Skirmishes between India and Pakistan are a recurring issue. However, the developed world’s investment in South Asia is rapidly growing.
This increasing stake makes the risk of conflict between the nuclear-armed neighbors a more pressing concern for countries, executives, and investors who are banking on India, the world’s fifth-largest economy, to emerge as a safe haven from the global trade war.
On Wednesday, just hours after Prime Minister Narendra Modi announced a significant trade agreement with the UK and highlighted his country’s transformation into a dynamic global commercial center, India reported attacking nine “terrorist infrastructure” sites within Pakistan. This juxtaposition of economic progress and political tension is striking.
A strong response from New Delhi was anticipated following an attack on tourists in Indian Illegally Occupied Jammu and Kashmir (IIOJK) last month, which resulted in 26 fatalities.
This explains why Indian stock, bond, and currency traders showed minimal reaction on Wednesday morning local time: the Nifty 50 index recovered after an initial dip, 10-year government bond yields remained stable, and the rupee regained some of its early losses. In contrast, the less developed markets in Karachi exhibited more nervousness.
India also demonstrates a high tolerance for geopolitical risk. A key concern, however, is whether New Delhi will achieve its desired deterrent effect.
Predictably, Pakistan’s military has warned of retaliation. In the long term, India’s suspension of a long-standing water-sharing treaty, which ensured supply to 80% of Pakistani farms, threatens to exacerbate poverty and further incite violence.
Highlighting the persistent risks, several Indian states were scheduled to conduct security drills on Wednesday to assess civil preparedness. This prompted multinational corporations with global research and back-office operations in the country to prepare for potential power outages.
This marks a sobering moment for those who are relying on India to capture a larger share of American supply chains shifting away from China – Apple aims to manufacture the majority of its United States-bound iPhones in India by the end of 2026.
Furthermore, while the US has not effectively acted as a global peacekeeper for some time, the danger of an escalating conflict between India and Pakistan may be amplified under a volatile administration in Washington.
New Delhi stands to lose the most from a prolonged standoff.
Despite some progress in capitalizing on its moment on the global stage, India remains a heavily regulated, inefficient, and complex market where overall foreign direct investment is decreasing as a percentage of its GDP.
Among emerging markets, India has experienced some of the largest sell-offs by foreign institutional investors this year. Heightened tensions with Pakistan provide yet another reason for hesitant investors to withdraw.
