A military escalation that risks triggering economic ruin in Pakistan

India’s military move deepens crisis for Pakistan as economic collapse looms amid rising tensions.

Locals stand on the debris of destroyed structures at the Government Health and Educational Complex in Muridke, about 30 kilometers from Lahore, following Indian strikes on May 7, 2025. Photo by Farooq Naeem/AFP

By Alana Salsabila and Clarisa Sendy

India’s recent missile strikes against Pakistan mark a turning point in one of the world’s most enduring rivalries. This sharp escalation — the deepest military incursion into Pakistan’s undisputed territory since the 1971 war — has reignited fears of a broader regional conflict. But beyond the military maneuvering, what is truly at stake is Pakistan’s economic survival. The India Pakistan missile strikes may ultimately do far more damage to Islamabad’s fragile fiscal health than to New Delhi’s geopolitical posture.

The attacks were prompted by a deadly terror strike in Indian-administered Kashmir in April, which killed 26 civilians. India’s forceful retaliation, framed as a response to cross-border terrorism, has drawn both condemnation and concern from the international community. U.S. President Donald Trump described the developments as “a shame,” urging both nations to seek a peaceful resolution, noting that “they have been fighting for a long time.”

While the military conflict grabs global headlines, the deeper story is economic. And it is Pakistan, not India, that stands to suffer the most.

Pakistan’s economic house of cards is teetering

For Pakistan, the timing of the India Pakistan missile strikes could not be worse. The country is still struggling to stabilise its economy after years of mismanagement, natural disasters, and political volatility. Moody’s Investors Service issued a stark warning earlier this week: further escalation could derail Pakistan’s fragile macroeconomic recovery and compromise fiscal consolidation efforts.

That risk is real. Pakistan is currently operating under a $7 billion loan programme from the International Monetary Fund (IMF), and its continued access to that financing depends heavily on stability — both political and economic. A spike in geopolitical tensions, particularly of this magnitude, raises investor concerns and jeopardises access to foreign capital markets.

As of December 2024, Pakistan’s external debt had ballooned past $131 billion. Its foreign exchange reserves were barely hovering above $10 billion — a figure that covers only about three months’ worth of imports. In simple terms, the country is walking a tightrope. A military escalation of any scale could knock it off balance.

A history of instability and external shocks

Pakistan’s vulnerability is not new. Decades of intermittent conflict — both internal and external — have left the country’s economic foundations brittle. The war in Afghanistan, for instance, did more than destabilise the borderlands. It flooded Pakistan with weapons, drugs, and ideologies that have long outlasted the Taliban’s first reign. It also entrenched a militarised economy, where defence spending consistently outranks development priorities.

The return of large-scale hostilities with India, even if limited, threatens to deepen this pattern. Former Army Chief General Qamar Javed Bajwa once admitted that Pakistan lacked the diesel reserves to operate its tanks — a sobering illustration of how underfunded and overstretched its military apparatus remains. That vulnerability, which he described in 2021, still lingers.

India holds the upper hand — for now

India, in contrast, is economically more resilient. Despite the gravity of the India Pakistan missile strikes, India’s domestic economy is unlikely to face serious disruption. Bilateral trade between the two countries has remained negligible since the early 2000s, and currently accounts for less than 0.5 percent of India’s total exports.

This means that even a full severance of ties would leave India largely unaffected in trade terms. While defence spending may rise, potentially slowing down fiscal consolidation, India retains the policy space to absorb such shocks. However, that doesn’t mean New Delhi is immune from consequences. With an assertive China along its northeastern border, India must carefully weigh the risks of adopting a two-front military posture.

Still, India’s manageable challenges pale in comparison to the existential threats Pakistan faces. Islamabad’s dependence on external aid, particularly from China, has become increasingly precarious. In March, Beijing quietly rolled over $2 billion in debt — a temporary reprieve that only underscores Pakistan’s limited options.

Domestic instability adds fuel to the fire

Militarised posturing may temporarily rally nationalist sentiment in Pakistan, but the long-term economic costs are devastating. The country is already grappling with soaring inflation, political unrest, and the lingering impacts of the catastrophic 2022 floods. Its agriculture sector — the backbone of its real economy — is increasingly under threat.

India’s unilateral suspension of the 1960 Indus Waters Treaty, a cornerstone agreement governing water sharing between the two nations, sends a chilling message. Pakistan’s agricultural sector employs nearly 40 percent of its labour force. Without adequate water access, the risks of mass displacement, food insecurity, and civil unrest become very real.

With this in mind, Pakistan’s continued sabre-rattling appears deeply self-defeating. The economic fabric of the nation is too worn to withstand another crisis. And if the economy collapses, it could ignite a humanitarian disaster affecting tens of millions.

Global leaders must act — now

The India Pakistan missile strikes serve as a dire warning. While a full-scale war remains unlikely, the possibility of recurring skirmishes is high — as history has shown. Even short-lived conflicts can inflict disproportionate harm, particularly on weaker states. Pakistan, by almost every metric, fits that description.

This moment calls for urgent diplomatic engagement from the international community. The United States, China, and Gulf states — all with leverage over either Islamabad or New Delhi — must step in to prevent further escalation. The stakes are not limited to South Asia. With both countries being nuclear-armed and home to a substantial share of the world’s poorest people, any misstep could spiral into global crisis.

There’s also a broader principle at play. Global conflict mediation should not wait until mushroom clouds threaten the sky. The world watched Syria burn, Ukraine shatter, and Gaza bleed — often with delayed responses. South Asia must not be next.

War is not an option

The India Pakistan missile strikes may be the most significant escalation since the 1971 war, but they need not become a repeat of it. For Pakistan, the path forward must prioritise economic stability over political theatre. For India, strategic patience and diplomatic restraint will reinforce its standing as a rising global power.

Above all, both nations must recognise the cost of war has changed. In an interconnected world with fragile supply chains and volatile capital flows, bullets and bombs no longer remain confined to battlefields. They echo in markets, in homes, and in the lives of ordinary people — especially in a place as vulnerable as Pakistan.