The escalating tensions between India and Pakistan have significantly affected various sectors of India's economy, causing disruptions in trade, investment, and market stability. While such crises are not uncommon during periods of heightened conflict—often driven by state-level decisions—experts emphasise the urgent need for diplomatic efforts to de-escalate the situation and mitigate its economic repercussions.
Trade and Economic Disruptions
Suspension of Trade:
Pakistan has fully suspended bilateral trade with India, including critical imports such as cotton, which directly impacts India's textile industry. Border economies, particularly in Punjab, have suffered substantial losses. For example, the closure of the Attari-Wagah Integrated Check Post has resulted in an estimated income loss of ₹7,013 crore over five years, leading to the loss of direct employment for nearly 12,000 workers.
Forex Reserves and Currency Volatility:
India’s foreign exchange reserves declined by $2.07 billion to $686.06 billion as of May 2, 2025. While the rupee initially appreciated by about 1% due to increased foreign inflows, it later depreciated by 0.9% amid mounting geopolitical tensions.
Market and Investment Impact
Stock Market Volatility:
Indian equity indices have declined due to investor concerns over the escalating conflict and rising global crude oil prices. Analysts warn that continued hostilities could further depress market performance and deter foreign investment.
Foreign Portfolio Investment (FPI) Outflows:
The threat of prolonged conflict has slowed FPI inflows, weakening the rupee and undermining overall investor confidence.
Disruptions in Transportation and Communication
Air Travel Disruptions:
The conflict has led to the cancellation of over 430 flights across 27 airports in northern and western India, with major airlines suspending operations in the affected regions. International carriers have also rerouted flights to avoid Pakistani airspace, causing longer travel times and delays.
Digital Censorship:
The Indian government has ordered the blocking of over 8,000 accounts on the social media platform X (formerly Twitter), including those belonging to Pakistani politicians and media outlets. This move, backed by threats of fines and imprisonment for local staff, is part of a broader digital crackdown amid the escalating tensions.
Broader Economic Implications
Impact on Infrastructure and Supply Chains:
A prolonged conflict could derail infrastructure investment plans, disrupt supply chains, and weaken business confidence. Multinational corporations with significant exposure to India may reassess their investment strategies, potentially slowing economic growth.
Energy and Commodity Markets:
The conflict poses a threat to regional energy routes and shipping lanes, increasing insurance premiums and causing further supply chain disruptions. Given India’s reliance on oil imports, any escalation could result in higher crude prices and rising inflationary pressures.
"The escalation of the conflict will mean diversion of budgetary resources towards buying arms. India is the second-biggest arms purchaser in the world. For two developing countries where millions live below the poverty line, it makes little sense to keep buying weapons from highly advanced countries like Russia, Israel, and the US," says Jayashree Sengupta, Senior Fellow (Associate) with the Observer Research Foundation's Economy and Growth Programme.
She adds that both India and Pakistan rank low on the Human Development Index (HDI) and are hampered by weak social and physical infrastructure. High unemployment persists in both countries, and there is an urgent need to increase public spending on health and education.
"Under such circumstances, any escalation of war will only increase the financial burden on both nations and will make ordinary people suffer, as governments divert resources to arms rather than improving quality of life. Dialogue between the two countries is crucial to reduce geopolitical tensions in the region at this juncture," Sengupta suggests in her latest report on ORF Online.
