the conflict for India will extend far beyond the battlefields and severely undermine its longstanding ambition to position itself as a global economic powerhouse and attractive destination for companies looking to shift production from China. The military damage would be nothing compared to the losses India’s economy would have to bear.
Finance Outlook India has argued that the military funding decisions of India and Pakistan reflected their economic objectives. India will spend $80 billion in 2025 to modernise its military forces. Pakistan’s defense expenditures are projected to reach $11bn which places financial strain on its struggling economy.
“Investing heavily in defence often diverts resources from critical sectors such as health and education, creating long-term economic challenges,” the website quoted Shazia Malik, a defence analyst at Global Security Solutions, as saying.
‘The potential for a devastating conflict with Pakistan remains a latent risk to India’s rise on the global stage’
The war between the countries creates lasting economic damages that surpass basic military budget costs, it added. “The disruption of trade combined with reduced investor trust leads to monumental economic costs, which hinder regional development. Both countries and the entire area will benefit from diplomatic initiatives taking precedence over military confrontation.”
The hostilities between the nuclear-armed neighbours flared up on Saturday morning after Islamabad launched retaliatory strikes against multiple military targets in India hours after a failed Indian attempt to target Pakistani air bases in Rawalpindi, Chakwal and Jhang.
Ever since New Delhi had hit six civilian targets in Pakistan and Azad Kashmir in unprovoked attacks under its ‘Operation Sindoor’ on May 7, Islamabad had constantly warned it against escalation and made its intent to use its right to retaliate at a “place, time and manner of our own choosing” quite clear.
At least 31 civilians, including minors and women, had lost their lives in the attacks. In response, Pakistan took down five Indian jets, including three French-made Rafael, besides destroying an Indian brigade headquarters.
However, India did not stop at that despite claiming that “it would not escalate from here”. During the next couple of days, it again violated Pakistan’s territorial integrity by launching kamikaze drone attacks in multiple cities across Punjab and Sindh before targeting airbases in the wee hours of Saturday.
Initial state media reports suggested that Pakistan had targeted key Indian military installations in a “befitting response” as part of its retaliatory operation “Bunyan-un-Marsoos” in response to “India’s initial attack, which was an assault on our homeland, people and sovereignty,” a federal government statement said, referring to the earlier Indian missile strikes against airbases.
At the time of writing this, the state media has reported that Pakistan had inflicted massive damage on India, destroying their S-400 defence system, strategic airfields, and military supply and storage sites in addition to rendering 70 per cent of India’s power grids inoperative in a cyber attack.
Commenting on post-Pahalgam hostilities between India and Pakistan, S&P Global Ratings had on Thursday said that the ongoing conflict between the pair posed increased risks to both nations’ credit metrics —though immediate credit rating impacts are not expected with potential sovereign credit support deterioration if tensions escalate. The report suggested neither nation would benefit from extended tensions.
A sustained military conflict would create obstacles for India in attracting international investors looking to reorganise their production operations there during the current uncertain economic climate. It said a prolonged conflict could complicate efforts by foreign investors looking to expand in the country and diversify their supply chains.
A note by Moody’s on Monday said that escalating tensions between India and Pakistan would weigh on Pakistan’s economic growth, adding higher defence spending would also impact India’s “fiscal strength and slow its fiscal consolidation”. “Our geopolitical risk assessment for Pakistan and India accounts for persistent tensions, which have, at times, led to limited military responses,” it added.
India has a lot at stake if any escalation on the border with Pakistan goes out of control and leads to a broader conflict, Abhishek Gupta, India economist with Bloomberg Economics, had said in a note. “That may dent investors’ confidence in India as a safe haven from Trump’s tariffs, and capacity constraints at the political level may shift the focus away from the economy.”
Although Pakistan’s economic woes have made it less relevant on the international stage, it still had the potential to disrupt India’s efforts to become an export-oriented nation that is a key piece of the global supply chain, especially as it looks to attract companies from China, according to Pramit Pal Chaudhari, South Asia practice head at Eurasia Group.
“This adds to your risk premium… For India, these add to the image that you don’t want,” a Bloomberg report quoted him saying. The report also quoted analysts from India that “the potential for a devastating conflict with Pakistan remains a latent risk to India’s rise on the global stage”.
At the heart of the conflict is the longstanding dispute over Kashmir. Many across the world anticipated an escalation of tensions as soon as India blamed Pakistan — without any evidence, though — for involvement in a deadly militant attack in Pahalgam, a tourist destination in occupied Kashmir, on April 22.
In spite of Islamabad’s denial and offer for its complete cooperation in a neutral probe into the event, the Narendra Modi government amped up its anti-Pakistan rhetoric led by the Indian media. New Delhi immediately downgraded bilateral diplomatic relations, completely cut off trade ties, and pledged to take “punitive” action against Islamabad.
More crucially, New Delhi unilaterally and illegally “held in abeyance” the 64-year-old Indus water treaty, threatening to strangulate Pakistan’s economy and food security. The weaponisation of the water treaty against the lower riparian practically amounts to an act of war, as rightly pointed out by Prime Minister Shehbaz Sharif.
The political rhetoric by the Modi government also led to widespread anti-Muslim riots in India and Occupied Kashmir as people raised questions about security lapses and the BJP government’s Kashmir policy, including the revocation of the valley’s autonomy in 2019.
While wreaking major economic destruction across the two countries with worldwide consequences, further escalation in the armed conflict between the nuclear nations would lead to catastrophic human loss.
Even though several countries have been actively trying to convince India to de-escalate, the world does not seem to be taking it seriously. It is time for the world to effectively intervene to preempt any catastrophic outcome from the conflict.
UN Secretary-General António Guterres has correctly emphasised that “the world cannot afford a military confrontation between India and Pakistan.” The US has called upon both Pakistan and India to hold “direct talks” to bring down tensions and said it will support any effort, including a neutral probe, to ensure the perpetrators of the Pahalgam attack are brought to justice.
But it has so far refused to intervene directly. The world must realise that when nuclear-armed nations are fighting, all it takes is a miscalculation or a mistake. The risk increases if you have a madman like Modi taking such decisions.
Published in Dawn, The Business and Finance Weekly, May 12th, 2025
