India-Pakistan War 2025: Financial Impacts and Long-Term Effects
In May 2025, tensions between India and Pakistan escalated into a military conflict following a deadly terrorist attack in Pahalgam, Kashmir, on April 22, 2025, which killed 26 civilians.
India’s response, dubbed Operation Sindoor, involved missile strikes on alleged terrorist sites in Pakistan, sparking retaliatory actions and raising fears of a prolonged war.
This article explores the financial aspects of the conflict, focusing on immediate costs, economic disruptions, and the potential long-term effects if the war extends beyond a month.
Drawing from recent analyses, we’ll break down the impacts on both nations, compare their economic resilience, and highlight key challenges.
Background: The Spark of Conflict
The Pahalgam attack, blamed by India on Pakistan-backed militant groups like Jaish-e-Mohammed and Lashkar-e-Taiba, triggered a swift response.
On May 7, 2025, India launched missile strikes targeting nine locations in Pakistan and Pakistan-administered Kashmir.
Pakistan denied involvement, claimed civilian casualties, and retaliated, reportedly downing Indian jets.
Both nations suspended trade, closed borders, and halted diplomatic ties, with India also withdrawing from the Indus Waters Treaty, further escalating tensions.
By May 10, a fragile ceasefire was announced, but the risk of renewed conflict remains high.
The financial toll of this short but intense standoff is already significant, and a war lasting over a month could devastate both economies, with ripple effects across South Asia and beyond.
Immediate Financial Costs of the Conflict
India’s War Expenses
India’s 2025–26 defence budget is ₹6.81 lakh crore ($78.8 billion), with 72% allocated to salaries, pensions, and maintenance, leaving limited room for wartime surges.
A 42-day conflict is estimated to cost India ₹49,000 crore ($5.9 billion), or 7% of its defence budget.
Daily war costs range from ₹1,460 crore to ₹5,000 crore ($175 million to $600 million), depending on the intensity of operations, such as missile strikes, jet deployments, and troop mobilization.
Pakistan’s War Expenses
Pakistan’s defence spending, at 26% of its national budget, is already stretched thin. A 42-day conflict could cost ₹12,250 crore ($1.5 billion), consuming 15% of its $10 billion foreign reserves.
Daily costs are estimated at $11.8 million to $83.2 million, potentially doubling regular military spending of $27.9 million per day.
With foreign reserves covering only two months of imports, Pakistan’s economy is highly vulnerable.
Comparison: Economic Capacity
GDP: India’s economy, valued at $4.2 trillion in 2025, dwarfs Pakistan’s $374 billion, giving India greater financial flexibility.
Defense Budget: India’s $77 billion defence budget is ten times Pakistan’s $7.6 billion, allowing for sustained military operations.
Foreign Reserves: India’s $677.84 billion in reserves contrasts with Pakistan’s $15.6 billion, limiting Pakistan’s ability to absorb shocks.
Economic Disruptions: Short-Term Impacts
Stock Market Volatility
The conflict triggered immediate financial panic. Pakistan’s Karachi Stock Exchange plunged 2,000 points within hours of India’s strikes, reflecting investor fears.
India’s Nifty50 index showed initial resilience but faces risks of decline if the conflict prolongs, as seen in the 2001–2002 standoff when markets dropped significantly.
Historical data suggests mixed long-term market responses; for example, post-Kargil War (1999), India’s markets rebounded with 16.5% gains, but the 2001 Parliament attack led to a 0.8% drop.
Trade and Border Closures
Formal trade between India and Pakistan, worth $1.2 billion annually, has ceased.
The closure of the Attari-Wagah border, which facilitated $451 million in commerce in 2023–24, disrupted Pakistan’s access to Indian pharmaceuticals, soybeans, and poultry feed. India faces minor shortages of cement and dry fruits.
Airspace closures have increased airline costs, with Pakistan losing 2.2 times more relative to its economy due to overflight bans.
Currency and Inflation Pressures
Pakistan’s rupee, already weak, could devalue to ₨285/$ in a prolonged conflict, driving hyperinflation.
