The outbreak of a full-scale war between India and Pakistan would cause an economic earthquake that would extend beyond South Asia. The world would experience a widespread economic crisis, beginning with the collapse of the Bombay and Karachi stock exchanges and extending to Asian and global markets, such as Hong Kong, Shanghai, and Singapore, which would experience declines due to fears of the conflict spreading.
Investors would turn to gold and oil as safe havens, significantly raising their prices.
Meanwhile, the Indian and Pakistani rupees would collapse against the rising dollar and Swiss franc, impacting other emerging market currencies. Economically, global supply chains would be affected by India's role in software and pharmaceuticals, and Pakistan's position in the Belt and Road Initiative. Insurance and shipping costs will rise, and investment and growth in emerging markets will slow. Global markets will react negatively immediately upon the outbreak of war, potentially tipping the global economy into a new recession if the conflict prolongs or its effects expand.
Deteriorating Trade Relations
Based on past experience, trade relations between India and Pakistan are expected to collapse completely, as happened after the Pulwama attack in 2019. Trade between the two countries fell from $3 billion in 2018 to just $1.2 billion in 2024. With the All India Traders Federation announcing a complete halt to trade in April 2025, the losses are certain. India will incur losses exceeding $1.14 billion due to the disruption of Pakistani territory for trade, $640 million in disrupted shipments to Afghanistan, and $1.18 billion in lost exports to Pakistan.
Pakistan, while its direct impact is limited due to its weak exports to India, will face disruptions to regional trade and a deterioration in logistical stability.
Tourism Collapse
The Pahalgam attack led to the cancellation of 80% to 90% of tourist bookings, inflicting heavy losses on India during the peak tourist season. India, which received approximately 18.89 million international tourists in 2023 and generated tourism revenues estimated at Rs. 2.32 trillion, would be at risk of losing most of this revenue if war broke out.
Investment Flight
Security tensions typically prompt investors to reassess their risks, as evidenced immediately after the attack in Kashmir, when stock markets in India and Pakistan recorded a sharp decline. Continued escalation could lead to a flight of foreign and domestic capital and a freeze on new investments in vital sectors, weakening economic growth in both countries.
The direct military confrontation between the two nuclear powers, India and Pakistan, which erupted on Wednesday, has placed the world in a state of heightened anxiety, fearing a wider war and open conflict between the two neighbors, which would affect the stability of Asia and the world. There are fears that the clashes could lead to significant economic losses.
India attacked the Pakistani portion of the disputed Kashmir region, and Pakistan said it shot down five Indian fighter jets in the worst clash between the two countries in nearly two decades. Both countries also reported casualties and injuries on both sides.
Economically
Economically, Pakistani stocks declined, while Indian assets remained stable after the two sides exchanged retaliatory strikes, according to Bloomberg.
Pakistan's benchmark KSE 30 index fell about 6.1%, reaching its lowest level on December 4, before paring some of its losses.
In India, the NSE Nifty 50 index fluctuated between gains and losses, after initially falling 0.7%. The Indian rupee also fell 0.4% against the dollar, while 10-year bond yields were little changed.
Amit Kumar Gupta, chief investment officer at New Delhi-based Fintrekk Capital, said, "Military strikes between the two countries will have little impact in the short to medium term."
Analysts warned that renewed tensions with Pakistan could push the Indian government to increase defense spending, at the expense of capital investments.
Indian markets have recently attracted interest from global investment funds, driven by the economy's resilience in the face of trade disruptions and the support provided by the Reserve Bank of India through interest rate cuts and strong liquidity.
In April, foreign investors pumped a net $1.3 billion into local Indian equities, after markets recorded withdrawals of more than $3 billion earlier in the month.
Pakistani stocks and bonds saw their worst monthly performance since 2023, amid concerns that the escalating confrontation with India could further damage the country's fragile economy.
"Markets will remain on tenterhooks in the short term as the situation remains uncertain, but past experience shows that the economic and market impact of such geopolitical events is typically short-lived," said Sonal Varma, economist at Nomura Holdings.
In previous conflicts, escalating border tensions between India and Pakistan have only temporarily dented investor confidence in Indian equities.
In February 2019, the Nifty 50 index rose more than 1% a week after India announced it had carried out precision strikes inside Pakistani territory in retaliation for an attack on a military base.
Airlines
Regarding air traffic, several Asian airlines said on Wednesday they had rerouted or canceled flights to and from Europe due to the clash between India and Pakistan.
More than 20 commercial flights were rerouted to avoid Pakistani airspace. Data from Flightradar24 showed that airlines had canceled 52 flights to and from Pakistan by Wednesday morning local time.
Taiwanese airline EVA Air said it would reroute its flights to and from Europe to avoid airspace in the India-Pakistan clash zone for safety reasons. Its shares fell by about 1.7 percent.
Korean Air said it had begun rerouting flights between Seoul and Dubai on Wednesday to a southern route over Myanmar, Bangladesh, and India, instead of a previous route that passed through Pakistani airspace.
Thai Airways said its flights to destinations in Europe and South Asia would be rerouted starting early Wednesday morning, noting that this could cause delays for some flights.
Vietnam Airlines and Taiwan's Air China also announced that their operations would be affected by developments between India and Pakistan.
South Asia is one of the most densely populated regions in the world and is home to two major economies: India, the world's fifth-largest economy, and Pakistan, a geopolitical heavyweight within China's Belt and Road Initiative. The region contributes significantly to global economic growth and is an important gateway for trade and energy flows, making any disruption there potentially impactful for international markets.
Major world powers, the United States, China, and Russia, as well as the United Nations, called on the two warring countries to exercise maximum restraint, quickly defuse the crisis, and prioritize peace and stability.
US President Donald Trump, during a press conference from the Oval Office on Tuesday, described the strikes between the two countries as "unfortunate." Trump said, "They've been fighting for a long time... All I hope is that it ends quickly."
US Secretary of State Marco Rubio said he is closely monitoring the escalating situation between India and Pakistan, reiterating Trump's statements in which he expressed his hope that "this conflict will end quickly," noting that his country will continue to communicate with the Indian and Pakistani leaderships to reach a peaceful solution to the crisis.
China called on India and Pakistan to exercise restraint and prioritize peace and stability in light of the military escalation between them.
Russia said it is deeply concerned about the military clash between India and Pakistan, adding that it calls on both countries to exercise restraint.
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