India-Pakistan: Just don’t press that red button

So it turns out Vladimir Putin and Donald Trump aren’t the only world leaders with planet-sized egos and a point to prove.

In early May, the respective prime ministers of India and Pakistan came within a whisker of all-out war, in their latest dispute over the Muslim-majority region of Kashmir. The near-calamitous run-in between the two nuclear powers came after a terror attack in Kashmir, which is administered by India.

In essence, New Delhi said Pakistan was behind the attack, which killed 26, and launched missile strikes. Islamabad denied the charge, and struck back. After waves of drone incursions and downed fighter jets, prime ministers Narendra Modi of India and Pakistan’s Shehbaz Sharif pulled back from the brink and declared a fragile truce.

Both sides claimed victory, in a ceasefire that Trump took credit for brokering, much to the chagrin of India which felt it told the world the two countries were on an equal footing. You keeping up?

Conflict contagion

While it has echoes of a “did, didn’t” playground punch-up, only on a national scale, this time the conflict threatens to have much wider ramifications. And frankly, at this stage in its economic life cycle, it feels as if India has much more to lose.

For starters, India’s economy – the world’s fifth largest – dwarfs that of its South Asian neighbour. It was more than 10 times the size of Pakistan’s in 2023, according to figures from the World Bank (1) and is forecast to grow at a much faster rate.

Modi is helping to make India a manufacturing centre for tech kit such as smartphones and tablets and to contribute to the green revolution with its solar panels and electric cars (stealing share from China in the process, obviously).

And would he want to jeopardise a trade deal with the UK, three years in the making, and a similar agreement with the Trump administration that is also in the offing?

Pakistan, on the other hand, has been mired in economic crisis, propped up by a $7bn loan from the International Monetary Fund. It is only just beginning to tame rampant inflation, and the last thing it needs (India too, actually) is the inflationary costs of a conflict.

Global supply chain concerns

Still, India’s customers, which include the US, EU and China, are bound to be stress-testing their supply chains. Ford, for example, last year detailed plans to resume manufacturing at its factory in Chennai (2), while Boeing has made substantial investments in the country and operates a joint venture with India’s Tata Group to make helicopter fuselages (3).

Nuclear currencies

The two countries will also have an eye on their currencies (Indian and Pakistani rupee), which began to rally on the ceasefire, only to fall away in the following days amid signs the agreement was fragile. While investors often turn to the safe havens of gold, the dollar and Swiss franc during turmoil, no-one will want to see contagion, where a ‘nuclear’ sell-off spreads like wildfire into other markets.

Sources:

1. World Bank data - https://data.worldbank.org/?locations=CN-PK-IN

2. Ford Motor Co press release September 2024 - https://media.ford.com/content/fordmedia/img/im/en/news/2024/09/13/ford-prepares-for-manufacturing-in-chennai--india--focus-on-expo.html

3. Boeing in India - https://www.boeing.co.in/boeing-in-india#anchor1