Pakistan a rogue state; India’s response must be calibrated to avoid economic damage: Economists

Amidst the heightened India-Pakistan tensions, economists have cautioned that India’s response to Pakistan’s border misadventures must be calibrated, as a full-blown escalation has the potential to hurt the domestic economy. They underlined that while Pakistan is a failed, rogue state, India has got bigger ambitions and a larger stake in the global economy.

In response to the dastardly terror attack in Pahalgam on April 22, India destroyed nine terror outfits in Pakistan and Pakistan occupied Jammu and Kashmir (PoJK) in the early hours of May 7. Pakistan, which has resorted to ceasefire violations at the Line of Control and the international border since the Pahalgam terror attack, launched unprovoked attacks on India in the intervening night of May 8 and May 9.

India’s military establishments were targeted, said the ministry of external affairs today. “On the intervening night of May 8 and May 9, 2025, Pakistan military carried out multiple violations of the Indian air space along the entire Western border with intent to target military infrastructure,” said Wing Commander Vyomika Singh in a briefing on Friday.  

“Pakistan military also resorted to firing of heavy calibre weapons along the line of control. Along the international border and the line of control, drone intrusions were attempted at 36 locations with approximately 300–400 drones. Indian armed forces brought down a number of these drones,” Singh said.

Economists are of the view that Pakistan is a failed state, with divided factions within its military and government establishments. They are of the view that India’s response, which has till now been precision oriented, must remain calibrated and calculated, given the country’s responsible vantage point, aspirations for economic growth, and high stakes in the global economy.

“Pakistan is in a state of economic and political turmoil for a long time now. The civic eco-system does not determine who rules the country. It is a military-controlled state,” said economist Sunil Sinha, Professor (economics), Institute of Development and Communication, Chandigarh.  

“India’s stakes are much larger. It has to emerge as a robust economy on the global stage. Currently, it is the fifth largest global economy and wants to become the third largest global economy. So, a full-blown engagement is not advisable. Once you get into that spiral, there will be fair amount of economic implication,” Sinha said, adding that such factors are not deciding factors for Pakistan and it can resort to adventure or misadventure.

Economist NR Bhanumurthy, vice chancellor, Dr. BR Ambedkar School of Economics University is also of the view that the long-term story of India’s growth is intact, despite the current challenges, which the country is facing with a lot of precision. “The way India is responding to the challenge right now and the way India’s stakes in the global world has tremendously gone up, the long-term story of the Indian economy has only improved. India is in a position to overcome any bigger challenge in the long run,” said Bhanumurthy.

Escalation to hurt the Macroeconomy

Sinha says India attacked the terror installations with a view that Pakistan will behave responsibly, but it chose to escalate. “War has its own costs. It does not come free,” Sinha says underlining that a full blown conflict will have macroeconomic ramifications.  

“FY26 Budget allocations will have to be reworked as they were considering peace time. A number of expenditures will have to be curtailed, or diverted. Capex will have to be postponed,” Sinha says.  

Bhanumurthy also points to the macro risks in case the situation blows out of control. “Defence Budget, implied pressure on the overall fiscal deficit and impact on the government’s productive expenditure are the key areas to look at if the situation escalates,” said Bhanumurthy.

Inflation is yet another major concern. “Supply disruptions during the heightened conflict will have an impact on inflation. It will impact accommodative stance on rate cuts, cost of capital may go up. GDP growth, which has already been impacted by the tariff war, will be impacted even more,” said Sinha.

“There would be rationing of public services to security side. And we also need to see how oil producing countries react. Pakistan has cordial relations with oil exporting countries, except Qatar. We will have to see whether that leads to any pressure on the oil imports and consequent impact on the exchange rate,” Bhanumurthy said.  

High sovereign debt and imposition of cess are also the key risks to the macroeconomy. “Government will have mobilise extra resources for the war. It could be debt, but past experience shows that mostly cess—war cess, defence cess—has been resorted to. Investments will also be on hold as the corporate sector will be cautious about the demand,” Sinha added.  

It may be noted that ratings agencies are watchful and have even indicated there could be ramifications.  S&P Global Ratings has said the India-Pakistan confrontation poses credit risks to both the countries and could put downward pressure on their sovereign credit ratings.