Why Pakistan can’t afford another conflict with India

Heightened geopolitical tensions threaten to unravel Pakistan’s fragile economic recovery.. India’s missile strikes into Pakistani territory this week — the deepest incursion since the 1971 war — have sharply escalated tensions between the two nuclear-armed neighbours. The strikes followed a terrorist attack in Indian-administered Kashmir that left 26 civilians dead. In response, Pakistan’s Prime Minister Shehbaz Sharif has reportedly described the Indian offensive “an act of war” and pledged retaliation, raising fears of yet another cycle of conflict in South Asia.
But for Pakistan, the consequences of even a limited conflict could be disastrous. While India, too, faces potential economic fallout, the relative resilience of its $3.7 trillion economy — the fifth-largest globally — offers it far more room to absorb shocks than Pakistan, whose GDP stands at around $375 billion, nearly one-tenth the size. “Tensions with India would likely weigh on Pakistan’s growth and hamper fiscal consolidation, setting back macroeconomic stability,” reportedly noted Moody’s Investors Service in a note dated May 5.
Fragile Recovery Threatened by Renewed Conflict
Pakistan’s economy is already on precarious footing. The country is currently under a $7 billion International Monetary Fund (IMF) programme aimed at stabilising its macroeconomic environment after years of fiscal mismanagement, inflationary pressure, and external account stress. A resurgence in geopolitical risk threatens to derail that recovery.
As of December 2024, Pakistan’s external debt had risen to over $131 billion, while its foreign exchange reserves hovered near $10 billion — barely enough to cover three months of imports. Access to international debt markets remains restricted, and any further escalation with India could further dampen investor confidence and jeopardise disbursements from bilateral and multilateral lenders.
Adding to the concern is Pakistan’s dependency on external financing including regular debt rollovers from China, which recently extended $2 billion in repayments. Such reliance has raised alarm among economists and international donors, who warn that deepening dependency on Beijing could restrict Pakistan’s diplomatic flexibility and long-term economic autonomy.
Historical Lessons: Conflict Brings Economic Setbacks 
Pakistan’s history provides ample evidence of how regional instability can damage its economic prospects. The aftermath of the Afghan war in the 1980s and the Kargil conflict in 1999 left deep scars on the economy — spurring inflation, deterring investment, and fuelling sectarian violence that weakened state institutions.
The stakes today are even higher. A full-scale war, while unlikely, could destabilise already-fragile sectors such as agriculture, manufacturing, and services — the three pillars supporting Pakistan’s GDP. Inflation remains elevated, unemployment is high, and climate shocks such as the devastating floods of 2022 have only added to economic volatility.
India’s Comparative Strength: Shock Absorption Capacity 
India, though not immune to the costs of conflict, is in a markedly better position. Defence spending in the wake of a crisis could slow down its fiscal consolidation and divert resources from infrastructure development and welfare schemes. But with a robust economic base, substantial foreign exchange reserves (over $620 billion), and strong domestic consumption, India is far better equipped to handle external shocks.
Moreover, bilateral trade between the two countries remains negligible — less than 0.5% of India’s total exports in 2024 — meaning that any economic retaliation by Pakistan would have limited impact on Indian commerce. However, a two-front security challenge — involving Pakistan and ongoing tensions with China along contested borders could strain India’s defence budget. The Modi government has been keen to balance military preparedness with developmental imperatives, making long-term entanglement in any regional conflict an unattractive option even for New Delhi.
Agriculture and Water Security at Risk
Perhaps the most alarming prospect for Pakistan lies in the potential disruption of the Indus Waters Treaty — a critical lifeline for its agricultural sector. India’s decision to suspend elements of the treaty sends an ominous signal. Agriculture accounts for nearly 20% of Pakistan’s GDP and employs close to 40% of its labour force. Disruption to irrigation could devastate crop yields, drive food inflation, and exacerbate rural poverty. Combined with the economic aftershocks of recent floods and the ongoing political uncertainty, Pakistan is dangerously exposed to a multi-dimensional crisis.
For Islamabad, the desire to respond militarily may serve short-term political narratives, but the long-term economic consequences could be dire. A protracted conflict risks collapsing the IMF programme, exhausting foreign reserves, crippling agriculture, and triggering a capital flight that would further isolate Pakistan from global financial markets. India, too, would bear indirect economic costs, but its diversified and resilient economy offers far greater insulation.
In a region where approximately 400 million people survive on less than $3.65 a day, even small-scale conflicts could cause significant economic and humanitarian setbacks, with the most severe impact on the more fragile economy. Swift diplomatic intervention is essential. The stakes are not just geopolitical but profoundly economic, and for Pakistan, the cost of escalation could be nothing short of existential.

(Business Correspondent)