Skirmishes between India and Pakistan are not new. But the rich world’s stake in South Asia is rapidly increasing.
That makes the risk of a conflict between the nuclear-armed neighbours harder to ignore for countries, executives and investors betting on the world’s fifth-largest economy emerging from the global trade war as some kind of safe haven.
On Wednesday, hours after Prime Minister Narendra Modi unveiled a landmark trade deal with the UK and trumpeted his country’s transformation into a vibrant hub of global commerce, India said it attacked nine “terrorist infrastructure” sites in Pakistan. It’s a jarring juxtaposition of economic and political events.
A muscular response from New Delhi was expected after an attack on tourists killed 26 people in Indian Illegally Occupied Jammu and Kashmir (IIOJK) last month.
That explains why Indian stock, bond and currency traders barely flinched on Wednesday morning local time: the Nifty 50 index rebounded after starting in the red, 10-year government bond yields traded flat, and the rupee recovered some of its opening losses. The less developed markets in Karachi were more skittish.
India also has a high tolerance for geopolitical risk. One concern, however, is that New Delhi may not achieve its desired deterrence.
Unsurprisingly, Pakistan’s army warns it will respond. Over the longer term, India’s suspension of a long-standing water-sharing treaty that ensured supply to 80% of Pakistani farms threatens to turbocharge poverty and fuel further violence.
Underscoring the lingering risks, several Indian states were due to conduct security drills on Wednesday to test civil preparedness, prompting multinational companies with global research and back office operations in the country to plan for the risk of power outages.
It’s a sobering moment for those counting on India to capture a bigger share of American supply chains from China – Apple aims to make most of its United States-bound iPhones in India by the end of 2026.
What’s more, although the US has not been a useful policeman of world order for some time, the danger of a conflict between India and Pakistan escalating may be higher under a chaotic administration in Washington.
New Delhi has the most to lose from a protracted standoff.
Despite some progress in seizing its moment on the global stage, the country remains a highly regulated, inefficient and complex market where overall foreign direct investment is falling as a share of GDP.
Among emerging markets, India has suffered some of the most selling by foreign institutional investors so far this year. Heightened tensions with Pakistan provide another reason for the undecided to look away.
