War and economic variable
In the convoluted and ever-evolving terrain of South Asian geopolitics, military signaling often termed sabre-rattling has long characterized the India-Pakistan dynamic. Yet in 2025 this familiar pattern unfolds against a shifting backdrop with a growing economic disparity between the two nations. While the rhetoric of confrontation remains, the underlying economic fundamentals have changed significantly. This prompts a critical question whether Pakistan amid deepening economic vulnerabilities can afford the financial and structural costs of escalating tensions with a far larger and more economically resilient India.
The answer lies in understanding the divergent economic trajectories of the two countries. As of early 2025, Pakistan finds itself grappling with severe fiscal and macroeconomic challenges. According to the State Bank of Pakistan, the country's external debt has surpassed $131 billion. Foreign exchange reserves have dropped to around $9 billion—just enough to cover roughly six weeks of imports. Inflation remains persistently high, hovering between 20% and 30% over the past two years, eroding the purchasing power of ordinary citizens. Alongside this, the Pakistani rupee has lost over half its value since 2021, it faces a yawning current account deficit and plummeting foreign direct investment. These economic challenges are compounded by internal political instability, making Pakistan’s economic foundation increasingly fragile.
This economic malaise is not simply cyclical—it is structural. The Pakistani economy remains heavily dependent on external sources of funding, including remittances, foreign aid, and repeated IMF bailouts. Its tax-to-GDP ratio is among the lowest in the world, constraining public investment in infrastructure, healthcare, and education. Private sector growth has stagnated in many sectors, and foreign direct investment has been declining due to political instability and concerns about policy continuity.
This severely limits the government’s ability to invest in critical infrastructure or public services. Additionally, Pakistan's over-dependence on remittances and foreign aid has hampered its ability to build a sustainable growth model. At the same time, a deeply entrenched political elite continues to capture much of the national wealth, further derailing any genuine reform efforts.
In contrast, India has shown relative economic stability and growth. India has recently surpassed the UK to become the world’s fifth-largest economy in nominal GDP terms. As of May 2025, its foreign exchange reserves stand at a robust $686 billion, providing a significant buffer against external shocks. Inflation has remained largely within the Reserve Bank of India's target range of 2–6%. With a projected GDP growth rate of 6.5% in FY2025, India’s economy continues to surge forward, supported by a diversified base of manufacturing, services, and digital innovation. Inflation has remained within the Reserve Bank of India's target range, and the rupee has shown remarkable stability.
India, has positioned itself as an increasingly attractive destination for foreign direct investment, with a robust digital economy poised to hit $1 trillion by 2030. The country has shown political stability, institutional credibility, and the ability to execute tough economic reforms. India's economic strength is underpinned by several key factors: a diversified base in manufacturing, services, and digital innovation with continued investments in infrastructure and a growing domestic market. These efforts, though far from perfect, have contributed to consistent growth, with the economy projected to expand by 6.5% in FY2025. Furthermore, India’s growing strategic partnerships with global powers—through platforms like the G20, BRICS, and the Quad—have elevated its diplomatic standing, while Pakistan, once a key ally in the region, is increasingly isolated.
The divergence between the two economies becomes particularly important when viewed through the lens of strategic decision-making. Military escalation, even if limited, entails significant economic costs. These include direct expenditures on defense mobilization, losses from disrupted trade, capital flight, declining investor confidence, and potential sanctions or downgrades in sovereign credit ratings. In regions already struggling with poverty and underdevelopment, these economic disruptions can have long-term human consequences.
War is not just a matter of military hardware; it comes at a heavy financial cost. According to estimates from SIPRI (Stockholm International Peace Research Institute), any significant conflict between India and Pakistan would cost billions of dollars, not just in military expenditure but also in humanitarian costs. For Pakistan, the price of such a conflict would be existential; for India, it would be undesirable but manageable. This imbalance in economic resilience makes any sabre-rattling from Pakistan more theatrical than strategically sound.
India’s military prowess is not just about numbers, but also about strategic maturity. India has demonstrated a remarkable restraint, even in the face of provocations, relying on what military theorists call "compellence by denial"—asserting strategic red lines without resorting to all-out confrontation. It is an approach that reflects both military strength and diplomatic finesse.
Pakistan strategic calculus is often shaped by its nuclear deterrence which it considers a core component of its national security architecture. This, however, cannot insulate the economy from the ripple effects of military brinkmanship. The costs of even a limited conflict—both in fiscal and reputational terms—can be debilitating for an economy already operating on the edge. Additionally, international lenders and partners tend to view such posturing as a risk factor, potentially complicating ongoing and future financial negotiations.
What complicates matters further is Pakistan's internal economic governance. The persistent fiscal deficit, inefficiencies in tax collection, and policy uncertainty discourage long-term investment. Moreover, subsidies in energy and food, while politically necessary in the short term, place further strain on public finances. Without broad-based structural reforms ranging from energy sector rationalization to broadening the tax base, sustainable recovery remains elusive.
It’s also worth considering the economic opportunity cost of persistent regional tension. Both India and Pakistan stand to gain significantly from greater trade and connectivity. In the past, the World Bank has estimated that the potential for bilateral trade between the two countries could be as high as $37 billion annually. At present, formal trade remains a fraction of this due to political constraints. For Pakistan, increased regional trade could provide much-needed foreign exchange and job creation. For India, it could strengthen regional value chains and promote inclusive growth in its border states.
Another often-overlooked dimension is the perception of stability in attracting foreign capital. Investors are not just interested in macroeconomic indicators—they are deeply influenced by geopolitical risk. A nation embroiled in military provocations or seen as politically unstable is less likely to attract long-term, productive investment. Pakistan, over the past decade, has struggled to maintain investor confidence, and regional tensions have played no small role in this.
To be clear, this is not to suggest that security concerns are trivial or that strategic caution is unnecessary. Every sovereign nation has the right to safeguard its national interests. But in today’s global economy, security is deeply enmeshed with economic strength. The ability to project influence and maintain sovereignty increasingly depends not just on military capabilities but also on economic stability, technological innovation, and institutional resilience.
India’s rise on the global stage has been driven not just by its size but by its capacity to adapt, reform, and integrate with global markets. Pakistan faces a different set of challenges but not insurmountable ones. What is required is a shift in strategic focus—from external confrontation to internal consolidation. Prioritizing macroeconomic stability, institutional reforms, and investment in human capital could provide a more enduring form of national strength than military signaling.
In conclusion, the economic instability that Pakistan faces cannot be ignored. The country’s repeated flirtations with military confrontation, coupled with its inability to reform internally, have kept it locked in a cycle of stagnation. Rather than engaging in dangerous rhetoric and military posturing, Pakistan must focus on rebuilding its internal strength. The time has come to stop seeking distractions through confrontation and begin the arduous task of reforming its economy, its political structure, and its place in the world. Only by addressing these internal crises can Pakistan hope to build a future worth defending.
Malik Daniyal, Undergraduate Student, University Of Delhi
