India-Pakistan Tensions: What Next On The Economic Front?

The question that is on everyone’s mind is: What next?

Surgical strike on the lines of Balakot? Ending the ceasefire along the Line of Control (LoC) and turning the whole border into a firing range? Those are possibilities, but every military action has consequences.

Other options could also be on the minds of India’s planners, including the stoppage of civilian flights over Indian airspace, blockade of Karachi harbour, through which 95 per cent of Pakistan’s US$ 100 billion trade passes.

But first, let’s understand the impact of the most important economic measures already announced — the suspension of the Indus Water Treaty — which was decided at a Cabinet Committee on Security meeting which took place on Wednesday night. 

Indus Waters Treaty: All Flow, No Stop

Despite the impact of the announcement on the 1960 treaty brokered by the World Bank, the truth is that water from a river cannot be stopped by turning off a tap. 

The six rivers that enter Pakistan and are the principal source of its water supplies (some 70 per cent), do originate or pass through India, but it is difficult to build infrastructure to either stop the flow of water or to store it within India even over the medium term.

"The immediate impact of the suspension of the Indus Water Treaty will be that information sharing and meetings of the respective Indus commissioners will be in abeyance. The symbolic impact is, of course, much more, given Pakistan's anxieties as a lower riparian of India," TCA Raghavan, former High Commissioner to Pakistan, told The Secretariat.

Three rivers — Beas, Ravi, and Sutlej — were awarded to India, while the other three rivers — Indus, Chenab, and Jhelum — were given to Pakistan. The award was based on a recognition of topography rather than a case of even-handedness.

What, however, could happen is that Indian plans for hydel projects on the Jhelum and Chenab rivers to generate electricity by using the flow of the river, which Pakistan has repeatedly thwarted, may now be restarted with full vigour.

However, the squabble over the rivers may prove to be short-lived, as experts predict that by 2030, the Indus might start shrinking fast. By 2060, it could be 20 per cent weaker than it was in 2000. That may well be the point when a real threat of “war over water” looms large over the subcontinent.

India-Pakistan Overflight 

In retaliation to India's steps, Islamabad on Thursday said it has stopped all flights by Indian aircraft over its territory.

Pakistan had similarly banned Indian overflights in 2019, in the aftermath of India carrying out retaliatory strikes on Balakot in the wake of the Pulwama attacks by terrorists from across the border. India had responded with a similar stoppage of all Pakistani overflights at that point of time (Though both sides backed down later).

One cannot rule out a similar tit-for-tat move by India this time round, too. Last time round, some 400 flights a day were affected by the over-flight ban.

"At least 450 km is added if we avoid taking Pakistani airspace for flights to London for instance. For Pakistani flights to Southeast Asia, the diversion would mean flying at least 800 km more," said a Delhi-based director of a private airline.

This would mean Indian flights to the Gulf, Europe, and the Americas would have to take longer alternate routes, raising fuel costs and extending travel time. This would not only impact passenger fares but, more importantly, also raise air cargo rates. The rise in costs for Pakistani flights to South East Asia would of course be far more.

In response to India’s actions besides the closure of airspace, Pakistan on Wednesday announced a series of retaliatory measures which were largely expected. Other steps included suspension of all Bilateral Agreements including the 1972 Simla Agreement; suspension of whatever trade was left between the two countries; tit for tat visa revocations and diplomatic downgrading  besides a warning that it would consider the any diversion of Indus waters as “an act of war”.

Karachi Blockade?

“This option (of a harbour blockade) should be considered. The economic cost to Pakistan would be huge. All its trade and commerce is through Karachi,” pointed out Vice-Admiral Shekhar Sinha, former Flag Officer-in-Chief of the Western Naval Command.

Any tension between the two countries, including and especially if it extends to an economic blockade of Karachi harbour — through which some US$ 95 billion worth of trade passes — 30 per cent of it being Pakistan’s exports, the rest, its imports, could also increase shipping rates and insurance costs for exporters of all countries in the region.

The impact on Pakistan would be severe, as it could virtually end most of its foreign trade, and impose a punishing economic cost on a country that is already saddled with a national debt of US$ 285 billion, has to repay its creditors around US$ 100 billion over the next four years, and whose currency has fallen by 76.25 per cent in five years, to Pak Rs 282 to the Dollar.

The option of retaliatory missile or air strikes, of course, remains, but with the possibility of counter-retaliations ratcheting up the heat, the danger of an escalation beyond control always exists.

Trade Or No Trade

Despite the ban by Pakistan on Indian exports, the occasional permission to import much-needed food or other goods such as onions and raw sugar, has meant that even in April 2024-January 2025, India exported goods worth nearly US$ 490 million to Pakistan, while Islamabad — which faces a 200 per cent tariff for its goods in India — managed to sell directly goods worth nearly US$ 605 million.

Experts believe that trade between the two countries through third countries like Dubai, Singapore, Afghanistan and China is far higher. Estimates vary from US$ 3 billion to US$ 10 billion. The potential trade between the two was identified at US$ 12 billion in 2007 by the thinktank ICRIER. Many believe this would be nearer US$ 30 billion as of now.

“There is significant demand for goods from India in Pakistan, and visa-versa. The ASEAN integration process has also shown us how trade with neighbours can have a multiplier effect on economic growth,” said Professor Biswajit Dhar, former Director-General of Research and Information Systems for developing countries. 

However, Pakistan's current moves to totally stop trade can only mean that India's exports to Pakistan will flourish through third country trade and middle-men in Dubai and Singapore will earn more commission, said analysts.

The future will tell us which way the two neighbours will move — towards conflict or peace. However, one thing is accepted in Indian policy circles — there can be no peace or going back to normal as long as terror continues to be exported by Pakistan or its proxies on Indian soil. 

“I see our policy as one of strategic patience, and of choosing our time, place and target to punish the perpetrators,” said Pinak R Chakravarty, former secretary in the Ministry of External Affairs.

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