How An India vs. Pakistan War Could Harm Their Economies

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On Wednesday, Capital Economics released the Emerging Asia Economics update which focused on the escalating crisis between India and Pakistan. Within the report, they summarized the recent history of conflict between the two nations.

India and Pakistan have fought three wars since the two countries became independent states in 1947 and there have been frequent spikes in tensions in recent years. The most recent incident was in September 2016 when an attack on an army base in Indian-administered Kashmir led to the death of 19 soldiers. After each such incident, tensions have been calmed, usually by a promise by the Pakistani authorities to do more to clamp down on Islamic militant groups operating in the country.

“The most likely scenario is that tensions start to cool over the coming days and weeks and there is no major economic impact. The fact that both countries possess nuclear weapons means each side has an incentive not to escalate the crisis further,” the report affirms while quoting Indian External Affairs Minister Sushma Swaraj, “India does not wish to see of the situation. India will continue to act with responsibility and restraint.”

However, Capital Economics sees several issues which could create humanitarian and economic instability in the country.

The first is that tensions have already escalated to a level where it becomes harder for the other side to back down. The attack by the Indian Air Force on the militant training camp on Tuesday was the first time Indian warplanes had struck inside Pakistan since a war in 1971. The second is that India is due to hold a general election in April. With Prime Minister Modi struggling in the polls, he is likely to find himself under growing pressure to retaliate.

While the original conflict began in the disputed areas of Kashmir, Capital Economics suggests a period of ‘intensive’ fighting within the area would have ‘limited impact’ on the overall economy and create minimal humanitarian concerns detailing “Indian-occupied Kashmir accounts for less than 1% of India’s GDP, while the Pakistani controlled area is just 2.0% of Pakistan’s GDP.”

The report would then go on to warn of how catastrophic a widespread conflict would be for each nation.

A full-blown spread beyond Kashmir much bigger impact. The experience of past military conflicts shows wars can have a devastating impact on the economy. The war in Syria has led to a 60% fall in the country’s GDP. South Korean GDP fell by over 80% following the Korean War (1950-53).

Capital Economics details an added concern for Pakistan being the conflict taking place during their balance of payments crisis, which could concern investors. “Having been quite stable since the initial attack on 14th February, Pakistan’s stock market fell by over 3% (although it has since recovered some ground),” details the report showing the compounded effect of possible war and economic concerns. In comparison, stocks in India only took a .2% hit.

The report finishes on a note which doesn’t quite capture the importance over the next few days, “The upshot is that despite the escalation, the most likely outcome is that some compromise is found that allows both sides to back down. And even if a military conflict were to break out, provided it was limited to just Kashmir, the economic impact would be quite small.”

Yet, the conflict has the added fire of long-standing tension between India and Pakistan. Pakistani Muslims have ill will towards Indian Prime Minister Narendra Modi for his believed role (or inaction) during the 2002 Gujarat riots which saw approximately 2,000 Muslims murdered in India. When incorporated with India blaming the Pakistani government over the Pulwama attacks, any possible conflict could negatively impact hundreds of thousands of individuals living within the scope of a possible war.

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