The tensions between India, Pakistan and Afghanistan have continued to rise for the third day following India’s military operation, Operation Sindoor. This was in response to a terrorist attack that claimed 26 lives at Pahalgam.
Residents in several Indian cities reported explosions and blackouts over the night of Friday.
Indian defense authorities reported that drones had been spotted at 26 different locations.
New Delhi authorities said Pakistan had used almost 400 drones in 36 different locations from Siachen all the way to Sir Creek on May 9th, which Indian air defence was able to stop.
The Pakistani military has dismissed India’s claims of cross-border aggression, calling them “phantom defense”.
The Pakistani Army’s Press Secretary, Lt. General Ahmed Sharif Chaudhry said at a briefing that “They sent their drone.” “They are receiving a proper response.”
The Pakistani official added that the country would respond “at any time, anywhere, using whatever method we choose.”
Chaudhry acknowledged indirect communications between Indian and Pakistani leaders, but he emphasized that Pakistan played no part in the terrorist attack at Pahalgam and disputed India’s claim of foiled attacks across a dozen different cities.
Concern grows over the threat of prolonged war
Global observers are concerned about the possibility of a larger conflagration, as both countries have nuclear weapons and share a turbulent past.
Analysts have noted that India and Pakistan both appear to be more willing to take risks, increasing the chances of military clashes.
Even though a war of full scale is considered by many experts to be unlikely, limited conflicts can have high human and economic costs.
Kargil is frequently cited as an example. India spent approximately Rs14.6 billion a day at that time, while Pakistan had daily expenditures of Rs3.7 billion.
IMF is considering approving another $1.3 billion loan for Pakistan, but the country’s economy remains fragile
Pakistan is likely to suffer more from the economic impact of hostilities that continue for a long time, as it is already dealing with multiple crises.
Sharif’s government faces a weak mandate, a continuing Islamist insurgency on the Afghan border and separatist violence within Balochistan.
Islamabad has a lot of problems on the financial front.
In 2024 its external debt will have risen to $130 billion, and over 20% of it is owed by China.
The foreign exchange reserves hovered at just over $15 billion. This is enough to cover about three months worth of imports.
Fitch estimates that more than $22 Billion in external public debt, including $13 Billion in bilateral deposits is due by FY25.
Pakistan received a bailout of $7 billion from the IMF in September 2024. This provided a temporary reprieve, but the country is still vulnerable.
IMF reviewed on Friday its Extended Fund Facility of $1 billion and considered approval of a $1.3 billion Resilience and Sustainability Facility.
India, an active member of the IMF, expressed skepticism regarding Pakistan’s reform ability, noting its long history with failed bailouts.
India questioned whether Pakistan needed another bailout because the program had failed or was not implemented properly.
India has also expressed strong objections to any potential misappropriation of IMF funding, warning the international community that continuing financial support to a country suspected of supporting cross-border terrorist acts sends an alarming message.
The report warned that this kind of assistance would undermine the trustworthiness and principles held by global donors and institutions.
Why Pakistan can’t risk full-blown conflict
Moody’s Ratings had warned just two days prior to India’s Operation Sindoor that extended hostilities could derail Pakistan’s fiscal consolidating and hinder any macroeconomic progress.
The report said that tensions would increase and could affect Pakistan’s ability to access external funding, as well as put pressure on its already thinned out foreign reserves.
Yousuf Nazar, a former Citigroup executive, echoed these concerns in the Financial Times, writing that Pakistan’s agriculture sector was not prepared for another shock.
Nazar said that India’s suspension of Indus Waters treaty would further threaten the livelihoods and lives of millions of Pakistanis, since agriculture is the main occupation of nearly 40% of Pakistani workers.
The country, with its political instabilities and the effects from the floods of 2022 still lingering on the ground, is not prepared for another shock. One crisis can trigger mass suffering and economic collapse. “For Islamabad, avoiding a significant escalation may be a matter of survival”, Nazar writes in FT.
Even if it appears that a war of full scale is unlikely, there remains a high possibility for limited hostilities – which have been frequent throughout the turbulent history of the rivalry. “Short-lived escalations could still have a huge impact on the economy and people of Pakistan, especially if they are short lived.” he said.
India’s economy is more stable, but increased defence spending has repercussions
India is a relatively stable economy, but it also evaluates the cost of maintaining a military readiness.
India’s foreign exchange reserves are over $650 Billion, which makes it better equipped to handle shocks like capital outflows and rising military spending.
These costs are not negligible.
India has allocated Rs 6,21 lakh crore for defence expenditures in the Union Budget 2024.
This figure is modest when compared with China’s budget for military expenditures of more than $200 billion. However, any increase in this amount could put fiscal resources under strain.
Frontline reported that economist and journalist Mitali Mukerjee had noted how recent tax incentives introduced to increase consumer demand reduced government revenues by Rs1 trillion per year, which could limit future spending.
She said that if India increased its military spending, the country would be in a difficult situation.
Mukherjee stated that the latest Union Budget is an admission of the need to address consumer spending urgently, with a tax stimulant being the solution.
It is unclear whether there has been any improvement on the erosion of real purchasing power, or slowing down personal loan growth. This tax stimulus does have a negative side. The government loses 1 trillion rupees per year, which will affect its revenue and limit its spending power.
In a separate report, Moody’s stated that India’s economic conditions would likely remain stable even in the event of prolonged tension.
As buffers, they viewed strong public investments and robust consumption by private consumers.
The agency did add a cautionary note: “Higher defense spending could potentially impact New Delhi’s financial strength and slow down its fiscal consolidation.”
The cost of a standoff that has no end in sight
Both nations have taken steps to prevent a full-scale conflict, but the likelihood of a low-intensity war continuing is high.
Financial institutions and experts have started to calculate the cost of lost growth, increasing debt and long-term instabilities.
The world is increasingly concerned as drones and air defense responses continue to light up the night sky in northern India.
Even if a war never erupts fully, the price may be already being paid in terms of economic decline, weak diplomacy and weakened domestic stability.
The post How much an extended conflict between India & Pakistan will cost both their economies can be updated as new information becomes available
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