Pakistan faces a $22 billion external debt repayment in 2025, and war could push it toward sovereign default, especially with reliance on IMF bailouts.
India’s low retail inflation (3.34% in March 2025) could spike due to supply chain disruptions, panic buying, or oil price surges, increasing borrowing costs and straining public finances.
Long-Term Effects of a Prolonged War (Beyond One Month)
If the conflict extends beyond a month, the economic fallout could be catastrophic, reshaping both nations’ financial landscapes and regional stability.
1. Macroeconomic Losses
A prolonged war could cost India over $17.8 billion (₹1.34 lakh crore) daily when factoring in macroeconomic impacts like reduced investment, trade disruptions, and slowed growth.
Pakistan’s smaller economy, projected to grow at 2.6%–3.2% in 2025, would likely contract, reversing IMF bailout gains and triggering a deeper recession. Both nations would face capital flight, reduced foreign direct investment (FDI), and higher borrowing costs.
2. Diversion of Resources
Heavy military spending would divert funds from critical sectors:
India: Reduced investment in infrastructure, healthcare, and education could slow poverty alleviation and job creation, exacerbating youth unemployment.
Pakistan: With limited fiscal space, cuts to healthcare and education would worsen poverty and social unrest, given its high population growth and structural challenges like a narrow tax base and energy shortages.
3. Global Trade and Energy Markets
A prolonged conflict could disrupt global supply chains and energy routes, especially if regional instability spreads.
While neither country is a major oil producer, escalation could raise insurance costs for shipping lanes, tightening energy markets.
Gold prices, already high, could rally further, and safe-haven currencies like the Swiss franc and yen may see increased demand.
Defence contractors and cybersecurity firms could benefit, but global investors may shift to safer jurisdictions, reducing FDI in South Asia.
4. Regional and Geopolitical Shifts
Pakistan may seek financial aid from allies like China or the IMF, potentially reshaping regional alliances.
India’s push to isolate Pakistan diplomatically, including pressuring donors and terrorist financing watchdogs, could strain Pakistan’s economy further.
However, India risks overextending its resources, especially if domestic pressure for aggressive action persists.
The absence of strong U.S. mediation, unlike in past crises, heightens the risk of escalation, as President Trump has shown little interest in intervening.
Challenges for Both Nations
India’s Challenges
Balancing Growth and Defense: India’s diversified economy and robust FDI inflows support growth, but prolonged conflict could deter investors, as seen in 2018 when FDI dropped 7%.
Inflation Risks: War-related disruptions could reverse low inflation, impacting consumer welfare and increasing government borrowing.
Domestic Pressure: Public outrage over the Pahalgam attack demands strong action, but escalation risks economic strain and regional instability.
Pakistan’s Challenges
Economic Fragility: With low reserves, high debt, and reliance on external aid, Pakistan faces a high risk of default and hyperinflation.
Limited Military Capacity: Despite acquiring advanced jets like the J-10, Pakistan’s smaller defence budget and reserves limit sustained conflict.
Public and Political Pressure: Leaders face pressure to retaliate, but economic constraints make prolonged war unsustainable.
Comparison: Who Can Endure Longer?
India’s larger economy, higher reserves, and diversified revenue streams give it a significant advantage in sustaining a prolonged conflict. Pakistan’s reliance on agriculture, narrow tax base, and limited reserves make it far less resilient.
A month-long war could push Pakistan toward economic collapse, while India, though strained, could maintain operations longer.
However, both nations would suffer long-term setbacks, with India losing developmental momentum and Pakistan risking systemic economic failure.
The India-Pakistan conflict of May 2025 has already imposed significant financial costs, with daily expenses straining budgets and disrupting markets.
If the war extends beyond a month, both nations face severe economic consequences: India risks slowed growth and inflation, while Pakistan teeters on the brink of collapse.
The disparity in economic strength favours India, but the prolonged conflict would harm both, with global implications for trade, energy, and regional stability.
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