By Monica Johnson, International Banker
It was a decidedly brief conflict, beginning on May 7 and ceasing on May 10. Nonetheless, the hostilities between India and Pakistan have had serious repercussions for both nations and the wider region, and not just in terms of geopolitical impact but also economic bearing. With renewed hostilities between the two nuclear-armed neighbours not out of the question, particularly given the fragile nature of the ceasefire, the economic ramifications of this conflict could end up proving substantial.
On May 7, the Indian government announced the commencement of Operation Sindoor, a military campaign that New Delhi claimed it had launched in response to what it called a terrorist attack, which had occurred on April 22 near Pahalgam in Indian-administered Jammu and Kashmir, claiming the lives of 26 civilians. The Indian military promptly launched missile strikes on nine targets in Pakistan and Pakistan-occupied Kashmir, with the situation escalating over the ensuing days. Multiple drone and missile strikes were reportedly launched on cities in both India and Pakistan, as well as on areas within Jammu and Kashmir, while cross-border raids, cyber operations, artillery fire and asymmetric attacks were also observed during the worst period of fighting between the two nations since 1999.
A United States-China-mediated ceasefire then unfolded on May 10, with Persian Gulf states also providing backchannel support. But with no sustained peace plan in place, the likelihood of hostilities resuming once more remains high. Despite lasting a mere four days to date, moreover, the conflict ended up having significant economic implications for both sides.
Nominally the world’s fifth-largest economy—and the third-biggest when adjusted for purchasing power parity (PPP)—India is also currently the fastest-growing major economy in the world. Last year saw its real gross domestic product (GDP) grow by an estimated 6.5 percent, while analysts are anticipating a similar growth rate for 2025. As such, one might not expect such a brief military escalation to have made much of a dent in the burgeoning Indian economy.
Indeed, the governor of the Reserve Bank of India (RBI), Sanjay Malhotra, insisted that this was the case. “The conflict…had a very, very limited, negligible impact on economic activity. It did have some impact for those days, especially in northern India, airports being closed, air passenger traffic did certainly decrease, but there was no major supply chain disruption, etc.,” Malhotra reported on June 6. For the few days during the conflict, the governor acknowledged that prices in certain affected areas had briefly gone up but had quickly normalised as tensions eased.
Nonetheless, some studies conducted since the cessation of hostilities view the situation differently. Using a computable general equilibrium (CGE) model inclusive of direct-cost estimates for military assets, infrastructure damage, disrupted trade and service-sector impacts, a policy paper from the Islamabad Policy Research Institute (IPRI) estimated that India’s economy incurred at least $88.712 billion in realised losses over the four-day war.
Published on May 13, the study’s modelling framework included fiscal balance-sheet pressures, such as a surge in the BJP (Bharatiya Janata Party) government’s budget deficit, “which conventional market-capitalization-based approaches overlook”. It also treated lost output (a GDP contraction) as a tangible economic cost, “not merely a paper wealth decline”. And the model integrated non-tradable service sectors, such as tourism, civil aviation and public-information campaigns, which are often excluded from headline war-damage assessments.
“This report reframes those four days of military engagement not merely as a clash of arms but as an acute economic shock, one that impaired production, reversed years of developmental gains, and imperilled the social safety nets upon which millions depend,” the paper concluded. “The CGE model captures the broad macroeconomic fallout: $4.02 billion in lost output and the corresponding surge in fiscal borrowing. Detailed sectoral and direct outlays including military hardware replacement, munitions and sortie costs, infrastructure repairs, tourism and aviation disruptions, trade stoppages, humanitarian relief, and cybersecurity response total $84.692 billion.”
The paper found that the total $88.712 billion in real‐economy and direct costs on India “far exceeds the $30 billion market-cap ‘paper loss,’ because this framework monetizes both the tangible output and fiscal impacts alongside on-the-ground material damages”. The report also sought to reframe the four days of military engagement “not merely as a clash of arms but as an acute economic shock, one that impaired production, reversed years of developmental gains, and imperilled the social safety nets upon which millions depend”.
Pakistani economist and political scientist Farrukh Saleem, meanwhile, estimated that the 87-hour conflict had cost “about a billion dollars an hour for both countries put together”; he also broke down the estimated costs borne by each party. “India has a much larger army, much larger air force. Once it starts moving, once it starts mobilizing its troops, it costs about, let’s say, 12 to 20 times more for the Indian army to mobilize itself as compared to the Pakistani army,” Saleem told Arab News on May 14. “So, when I say a billion dollars an hour, you’re probably looking at 20 percent of that being incurred by Pakistan and a good 80-85 percent by India.”
As for Pakistan, it does not quite possess the eye-popping economic-growth statistics of its adversarial neighbour. Its economy likely grew by 2.7 percent in the fiscal year (FY) ending June 2025 after expanding by 2.5 percent in the previous year, according to the government’s annual snapshot of economic performance published in early June. The International Monetary Fund (IMF) has forecasted growth of just 2.6 percent for this financial year and 3.6 percent for the next. The IMF provided a crucial $7-billion bailout programme to Pakistan last year, which helped stave off the threat of sovereign default. The need for this lifeline underlines the sheer vulnerability of Pakistan’s economy in recent years.
The risk of a prolonged conflict with India could send Pakistan’s economy reeling at a time when authorities are desperately attempting to bring stability to the country, boost its credit rating and return once more to international capital markets. It is undeniable that macroeconomic indicators have somewhat improved in recent times, with annual inflation at a relatively low 4.1 percent as of July, the Karachi Stock Exchange (Pakistan Stock Exchange) posting a robust recovery following the ceasefire announcement and URAAN Pakistan—the government’s reformist National Economic Transformation Plan 2024–29—already working to reduce deficits, control inflation and build foreign reserves.
Yet, this recovery remains perilously fragile, according to Policy Circle, which recently noted the deep structural flaws that remain inherent in Pakistan’s economy: low productivity, reliance on low-value exports, a narrow tax base and an unsustainable energy sector. “Any conflict with India would derail reforms, scare off investment, and accelerate capital flight,” the economic thought-leadership platform stated in a May 16 report. “Already, the tourism sector in sensitive areas like the Neelum Valley has collapsed under the weight of military tensions. Hotels are empty, small businesses are struggling, and uncertainty is choking off local enterprise. The threat of war turns economic recovery into a distant prospect.”
Should tensions resurface and hostilities resume, moreover, Pakistan’s $350-billion economy could be severely damaged. “Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability,” Moody’s warned in a May 5 report, just prior to the outbreak of the conflict. “A persistent increase in tensions could also impair Pakistan’s access to external financing and pressure its foreign-exchange reserves.”
India’s economy is not expected to see major disruptions since it has “minimal economic relations” with Pakistan, Moody’s added. That said, the credit-rating firm also cautioned that higher defence spending could weigh on New Delhi’s fiscal strength and slow fiscal consolidation.
The cross-border trade implications of a prolonged conflict are also likely to be substantial, again with Pakistan bearing more of the brunt given its much higher reliance on imports from India than India’s on Pakistani exports. “Formal trade between India and Pakistan—valued at $1.2 billion annually—would halt entirely,” warned Karan Karayi, editor-in-chief of Indian media outlet Marksmen Daily. “Historical precedent offers evidence: following the Pulwama attack [the attack on Indian security personnel carried out in Pulwama in Jammu and Kashmir on February 14, 2019], Pakistan’s exports to India plummeted from $550 million to a mere $480,000. Although India’s economy is less reliant on Pakistan, the fallout from geopolitical instability would reverberate through investor confidence and capital markets.”