India-Pakistan Trade Collapse: A Near-Total Standstill with Long-Tail Risks

The April 2025 terror attack in Pahalgam, Kashmir, has triggered a seismic shift in India-Pakistan relations, culminating in a complete suspension of bilateral trade, border closures, and reciprocal diplomatic expulsions. What was already a fragile economic relationship—worth just $1.2 billion in 2024—has now been reduced to zero, with profound implications for businesses, investors, and regional stability.

The Diplomatic and Trade Escalation

India’s retaliation began with the closure of the Wagah-Attari border crossing, a lifeline for trade and travel. Pakistan responded by suspending all trade with India, including indirect routes through third countries like the UAE and Singapore. Both nations expelled diplomats, with Pakistan reducing Indian diplomatic staff to 30 and India reciprocating. The suspension of the 1960 Indus Waters Treaty—a cornerstone of regional water management—added a new layer of tension, with Pakistan declaring any Indian interference with water flows an “act of war.”

The economic fallout is immediate. India’s exports to Pakistan in 2024 totaled $500 million, dominated by pharmaceuticals ($110 million), organic chemicals ($129.5 million), and sugar ($85 million). These exports now face a full stop. Pakistan, which relies on Indian pharmaceuticals for critical inputs, faces shortages of life-saving drugs. Meanwhile, India’s imports from Pakistan—already negligible at $0.42 million in 2024—have also vanished, though these were largely symbolic, consisting of fruits and agricultural byproducts.

Investors in Indian pharma stocks should note that while these companies’ exposure to Pakistan was limited, the broader geopolitical risk may weigh on regional confidence.

The Human and Economic Toll

Pakistan’s economy, already reeling from inflation and external debt, faces a triple threat:
1. Pharmaceutical Shortages: Pakistan’s drug manufacturers depend on Indian imports for 30–40% of active pharmaceutical ingredients (APIs). With no alternative suppliers, prices for treatments—from antibiotics to cancer drugs—are expected to surge.
2. Agricultural Disruptions: Indian sugar and fertilizers are critical for Pakistan’s farmers. The loss of these imports could reduce crop yields, exacerbating food inflation.
3. Stranded Patients: Over 2,000 Pakistani patients undergoing treatment in India were given a 48-hour exit window, risking their health outcomes.

For India, the impact is less severe but not negligible. The $500 million in annual exports to Pakistan represented 0.06% of India’s total trade. However, regional transit routes for Afghan goods—valued at $640 million annually—now face delays, raising logistics costs.

Investment Implications: Avoid the Crossfire, Focus on Resilience

The trade collapse offers few opportunities but many pitfalls:
- Pharmaceuticals: Indian drugmakers may see a short-term dip in export revenue, but their domestic and global markets remain intact. However, reputational risk could deter foreign investors.
- Airlines: The closure of Pakistani airspace forces Indian carriers to reroute flights, increasing fuel costs. IndiGo (INDIGO.NS) and SpiceJet (SPICEJET.NS) may see margin pressures.
- Regional Infrastructure: Ports in Dubai and Singapore may benefit from rerouted trade, but the volume is small compared to pre-2019 levels.

Note the precipitous drop from $2.8B in 2018 to $0 in 2025. This trendline underscores the fragility of cross-border ties.

Conclusion: A Standstill with No Quick Fix

The India-Pakistan trade relationship is now in a near-total freeze, with no clear path to thawing. The 2025 diplomatic rupture has erased even the modest rebound seen in 2024, when trade briefly rose to $1.2 billion. For investors, the key takeaway is clear: geopolitical risks in South Asia are escalating, and exposure to cross-border trade or regional assets carries heightened uncertainty.

Pakistan’s economy, more dependent on Indian imports, faces the brunt of this fallout. The suspension of pharmaceutical exports alone threatens public health, while inflation could spike to 15–20% in 2025. For India, the loss is financial but minor, though the broader regional instability may deter foreign capital.

Until diplomatic tensions ease—a prospect that remains distant—the investment mantra should be: avoid the crossfire, focus on domestic resilience, and brace for prolonged volatility.