India-Pakistan Trade War: A Strategic Escalation with Economic Repercussions

The recent escalation between India and Pakistan, triggered by the April 2025 Pahalgam terrorist attack, has introduced a new dimension to their longstanding rivalry. With India imposing sweeping trade restrictions and Pakistan retaliating in kind, the bilateral crisis now threatens to disrupt regional stability and impact global markets. This article examines the economic implications of these measures and their potential fallout for investors.

The Mechanics of the Trade War

India’s response to the Pahalgam attack has been multifaceted:
- Indus Waters Treaty Suspension: For the first time since 1960, India has withheld hydrological data critical to Pakistan’s agricultural sector, which relies on the Indus River for irrigation. Analysts estimate this could reduce Pakistan’s crop yields by 15-20%, exacerbating food shortages.
- Trade Sanctions: A 200% customs duty on Pakistani imports has effectively halted formal trade. While India’s exports to Pakistan (now $447.65 million in FY2025) represent just 0.1% of total exports, the indirect trade routed through third countries—worth $10 billion annually—has become a focal point. India has pressured Gulf states to block these channels, threatening Pakistan’s access to essential medicines and industrial inputs.

Pakistan’s retaliation includes:
- Voiding the Simla Agreement: The 1972 treaty, which provided a framework for conflict resolution, is now suspended, signaling a breakdown in diplomatic norms.
- Reciprocal Sanctions: Pakistan has banned Indian imports and cut informal trade routes, though its economy’s heavy reliance on Indian pharmaceuticals and agricultural products leaves it vulnerable.

Economic Fallout: A Lopsided Impact

While India’s formal trade exposure is minimal, Pakistan’s economy faces existential risks. The suspension of indirect trade could reduce imports by $5 billion annually, deepening its foreign exchange crisis. The International Monetary Fund (IMF) had already projected Pakistan’s GDP growth to slow to 2.6% in 2025, with foreign reserves at critical lows.

Meanwhile, India’s stock markets have remained resilient, reflecting limited direct exposure. However, sectors like pharmaceuticals—critical to Pakistan’s informal trade—could face indirect pressure if Gulf intermediaries comply with India’s demands.

Investment Implications

For India:
- Pharmaceuticals: Companies like Dr. Reddy’s Laboratories () and Cipla, which supply Pakistan via third countries, may face reduced demand if trade routes are cut. However, their domestic and global markets remain strong.
- Agriculture: Firms like ITC Limited, which export agricultural products, could see opportunities if India redirects supplies to other markets.

For Pakistan:
- Equity Markets: The KSE 100 Index has dropped 8% since April 2025, reflecting investor anxiety over geopolitical risks and currency devaluation.
- Currency: The Pakistani rupee has depreciated 12% against the dollar in 2025, worsening import costs.

Geopolitical Risks and Global Reactions

The U.S. has urged restraint, with Vice President J.D. Vance emphasizing the need for Pakistan to combat militants and India to avoid escalation. However, both nations have continued military posturing, including missile tests and drone interceptions. Investors in defense sectors—such as India’s Bharat Electronics ()—may see short-term gains, though long-term risks remain.

Conclusion: A Costly Escalation with No Winners

The India-Pakistan trade war underscores the high stakes of geopolitical tensions. While India’s direct economic exposure is negligible, its symbolic moves signal a hardline stance that could deter foreign investment in sectors tied to regional stability. Pakistan, already battling IMF-imposed austerity, faces a humanitarian crisis if informal trade collapses.

Key data points:
- Pakistan’s GDP Growth Projection: 2.6% (IMF, 2025) vs. India’s 6% (World Bank, 2025).
- Trade Disruption: $10 billion in informal trade at risk, compared to India’s $447.65 million in formal exports.
- Market Volatility: The KSE 100 Index’s 8% decline since April 2025 versus India’s stable BSE SENSEX ().

Investors must factor in prolonged geopolitical risk, particularly in sectors reliant on regional stability. While India’s markets may absorb the shock, Pakistan’s economy faces a downward spiral unless diplomatic channels reopen—a prospect growing dimmer by the day.