The writer is an economist, anchor, geopolitical analyst
and the President of the All Pakistan Private Schools’ Federation
president@Pakistanprivateschools.com
In the tumultuous landscape of South Asian geopolitics, the recent escalation of tensions between India and Pakistan, precipitated by the deadly attack in Kashmir on April 22, 2025, has cast a long shadow over the economic prospects of the region. As both nations, armed with nuclear capabilities, navigate the treacherous waters of diplomatic brinkmanship, the spectre of economic instability looms large, threatening to undermine the hard-won gains of India’s burgeoning economy. This analysis seeks to provide a comprehensive examination of the economic, financial, and foreign investment implications of this precarious situation, grounded in current data, expert insights, and historical context. The analysis explores the multifaceted impacts of the Indo-Pakistan tensions on India’s economy, including increased debt and military spending, market volatility, decline in foreign direct investment, disruptions in global supply chains, and the potential for broader regional instability. It would also highlight the need for de-escalation and diplomatic efforts to prevent further economic damage and maintain regional stability. India and Pakistan, both nuclear-armed nations, have a history of conflict centred on Kashmir, with three wars fought since 1947, two over this disputed region. The recent attack, killing 26 people, mostly Indian tourists, in the Baisaran Valley near Pahalgam, has escalated tensions, leading to diplomatic and economic retaliations. India accused Pakistan of supporting the attackers, while Pakistan denied involvement, resulting in measures like the suspension of the Indus Waters Treaty and bilateral trade. The Indo-Pakistan tensions, following the April 2025 Kashmir attack, could strain India’s economy, finances, and foreign investment, with significant impacts on Kashmir tourism. It seems likely that increased military spending and market volatility could raise India’s debt and affect financial stability, though the evidence leans toward limited direct impact due to India’s larger economy. The closure of bilateral trade and airspace restrictions may disrupt supply chains, potentially deterring foreign investors, but the full extent remains uncertain given recent developments. The recent tensions, sparked by the deadly attack in Kashmir, could lead to increased military spending, estimated at potentially billions daily in a full-scale conflict, straining India’s fiscal deficit. With India’s GDP at $4.27 trillion in 2025 compared to Pakistan’s $348.72 billion, the impact might set back India’s growth, though less severely than Pakistan’s fragile economy. Higher taxes to fund military efforts could make Indian products less competitive globally, affecting export-driven sectors. Financial markets have shown volatility, with the Sensex and Nifty 50 dropping 0.7%-0.9% post-attack, and the rupee depreciating 0.2%, while bond yields rose. Increased demand for safe-haven assets like gold and US bonds could pressure emerging market equities, including India’s. Supply chain disruptions, especially in technology and pharmaceuticals, could raise global prices, impacting India’s role in these sectors. Geopolitical risks from the tensions may deter foreign direct investment (FDI), crucial for India’s growth, with experts warning of potential declines. Market volatility and airspace closures could further erode investor confidence, though the impact’s scale remains uncertain given India’s attractiveness to global investors. Detailed Analysis of Indo-Pakistan Tensions and Economic Implications for India provides an in-depth examination of the economic, financial, and foreign investment implications for India arising from the recent escalation of tensions with Pakistan, following the April 22, 2025, attack in Kashmir. The analysis is grounded in current data, expert insights, and historical context, aiming to offer a comprehensive understanding for stakeholders and policymakers. The potential for conflict, as highlighted by recent analyses, could significantly impact India’s economy, given its size and integration into global markets. India’s GDP in 2025 is projected at $4.27 trillion, making it the 4th largest economy globally, compared to Pakistan’s $348.72 billion. The economic implications include: Increased Debt and Military Spending, a potential war could lead to heightened military spending, with estimates suggesting costs could reach billions daily. Historical data from the 1999 Kargil war, costing India between Rs 5,000 crore and Rs 10,000 crore, indicate that modern conflicts, involving advanced technology, could be far costlier. This could increase India’s fiscal deficit by a significant margin, potentially forcing higher taxes and reducing the competitiveness of Indian exports globally; Disproportionate Impact, while India’s economy is robust, the impact could still set back growth by several years. Pakistan’s economy, already fragile with a fiscal deficit at 7.4% of GDP and foreign exchange reserves at $16.04 billion, faces existential threats. For India, the loss of economic momentum could affect infrastructure projects and social welfare programs; Wars create unstable business environments, deterring foreign investors. India, heavily reliant on FDI, could see declines in investment flows, with higher financing costs impacting economic growth. The recent tensions have already led to cautious investor sentiment, with the India VIX rising 11% post-attack. The financial markets have shown immediate reactions to the tensions, with potential for broader impacts if the situation escalates: Volatility in Financial Markets. Following the attack, Indian financial markets fell sharply, with the Sensex and Nifty 50 closing 0.7%-0.9% lower, and the rupee depreciating by 0.2%. The yield on India’s 10-year benchmark bond rose four basis points, reflecting increased risk perception, which suggests that prolonged tensions could lead to sustained volatility, affecting investor confidence. Investors may seek safe-haven assets like gold, the US dollar, and US government bonds, putting downward pressure on riskier assets like emerging market equities, including India’s. This shift could increase borrowing costs for Indian companies and the government, exacerbating fiscal pressures.
In this precarious landscape, diplomatic prudence and statesmanship are imperative, lest the region be plunged into an abyss of instability, from which recovery may prove arduous and protracted. The imperative of de-escalation and dialogue cannot be overstated, for the sake of regional peace, economic stability, and the well-being of millions.
