India–Pakistan tensions may push South Asia's economy, including Nepal's, to the brink

Dr.Kedar Karki

The conflict between India and Pakistan is the longest-running geopolitical tension in the world. India’s latest military action against Pakistan is not just a limited tactical maneuver—it is seen as a potential indication of a prolonged conflict that could reshape the geopolitical landscape of South Asia. The possibility of a full-blown war could seriously affect both countries’ economies.

India and Pakistan are both members of the South Asian Association for Regional Cooperation (SAARC) and have played vital roles in facilitating regional trade and investment. Should the two nations enter into war, it would directly impact trade security—ports could shut down, air routes could be blocked, and borders could close. The consequences would not be confined to India and Pakistan alone but would extend to Nepal, Bangladesh, Afghanistan, Bhutan, and Sri Lanka as well.

The consequences of the Indo-Pak war would not be confined to India and Pakistan alone but would extend to Nepal, Bangladesh, Afghanistan, Bhutan, and Sri Lanka as well

India and Pakistan have a long-standing series of disputes, having fought three major wars over Jammu and Kashmir. Recently, tensions between the two countries have flared once again. A bomb explosion in the tourist area of Gulmarg, in Indian-administered Kashmir, on April 22, killed 26 tourists, sparking outrage across India. India blamed terrorist groups, particularly Lashkar-e-Taiba and Jaish-e-Mohammed, which it claims are sheltered in Pakistan. According to India, these groups were using Pakistani territory to plan attacks on India.

The inhuman face of terrorism and the drumbeat of war have intensified—especially following the cowardly attack in the Baisaran Valley of Pahalgam that killed 26 tourists. Calls for war are growing louder within India. Many Indian citizens believe that the attacks were carried out by terrorists trained in Pakistan. In response, the Indian government has imposed diplomatic and economic measures against Pakistan.

Under this context, India launched airstrikes on nine targets in Pakistan under "Operation Sindoor." India claims that these actions were "necessary countermeasures for deterrence," aligning them with international legitimacy.

As the risk of war escalates, international investors typically adopt a "risk aversion" strategy, withdrawing capital from the region. Both India and Pakistan have spent the past decades trying to attract foreign investment in technology, services, energy, and infrastructure, but a prolonged conflict could stall this progress.

As the risk of war escalates, international investors typically adopt a "risk aversion" strategy, withdrawing capital from the affected region

Military conflicts lead to significant increases in defence budgets. India is already the third-largest defense spender in the world, while Pakistan allocates nearly 16% of its national budget to defence. A long-term conflict could force budget cuts in social services, healthcare, and education—directly impacting ordinary citizens.

Following the April 22 terrorist attack in Pahalgam that killed 26 tourists, India immediately banned all direct and indirect imports from Pakistan. This was stated in an official government directive. The decision effectively halts all imports from Pakistan. As part of its response, India also closed the Attari border crossing, which was used for the transit of certain goods. Furthermore, India expelled Pakistani military attachés and announced the suspension of the 1960 Indus Waters Treaty. As a result, trade between the two nations has already come to a complete halt.

Meanwhile, Pakistan's foreign currency reserves are extremely low, and it has recently taken loans from the IMF. A war would likely lead to a decline in exports, disruption of foreign aid, and difficulties in energy imports, further weakening the Pakistani economy. Inflation could spiral out of control, and the Pakistani rupee may rapidly devalue.

Pakistan's foreign currency reserves are extremely low, and it has recently taken loans from the IMF. A war would likely lead to a decline in exports, disruption of foreign aid, and difficulties in energy imports, further weakening the Pakistani economy

Although India has a larger economy than Pakistan, war-related expenditures, shaken investor confidence, stock market volatility, and trade disruptions could severely affect India as well. Sectors like tourism, services, remittances, and manufacturing supply chains are particularly vulnerable.

India is Nepal’s largest trading partner. Any disruption at the Indo-Nepal border or through Indian ports due to military conflict could affect the regular supply of essential goods. In the event of war, shortages of fuel, medicine, construction materials, and raw materials are likely.

India is Nepal’s largest trading partner. Any disruption at the Indo-Nepal border or through Indian ports due to military conflict could affect the regular supply of essential goods

South Asian nations are currently working toward cooperation in energy, water resources, infrastructure, investment, and trade. While regional mechanisms like SAARC have been largely inactive, a military conflict could further weaken any remaining diplomatic efforts and make the region’s economic future even more uncertain.

Smaller countries like Nepal are actively seeking foreign investment. Heightened India-Pakistan tensions could create regional instability, prompting investors to reassess risk. This could slow the flow of investment and delay long-term development projects.

Smaller countries like Nepal are actively seeking foreign investment. Heightened India-Pakistan tensions could create regional instability, prompting investors to reassess risk

While India’s airstrikes may serve as an immediate message to terrorist networks, if the conflict drags into a prolonged war, it could deeply undermine the standard of living, economic stability, and regional security for both nations. The international community has urged restraint, emphasizing that diplomatic prudence and global cooperation are crucial for long-term peace.

Both India and Pakistan are nuclear-armed nations. Each has repeatedly issued threats, claiming readiness to retaliate with nuclear force. A potential war between two nuclear powers would inevitably impact countries like Nepal and others across South Asia.

Resolving long-standing disputes and embracing peace and reconciliation is essential for the people of India and Pakistan. Prolonging hostilities into future generations is detrimental from both a human and geopolitical standpoint. The consequences of this conflict—economic, political, and social—could directly affect Nepal as well.

The consequences of this conflict—economic, political, and social—could directly affect Nepal as well

Pakistan has faced multiple adverse conditions in recent years. Democracy is fragile, and the military’s influence over the government is growing. Relations with neighboring countries are strained, and the intensifying U.S.-China rivalry is putting additional pressure on Pakistan.

Amid political chaos and a collapsing economy, Pakistan’s government has become increasingly reliant on the military, which is eager to seize power in the name of stability. Since 2022, the country has seen significant political turmoil, highlighting the military’s grip over national politics. Former Prime Minister Imran Khan was removed from office due to growing tensions with top military generals over policy decisions and appointments. This led to his imprisonment. According to critics, Khan rose to power in 2018 with military support, but his tenure was marred by public disagreements with military leaders, ultimately leading to his ousting.

Throughout Pakistan’s history, elected governments and political leadership have never been truly strong. As a result, political divisions have only deepened the country’s reliance on the military. It is also true that military interference in governance has severely undermined the credibility of democratic processes, particularly elections. Since its inception, the Pakistani military has supported indecisive or pliant leaders who, after winning elections, implement both domestic and foreign policies as per military directives, leaving other politicians to follow orders.

At one point, The Economist described India and Pakistan as “natural trading partners.” In reality, if the two neighbors could establish friendly relations, trade and investment partnerships would flourish, benefiting people on both sides. The two countries are significantly complementary in agriculture, manufacturing, and services—they rely on each other. A long war would increase economic burdens on both sides, ultimately harming citizens, as governments would prioritize military spending over improving the quality of life. At this critical juncture, dialogue between the two nations is vital to reduce geopolitical tensions in the region.