The Cost of Conflict: What Do Current India-Pakistan Tensions Mean For South Asian Economic Growth?

The recent release of the Indian pilot Abhinandan Varthaman, whose plane was shot down over Pakistan-administered Kashmir, has given hope that tensions between India and Pakistan could reduce.  After the February 14 Pulwama terrorist attack carried out by a member of Jaish-e-Muhammad, which left 40 Indian paramilitary soldiers dead, and other instances of an escalation of tensions between the two South Asian countries, there was a great fear that an outbreak of full-scale violence could occur.  Pakistani Prime Minister Imran Khan’s “gesture of peace” has engendered an optimism that both countries can overcome this current situation and work towards better relations.

However, while cautious optimism runs high, the (potential) economic costs of this upswing in tensions have not gone unnoticed.  Economists, foreign investors, and corporations have been wary of South Asia’s stability as a market. 

For example, India’s decision to remove Pakistan’s “most favored nation” status in the aftermath of the Pulwama attack may seriously impact Pakistan’s economic growth.  According to Ubaid Mushtaq, writing for The Diplomat, “Trade always becomes a first casualty in a hostile environment and volatile political relations between any two countries.”  Pakistan currently does not have a “most favored nation” agreement with India.  Although both countries are not major trading partners of each other—neither country is among the top five trading partners of each other—the impact on South Asia’s economic growth could be quite significant.  Indeed, as South Asia’s two largest economies, the economic and political relationship between the two countries is of vital importance.  For Ubaid Mushtaq, “More trade between the two countries will help sustain the peace process.”

From a financial perspective, the recent spat may damage an already weak Indian financial sector.  The Indian rupee is already Asia’s worst-performing currency.  The recent uptick in the emerging-market stocks has improved, though this has been largely due to growing optimism that the U.S. and China will resolve their trade dispute and the dollar could weaken as the Federal Reserve pauses its rate-hiking program.  The financial situation in India, particularly with regards to its currency, will depend on how the government manages these ongoing regional tensions. 

Anirban Nag and Vrishti Beniwal, writing for The Economic Times, say, “Simmering tensions between the nuclear-armed rivals India and Pakistan have the potential to hurt foreign investments and sour business sentiment in an economy [India’s] that’s been one of the fastest growing in the world, but that’s now facing weaker domestic demand and a global slowdown.” 

The recent tensions have also had an impact on international business and tourism.  The decision to temporarily close all or some Indian or Pakistani airspace forced airlines to cancel or divert some flights.  In Bangkok alone, according to airport officials, over 4,000 travelers were affected by the closure of airspace.  Many travelers were forced to find accommodation in the Thai capital and wait for future flights to be available.  Among the airlines affected were Singapore Airlines, Thai Airways, United Airlines, Air Canada, Saudi Arabian Airlines, and British Airways, reflecting the international scope of this regional issue.  As a result, tourism and international business across Eurasia were deeply impacted.

For a region of profound potential, India-Pakistan tensions could in the long-term affect the region’s economic promise.  Tensions have yet to paralyze the economic futures of both South Asian giants, but any further escalation could seriously dampen the promises of a globalized economy.  With the Indian elections a couple months away and Pakistan’s internal stability in doubt, the stakes could not be higher.  It is hoped that Prime Minister Modi and Prime Minister Khan will be prudent and seek mutual cooperation.  Some seventy years after partition, it is hoped that further divisions do not mar this important bilateral relationship.