India’s significant role in global supply chains, particularly in technology, textiles, and pharmaceuticals, could be disrupted. The closure of Pakistani airspace and suspension of trade could lead to higher logistics costs and delays, affecting global prices and availability of goods. Foreign Investment Implications are huge as foreign investment is a cornerstone of India’s economic strategy, and the current tensions pose risks to this vital inflow: Decline in FDI, Geopolitical risks from the tensions may deter FDI, with warning of potential declines. While India remains attractive due to its growth prospects, the uncertainty could lead investors to pause or redirect funds to safer markets. The recent market volatility, with FIIs showing selling pressure, underscores this risk; India’s key role in global supply chains means that disruptions could affect trade flows, potentially impacting regional economic growth. The suspension of bilateral trade and airspace closures could exacerbate these effects, particularly for industries reliant on cross-border logistics; neighbouring countries could experience spillover effects, including refugee flows, trade disruptions, and increased security concerns, potentially affecting regional economic growth. This could indirectly impact India through reduced regional trade and investment opportunities. The Indian rupee depreciated by 0.2% post-attack, with the USD/INR exchange rate moving to approximately 84.75 from around 84.59 before the attack, based on forecasts. By May 1, 2025, it stabilised at 84.59, indicating a partial recovery, though the long-term impact remains uncertain given geopolitical risks. The attack has led to a significant decline in tourist arrivals, affecting the local economy and related sectors. Potential revenue losses are estimated in billions for 2025, with the closure of bilateral trade and airspace restrictions exacerbating the situation. Historical data suggests Kashmir tourism contributes significantly to regional GDP, and this disruption could have cascading effects on hospitality and transport industries. The suspension of $1.206 billion in bilateral trade and airspace closures could lead to higher logistics costs and delays, affecting global prices and availability of goods. India’s significant role in global supply chains, particularly in technology, textiles, and pharmaceuticals, means disruptions could raise prices, impacting trade flows and regional economic growth. Neighbouring countries could experience spillover effects, including refugee flows, trade disruptions, and increased security concerns. Potential disruptions in energy supply routes could fuel imported inflation, particularly in Europe and Asia, impacting India’s import bills and economic stability, given its reliance on oil imports. Emerging countries, including India, could see declines in FDI flows and higher financing costs, as investors shift to safer assets amid heightened geopolitical risks, potentially affecting India’s attractiveness to global investors. The broader implications extend beyond India and Pakistan, affecting global economic dynamics: Global GDP Growth; As prolonged conflict could cost global GDP growth between 0.2 and 0.5 percentage points, depending on intensity and duration, as estimated in previous analyses. This reflects the interconnectedness of global markets and the potential for regional instability to affect global trade; Rising oil prices due to potential disruptions in energy supply routes could fuel imported inflation, particularly in Europe and Asia, impacting India’s import bills and economic stability; Emerging countries, including India, could see declines in FDI flows and higher financing costs, as investors shift to safer assets amid heightened geopolitical risks.
To organise the economic impacts and their potential effects: Tourism in Kashmir, a Significant decline in tourist arrivals, affecting the local economy and related sectors. Potential loss of billions in revenue in 2025 bilateral trade and suspension of $1.206 billion trade, affecting specific industries. Limited direct impact includes: higher indirect costs and financial Markets, market volatility, rupee depreciation, and increased bond yield, 0.7%-0.9% drop in indices; Increased flight costs due to airspace closure, minimal direct economic impact; Higher fuel costs with a limited overall effect. In the long term, implications from the suspension of the Indus Waters Treaty include uncertain immediate impact, potential agricultural and diplomatic costs, FDI, and foreign investment. Potential decline due to geopolitical risks, affecting growth prospects. Uncertain, depends on tension duration; Global Supply Chains; Disruptions in technology, textiles, pharmaceuticals, affecting global trade; and Potential price increases and in trade flow issues. These issues highlight the multifaceted impacts, with tourism and financial markets showing immediate effects, while FDI and supply chain disruptions could have longer-term consequences, and have significant implications for India’s economy, finances, and foreign investment. While India’s larger economy provides some resilience, the indirect effects on tourism, market sentiment, and geopolitical stability could be substantial. The suspension of bilateral trade, closure of airspace, and potential water disputes have already created challenges, particularly for Kashmir’s tourism sector and certain industries. Financial markets have shown volatility, with the rupee weakening and bond yields rising, though the overall impact remains limited for now. Foreign investment, critical for India’s growth, is at risk if tensions persist, as geopolitical instability often deters investors. However, if the situation remains contained, the long-term impact on India’s economy may be unmanageable. The global economic consequences, including regional spillover effects and supply chain disruptions, further underscore the need for de-escalation. Both countries must prioritise dialogue and restraint to prevent further economic damage and maintain regional stability. As of May 1, 2025, the situation remains fluid, with the potential for both escalation and resolution, and India’s ability to navigate these challenges will depend on its diplomatic efforts, economic resilience, and ability to reassure investors and global partners. As the Indo-Pakistan tensions continue to simmer, threatening to boil over into a conflagration of unpredictable proportions, India’s economic ascendance hangs precariously in the balance. The tragic attack in IOK has unleashed a maelstrom of uncertainty, imperilling the nation’s hard-won economic gains and casting a pall of doubt over its future prospects. In this precarious landscape, diplomatic prudence and statesmanship are imperative, lest the region be plunged into an abyss of instability, from which recovery may prove arduous and protracted. New Delhi should explore non-military options, the US and China could together play a more constructive diplomatic role in South Asia have come to little. It may fall largely to New Delhi and Islamabad to resolve the current clash without allowing it to spiral out of control. Diplomats see some signs, behind the martial public rhetoric, of a desire to do so. But the price of any miscalculation could be catastrophic. The imperative of de-escalation and dialogue cannot be overstated, for the sake of regional peace, economic stability, and the well-being of millions.