India-Pak wars won't stop at LoC, they'll hit the economy hard, from trade to balance sheets

Economic Times

16-05-2025

All wars are economically destructive. A full-blown India-Pakistan conflict would be no different. Its consequences wouldn't stay limited to LoC. They would jolt India's economy, the world's fastest-growing large economy, rupturing key arteries and showing up clearly on balance sheets. Therefore, India has more to lose than Pakistan, and a war would result in industries haemorrhaging, investor sentiment shaken and GDP growth limping.Today's wars are not waged solely with tanks and missiles. They scorch fiscal budgets, fracture trade corridors and unsettle capital markets. Economists forecast that a sustained India-Pakistan conflict could wipe out 1.5-3% of India's GDP. Based on anticipated FY26 GDP of ₹300 lakh cr, that's an economic loss of up to ₹9 lakh cr, roughly the size of some national budgets. Since border tensions escalated earlier this month, the rupee has plunged to ₹85.57 a dollar, its steepest fall in recent years. FIIs have pulled out $1.7 bn within two weeks. Historical warnings paint a clear picture:
Kargil war (1999) cost over ₹5,000 cr. That's a fraction of what a modern-day conflict would demand.
Galwan clash (2020) with China caused momentary market tremors. But a two-front war involving Pakistan could inflict deeper, longer scars.
Uri surgical strikes (2016) triggered an immediate 2% decline in equity indices, and 1.6% fall in the rupee.
Analysts fear that today, with greater capital market exposure and tighter global interlinkages, the same events would have 2-3x the financial impact. Many sectors are vulnerable to immediate shocks.
Trade and logistics: Although formal trade with Pakistan remains symbolic post-2019, war hampers vital trade infra. Kandla, Mundra and Mumbai face threats of shipping insurance premiums and logistical bottlenecks. India's connectivity with Central Asia, already under strain, may be choked.
Tourism and hospitality: In FY24, the sector generated over ₹16 lakh cr in revenue. A full-scale war could vaporise ₹2 lakh cr from this, with cancellations cascading across airlines, hotels and allied services.
Energy and commodities: India imports more than 80% of its crude oil. In the event of war, crude prices could soar by $10-15 a barrel, inflating India's CAD by 0.4% of GDP and stoking consumer inflation by up to 0.6%, according to RBI estimates.
Transport network: Disruptions in road, rail and air networks, coupled with volatile raw material prices, could cripple MSMEs, as many of them lack the capital buffers to survive prolonged crises. Many analysts estimate a potential 20% contraction in output if war drags beyond six weeks.
Finance: Capital markets abhor uncertainty. In previous episodes of conflict, equity indices slid by 5-8% in the immediate aftermath of escalation. While domestic institutions have stabilised recent declines, foreign investors remain skittish. Global funds with ESG mandates are reassessing allocations, wary of reputational and regulatory risks.
Real estate: This sector, especially in tier-1 cities, could experience a temporary freeze, as buyers delay big-ticket purchases amid uncertainty. Meanwhile, the startup ecosystem, fuelled largely by overseas capital, might face a funding winter if the perception of India as a stable investment destination dims.
Here's a playbook for corporate preparedness:
Bolster liquidity buffers: Preserve cash, enhance working capital and avoid discretionary capex. Liquidity is not optional in wartime economics - it's existential.
Reconfigure supply chains: India Inc must reduce dependence on single-route imports and explore decentralised procurement, across Asean, Latin America and Africa.
Scenario planning: Conduct war simulations, not just cyber drills. From workforce safety protocols to customer communication strategies, every node of the organisation must be battle-ready.
Secure digital fortresses: Cyberattacks are a silent artillery in modern warfare. Strengthening firewalls, tightening access controls and running intrusion audits are no longer the chief information security officer's (CISO) job alone - it's the CEO's imperative.
Strengthen communication: False news and misinformation thrive in uncertainty. Transparent, frequent communication with staff, especially frontline and remote employees, builds resilience and morale.While GoI can deploy fiscal stimuli, slash fuel excise duties or issue war bonds, businesses must proactively adopt an austerity-plus-agility framework. Sectoral ministries and industry chambers must work together on contingency planning - from logistics to legal frameworks, insurance to import substitutions.Startups and MSMEs, usually the worst hit, should be granted war insurance packages, working capital credit extensions and deferred GST filings. A dedicated economic continuity taskforce could play a critical role in policy coordination.Wars are antithetical to economic progress. But preparedness is not paranoia, it's prudence. For businesses, this is a moment not just to protect profits but to prove purpose. Winners in wartime are not those who merely survive, but those who adapt, tweak and emerge more resilient. The economy may not fire the first shot. But it certainly bleeds the longest.