Assessing Geopolitical Risks in South Asian Markets: Implications for Defense, Infrastructure, and Tourism Sectors in India

The 2025 Jammu and Kashmir security crisis, triggered by the April 22 terrorist attack in Pahalgam, has reshaped investor behavior and capital allocation across India's defense, infrastructure, and tourism sectors. This escalation, marked by India's Operation Sindoor and Pakistan's retaliatory strikes, has underscored the fragility of regional stability and the urgency of strategic preparedness. For investors, the crisis has highlighted the interplay between geopolitical volatility and sector-specific risks, demanding a nuanced approach to portfolio management.

Defense Sector: A Surge in Strategic Investment

The crisis catalyzed an immediate and sustained shift in capital toward India's defense industry. The Ministry of Defence's 2025-26 budget of Rs. 6.81 lakh crore (US$78.7 billion)—a 9.5% year-on-year increase—reflects a strategic pivot toward modernization and self-reliance. Defense contractors such as Bharat Dynamics Ltd. (BDC) and Hindustan Aeronautics Limited (HAL) have seen heightened investor interest, driven by government contracts for advanced weaponry and aerospace systems.

The Nifty India Defence Index surged 2.4% on May 9, 2025, following India's military strikes, outperforming broader market indices. This trend aligns with historical patterns observed during past conflicts, such as the Kargil War (1999) and the 2019 Pulwama attack, where defense stocks rallied amid heightened military activity. The crisis also accelerated private-sector participation in defense manufacturing, with companies like TATA Aircraft Complex and JSW Defence securing contracts for drones and military transport aircraft.

Investors are now prioritizing firms involved in indigenous production, particularly those aligned with the “Make in India” initiative. The BrahMos cruise missile program, co-developed with Russia, and the SCALP-EG missile system have become focal points for capital inflows, given their strategic value in countering cross-border threats.

Infrastructure: Strategic Projects and Geopolitical Risks

Infrastructure investment in India has been reoriented toward border security and connectivity. The Border Roads Organization (BRO) received a Rs. 7,146 crore (US$825.7 million) allocation for 2025-26, focusing on roads, tunnels, and airfields in Jammu and Kashmir. Projects like the Sonamarg Tunnel and NH-06 highway are now seen as critical for sustaining military operations and economic resilience.

However, the crisis has introduced new risks. The suspension of the Indus Waters Treaty and the closure of airspace corridors have disrupted trade and energy flows, raising concerns about water-sharing disputes and their impact on agriculture and power generation. Investors are now factoring in geopolitical contingencies when evaluating infrastructure projects, particularly in border regions.

The 166.80 km NH-06 highway project and the 12.4 km ropeway in Uttarakhand exemplify the government's push for strategic infrastructure. Yet, cross-border tensions have led to a reevaluation of long-term investments in sectors like aviation and logistics. Airlines rerouting flights to avoid Pakistani airspace have incurred higher costs, prompting a shift toward domestic connectivity projects.

Tourism: A Sector in Turmoil and Cautious Recovery

The tourism sector in Jammu and Kashmir faced an immediate collapse post-attack, with hotel occupancy rates plummeting to near zero. By July 2025, however, signs of a cautious recovery emerged. Hotels in Srinagar reported 20% occupancy, driven by corporate retreats and high-value groups. The government's aggressive promotional campaigns, including roadshows in Kolkata and Ahmedabad, have begun to restore some confidence.

Despite this, the sector remains vulnerable. The Amarnath Yatra, a key pilgrimage event, further constrained tourism in Pahalgam and Sonamarg until August. Investors are adopting a wait-and-watch approach, with capital shifting toward diversified portfolios that balance tourism's cyclical nature with defensive sectors.

Investment Implications and Strategic Hedging

The crisis has reinforced the importance of diversification and geopolitical risk management. Investors are increasingly allocating capital to defensive sectors such as utilities and healthcare, while adopting hedging strategies like gold and safe-haven currencies. The volatility in regional stock markets—India's NIFTY 50 fell 5.2% in the week following the attacks—has prompted a reevaluation of exposure to cyclical industries.

For long-term investors, the defense and infrastructure sectors offer compelling opportunities, given their alignment with national security priorities. However, tourism remains a high-risk, high-reward proposition, contingent on sustained stability.

Conclusion

The Jammu and Kashmir crisis has underscored the need for a strategic, adaptive approach to investing in South Asia. While defense and infrastructure sectors are poised for growth, tourism faces an uncertain path to recovery. Investors must balance immediate geopolitical risks with long-term resilience, leveraging data-driven insights to navigate this complex landscape. As the region grapples with the aftermath of the 2025 conflict, the ability to anticipate and respond to shifting dynamics will define successful capital allocation strategies.