The Financial Effects of an Indo-Pak War

The relations between India and Pakistan have never really been cordial. Ever, since the Islamic Republic of Pakistan was carved out of British India, the two countries have been at loggerheads. The countries have fought four wars until now, and the disputed territory of Kashmir has been at the centre of three of those wars.

After the Indian security forces were attacked at Pulwama it Kashmir where 44 soldiers were martyred, there is immense tension in the Indian subcontinent. India has been holding Pakistan responsible for this dastardly attack. However, at the same time, Pakistan has been simply denying any involvement in the attack.

Warmongering and chest thumping by politicians and media channels on both sides of the Indo Pakistan border almost brought the nuclear-armed neighbours to the brink of another war.

The problem is that neither Pakistan nor India can actually afford a war at this stage. India is on its way to becoming a global economic power. On the other hand, Pakistan is on its way to bankruptcy. A war would mean both countries would find it impossible to meet their economic objectives.

In this article, we will have a look at some of the financial consequences that would arise in the event of an Indo-Pak war.

Financial Effects of War

• Disproportionate Effect: Pakistan Prime Minister Imran Khan has repeatedly been saying that both India and Pakistan cannot afford the economic effects of war. This is true to some extent. However, it also needs to be understood that the economic effects of war on India and Pakistan will not be proportionate. While the Indian economy will be set back by a few years, the very existence of the Pakistani economy will be in question.

  This is because of the size and respective strength of the given economies. The GDP of Pakistan is about $305 billion dollars. Also, the country already has a huge debt burden and is also facing a foreign exchange crisis. India, on the other hand, has a GDP of $2.7 trillion. It is amongst the top 5 economies in the world. Obviously, war will have a huge impact on the Indian economy, but the effects will be disproportionately felt by Pakistan.

  With regards to poverty as well, Pakistan is more vulnerable than India. About 33% of the population of Pakistan lives in extreme poverty (less than $1.9 per day). On the other hand, this number is close to 16% in India.

• Increased Debt: Both India and Pakistan have a lot of debt on their balance sheets. Consider the case of Pakistan which receives only about $30 billion in the form of taxes. It is already borrowing money to keep its economy afloat. If other nations such as Saudi and China stop supporting Pakistan, it will cease to exist within a few months. It is therefore obvious that war will severely drain out the resources of an already fragile country. For Pakistan, therefore, victory won’t really be an option. Even if they were somehow able to do the unthinkable and beat India, they would have destroyed their entire economy in the process.

  India also has a fiscal deficit problem. The last war, i.e. the Kargil war had cost India close to $1 billion per week. It is now estimated that the current war will cost India $1 billion per day! Hence, if this war were to go on for about 2 or 3 weeks, it would end up increasing the fiscal deficit by 50%. To cover this fiscal deficit, the government would have to levy more taxes. These taxes will make Indian made products less competitive. The rapid growth which India is witnessing on the global stage will be impacted.

• Increased Defence Spending: Pakistan is already known for being a military state. The country is only about one-sixth of the size of India. However, it has an army which is about half the size of India. This is the reason why about 26% of the budget of Pakistan is attributed to military spending! This is the amount which they spend on weapons during peace times. In the event of a war, almost their entire spending will be diverted towards war. There will be no money left for any other social or economic programs which the country badly needs.

  War would lead to a dramatic increase in the military spending of India as well. The money will have to be spent to recoup losses to human life as well as damage to property. The pensions to the survivors of martyred soldiers will also have to be paid. Also, the cost of rehabilitating injured soldiers and civilians will have to be borne by the state.

• Loss of Investment: Lastly, it is a known fact that businessmen and investors tend to stay away from war zones. This is usually because businesses in the war zone are not stable. There are chances of attacks which may cause damage to life and property. Also, taxes are generally higher in a war zone. Hence businesses tend to leave the region. The economy of India, as well as Pakistan, are highly dependent on foreign investors. They cannot afford to lose these investments. Hence, both nations would be better off without a war.

  The bottom line is that the economic consequences of the war will be too severe for the fragile economy of Pakistan and the fledgling economy of India. Hence the escalation of conflict should be avoided unless absolutely necessary.