Moneycontrol Pro Panorama | Economic lessons from past India-Pakistan conflicts

Beyond politics, the economic fallout of a potential conflict looms large. History offers key lessons from past India-Pakistan clashes.

Dear Reader,

For India and Pakistan, much has changed since the horrific attack in Pahalgam’s Baisaran Valley on April 22, 2025. Terrorists, including three Pakistani nationals, killed 26 tourists, plunging the two countries into a dangerous standoff.

Claimed by the so-called Resistance Front, a Lashkar-e-Taiba proxy, the attack prompted India to suspend the 1960 Indus Waters Treaty (IWT), shut the Attari-Wagah border, expel Pakistani diplomats, and ban Pakistani nationals.

But it appears there’s more to come in this unfolding episode.

Pakistan seems perturbed by the possibility of Indian military retaliation. On April 28, Pakistan’s Defence Minister, Khwaja Asif, warned of an “imminent” Indian strike, citing intelligence and revealing the deployment of tactical nuclear missiles like the Hatf-9/Nasr.

Beyond politics, the economic fallout of a potential conflict looms large. History offers key lessons from past India-Pakistan clashes:

The 1999 Kargil War:

Sparked by Pakistan’s incursion into Jammu and Kashmir, the Kargil War saw intense fighting for 10 weeks, killing over 1,000 soldiers. India’s Sensex, then around 4,000 points, dropped 5 percent in May 1999 as fears of escalation grew, compounded by global sanctions following India’s 1998 nuclear tests. Defence spending rose, contributing to a fiscal deficit of 5.1 percent of GDP, while trade disruptions hurt exports.

Pakistan’s KSE-100, less developed at the time, fell 7 percent amid international isolation following its own nuclear tests and the coup that ousted Nawaz Sharif. Pakistan’s GDP growth slowed to 4.2 percent in 1999–2000, strained by military costs and sanctions.

To be sure, both markets rebounded within months—India’s Sensex gained 20 percent by year-end, fuelled by IT sector growth while Pakistan’s recovery was slower due to political instability.

The lesson: Localised conflicts cause sharp but temporary market dips, with India’s larger economy recovering faster.

The 2001 Parliament Attack:

The December 2001 attack on India’s Parliament, blamed on Lashkar-e-Taiba and Jaish-e-Mohammed, killed 14 and triggered a military standoff, with over one million troops mobilised along the border.

India’s Sensex, around 3,300 points at the time, fell 7 percent in December 2001, worsened by the global recession post-9/11. Foreign institutional investors (FIIs) pulled out $200 million, and India’s GDP growth dipped to 4.8 percent in 2001–02, reflecting trade and tourism losses.

Pakistan’s KSE-100 dropped 6 percent, with GDP growth slowing to 3.1 percent as military spending surged and FDI dried up. Bilateral trade, then $250 million, halted, and airspace closures cost Pakistan $50 million in overflight fees.

Diplomacy, led by the US, averted war, and markets stabilised by mid-2002, with India’s Sensex rising 10 percent as global conditions improved. Pakistan’s recovery lagged, hampered by its smaller, $72 billion economy.

This shows how the global economic context amplifies conflict-driven losses, with Pakistan’s smaller market more exposed.

The 2008 Mumbai Attacks:

The November 2008 Mumbai attacks, orchestrated by Lashkar-e-Taiba, killed 166 and paralysed India’s financial hub. The Sensex, already battered by the global financial crisis, fell 4 percent to around 8,700 points in late November, with hospitality and real estate stocks hit hardest.

FII outflows reached $13 billion in 2008, and tourism revenues dropped 15 percent, costing $2 billion. India’s GDP growth slowed to 6.7 percent in 2008–09, though domestic demand cushioned deeper losses. Pakistan’s KSE-100 crashed 8 percent, reflecting its $170 billion economy’s fragility amid political turmoil and IMF bailout talks.

Trade, at $1.8 billion, plummeted, and Pakistan’s growth fell to 1.7 percent. India’s restraint, under US pressure, prevented escalation, and the Sensex rebounded 80 percent in 2009, driven by stimulus and banking reforms.

Pakistan’s KSE-100 gained 35 percent, but structural weaknesses slowed recovery.

The takeaway: Terror-driven shocks are sharp but short-lived if war is avoided, with India’s market depth offering an edge.

The 2019 Pulwama–Balakot Crisis:

The February 2019 Pulwama attack, which killed 40 Indian soldiers, prompted India’s airstrike on a Jaish-e-Mohammed camp in Balakot, Pakistan. Pakistan’s retaliatory airstrikes and capture of an Indian pilot raised fears of full-scale war.

The Sensex, then at 36,000, dipped 2 percent in February, with aviation and tourism stocks falling 5 percent. FII inflows slowed, but India’s $2.9 trillion economy absorbed the shock, with GDP growth at 6.1 percent in 2019–20.

Pakistan’s KSE-100 fell 3 percent to 38,000 points, reflecting its $320 billion economy’s exposure to trade sanctions and FATF scrutiny. Bilateral trade, already down to $2 billion, shrank further, and Pakistan’s growth slumped to 0.5 percent.

De-escalation, via Pakistan’s return of the Indian pilot, stabilised markets. The Sensex ended the year up 10 percent, and the KSE-100 recovered 15 percent as tensions eased.

This highlights the resilience of India’s market to limited conflicts while Pakistan’s smaller economy struggles under prolonged uncertainty.

As my colleague Shishir Asthana notes in his piece, experts believe that although a full-scale war appears unlikely, if tensions escalate, Pakistan’s economy could bear the brunt more severely than India’s.

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