Kashmir Conflict Sparks Geopolitical Risks and Investment Shifts in South Asia

The India-Pakistan military standoff over Kashmir has escalated in 2025, with India launching retaliatory strikes against militant infrastructure in Pakistan-administered areas following a deadly April 22 terrorist attack. While the immediate human toll is tragic, the conflict’s economic ripple effects are reshaping investment landscapes in South Asia and beyond.

The Conflict’s Economic Toll: Sector-by-Sector Analysis

The conflict has already triggered measurable disruptions across key sectors, with defense spending surging and agriculture facing existential risks.

Defense Sector Booms, but Risks Linger
India’s defense budget is projected to hit ₹6.81 lakh crore ($78.8 billion) by fiscal 2026, a 6% annual growth rate. Companies like Bharat Forge (part of India’s Rafale jet procurement) and Mahindra Defence stand to benefit from this spending. However, 72% of India’s defense budget is allocated to pensions and maintenance, leaving limited room for wartime surges.

Pakistan, meanwhile, allocates 26% of its budget to defense, exacerbating fiscal strain. With foreign reserves covering just two months of imports, its economy teeters on default.

Agriculture: A Weapon of War?
The suspension of the 1960 Indus Waters Treaty threatens Pakistan’s agrarian backbone. Agriculture accounts for 22.7% of Pakistan’s GDP, employing 37.4% of its workforce. A disruption to irrigation systems could spike food inflation (already at 38% in 2023) and trigger famine in Punjab.

India’s Kashmiri apple and saffron industries face secondary impacts, but the real danger lies in cross-border water disputes.

Energy and Trade: Global Supply Chains at Risk
A prolonged conflict could disrupt energy flows, with global crude prices sensitive to regional instability. India, which imports 83% of its crude oil, faces inflationary pressures if prices rise.

Bilateral trade between India and Pakistan—worth $1.2 billion annually—has collapsed, with the Attari-Wagah border closure costing $451 million in lost trade. Pakistan’s informal trade routes now inflate costs by 20–30%.

Stock Markets: Resilience vs. Fragility

India’s Markets Hold Steady
Despite the military strikes, Indian equity markets have shown remarkable resilience. The Nifty 50 and BSE Sensex traded nearly flat post-Operation Sindoor, reflecting confidence in domestic demand and structural reforms.

The rupee weakened slightly (0.33% to ₹84.56/$) but remained near three-month highs. Analysts note that markets anticipate a swift de-escalation, as seen in the post-2019 Pulwama attack recovery.

Pakistan’s Markets Plunge
The Karachi Stock Exchange plunged 2,000 points within hours of India’s strikes, highlighting the fragility of Pakistan’s financial system. With $22 billion in external debt due in 2025, capital flight and sovereign default risks loom large.

Geopolitical Risks and Investment Implications

India: Opportunities Amid Uncertainty
- Defense Stocks: Companies like Bharat Forge and Mahindra Defence may benefit from elevated military preparedness.
- Trade Deals: India’s FTA with the U.K. and anticipated U.S. trade pact could offset geopolitical risks. Moody’s expects RBI rate cuts to support growth.
- Caution: A prolonged conflict could divert funds from Modi’s $1.4 trillion infrastructure targets, squeezing fiscal deficits.

Pakistan: High Risk, Low Reward
- Economic Collapse: With 26% of its budget allocated to defense, Pakistan’s healthcare and education sectors are starved of funds. Hyperinflation and currency collapse are real threats.
- Geopolitical Leverage: China’s $55 billion China-Pakistan Economic Corridor (CPEC) may provide lifelines, but Beijing’s calls for “restraint” highlight limits to support.

Conclusion: A Delicate Balancing Act

Investors must weigh geopolitical risks against economic fundamentals. India’s 6.3% GDP growth forecast and resilient markets suggest opportunities in quality large-caps, defense, and infrastructure. However, prolonged conflict could derail progress, especially if defense spending crowds out social programs.

Pakistan, meanwhile, faces existential threats. Its economy is on the brink, with 2.7%–3.2% GDP growth at risk of turning negative. Investors should avoid mid/small-cap stocks and speculative plays in tourism or informal trade.

The stakes are global: supply chain disruptions in energy and agriculture, coupled with nuclear escalation risks, could trigger a broader sell-off in emerging markets. For now, quality large-caps in defensive sectors (FMCG, pharma) and India’s tech hubs remain the safest bets—until de-escalation becomes reality.

The path forward hinges on diplomacy. Without it, South Asia’s economic gains could unravel, and investors may find themselves caught in the crossfire.