The tensions between India and Pakistan which has led to cross border attacks and raids by India and also the continued infiltration and attack on army base in Kashmir has caused a lot of concern. While the tensions continue, the question is how it is affecting the economy both in short term and long term. The Finance Minister has asserted that the impact is marginal. However, the stock markets have been reacting negatively. Business analysts feel that the international outlook towards this tension is cautious and a wait and watch approach is being adopted.
Impact on Economy:
- Indian economy is very large therefore, in some sense it is able to absorb any direct impact of disruptions in bilateral trade from Pakistan which in any case is rather marginal and small in magnitude. The major impact is on investment climate in India as these tensions are being perceived as causing instability in the South Asia region and therefore, investors are bound to take a wait and watch approach towards bringing in further investment to the country.
- FDI, India’s trade with Central Asia, regional cooperation and trade will get affected as evident from cancellation of SAARC Summit. MFN status to Pakistan has collapsed now. One year ago, there were talks of SAARC currency. India might be forced to look for other options of trade in the region. It should try to come closer to the ASEAN.
- Same thing might hold true for domestic investors as well because no one wants to invest in a situation where political risk in heightened as it easily translates into commercial risk. However, there is also a positive sentiment that the government is strong and decisive enough.
- There is a need to keep in mind the diversity between Indian economy and the Pakistani economy. Pakistan’s economy is smaller, not so diverse and mainly agrarian and hence depends upon a lot of water which flows down the Indus, Chenab and Jhelum on which it has full rights. If tensions continue to build, impact on Pakistan would be more as compared to India.
- There would be a certain impact on government expenditures of both the countries in case of a war. India is passing through a stage where private investment is lagging behind and this is considerably important for keeping our rate of growth, investment ratio on track. Continued tensions and low intensity warfare may also increase the inflationary impact on the country. Rolling out of GST in the coming days will only add to inflation. There would be an impact on the government finances taking into account the fact that a government which is keen on increasing public investments; suddenly there might be a tremendous pressure from Defence Ministry to increase its budget. This affects capital expenditure which is a long drawn out process.
- This is an opportunity lost by both the countries to have bilateral trade which could have boosted both the economies, direct route to Afghanistan, in terms of power supply to Pakistan although not much has been done in this regard etc.
- Bollywood is something which is not much talked about. But in this scenario as a tertiary impact, it would lose an indirect market in Pakistan. Though India does not gain direct benefit from it but through Dubai or other centres, lot of money is generated and India’s soft power is also extended.
- There are three types of trade between India and Pakistan i.e. the normal export and import and trade through Dubai which will be affected as well. There is also a barter trade taking place at the border which is probably not accounted. These goods impact the economy of the border states.
- On a positive side, if there is an increase in expenditure which improves the capacity utilization in our ordinance factories, it might help the economy. It would be a good opportunity for more foreign investment on the defence side. It would help government to move faster in this area keeping aside the political cobwebs.
- Over the years, Pakistan has tried to integrate its economy more and more with the Central Asian countries. Therefore, the benefits it is getting from these countries might not get affected significantly but the trade with SAARC countries might prove to be a setback for them. Their fiscal position is not that strong and robust so there will be more crowding out effect for public investment in Pakistan compared to India.
- CPEC is independent of what is happening now. It can be expected that if Pakistan faces some difficulty, China would certainly flex its muscles in different areas to create some difficulties for India which would be a diplomatic challenge to be countered effectively. If there is a naval blockade or tension in Balochistan, it will be against Chinese interests.
- Immediate concern for India is TAPI pipeline. After considerable many years, there was progress on it. Pakistan’s response has been lukewarm in this regard. India’s demand for hydrocarbons particularly gas is growing considerably because of substitution of coal with other resources, use of clean energy resources. Though India can get gas from Qatar and other countries but TAPI pipeline linked it with Central Asian countries directly.
- There might be much more heightened threats of terrorism in different parts of India beyond the border states. The security agencies will have to bolster their anti-terrorist intelligence.
The sustained hostilities are detrimental for both the nations. In the short run the impact would be marginal but if this thing continues and escalate, there would be lot of concerns in rest of the world and international organizations that the situation does not go out of hand and is contained.