mobilisations along the LoC or other escalatory moves. These include an Indian air strike on a major Pakistani military target; a catastrophic terrorist attack in India on the scale of the 2008 Mumbai tragedy, which killed 166 people; or a rapid succession of terrorist assaults in India that renders limited responses politically untenable for New Delhi. In these circumstances, unsettling questions about the strength of the nuclear deterrent – and how much force could be used before running up against nuclear red lines – would loom large. Economic Implications It’s worth examining not just the security ramifications of a prolonged bilateral stalemate, but also the economic consequences. Consider the impact of extended tensions on stock markets and investor perceptions. The good news is that stock markets in India have historically not been deleteriously affected by India-Pakistan tensions. They’ve weathered terror attacks quite well – Including catastrophic ones. In a 2016 Investopedia assessment, Elvis Picardo notes that after multiple blasts in the city of Mumbai killed more than 250 people on March 12, 1993 (a Friday), the city “reopened for business as usual on Monday” and there was “little impact” on financial markets and the Indian economy. Additionally, Picardo points out that when Mumbai was hit again in November 2008, India’s Sensex stock market index “hardly registered a blip” on the day of the attack. While it experienced declines in the succeeding days, the Sensex year-end position was higher than on the day before the attack. The conclusion? “Investors treat terror attacks as one-off events,” Picardo writes, and “their negative effect tends to only be temporary.”3 Similarly, investment analysts contend that one-off acts of limited conflict – such as India’s “surgical strike” – inflict little damage on markets.4 This is reassuring. However, markets may react quite differently if India were to suffer a series of attacks – say several within the same month. This could shift investor perceptions and cause them to believe that these strikes no long represent one-offs. Another factor driving investor perceptions is the location of attacks. Over the last two years, most major terror strikes in India have occurred in relatively remote regions of Kashmir or in small towns or cities in nearby Punjab state.
Investors treat terror attacks as one-off events,” Picardo writes, and “their negative effect tends to only be temporary.” Similarly, investment analysts contend that one-off acts of limited conflict – such as India’s “surgical strike” – inflict little damage on markets. However, a rapid-fire series of strikes in a single major city could spook investors in a big way, given that many would regard large urban spaces as their preferred locations to do business. To be sure, an actual shooting war between India and Pakistan would also be damaging for markets and would be extremely worrisome for investors. Another economic consideration about extended India-Pakistan tensions is the impact on trade. Historically, the two countries have often continued to engage in bilateral commerce even when relations are strained. In the early 1950s, India was Pakistan’s largest trading partner despite a wilting of political relations. In 1965, a year when the two countries went to war, nine branches of six Indian banks were operating in Pakistan.5 Consider as well that total annual bilateral trade volumes expanded from $345 million in 2003-04 to $2.3 billion in 2014-15 – a period often fraught with tension. Significantly, however, trade has stalled during the most recent crisis in relations. After reaching $2.7 billion in 2013-14, it fell to $2.6 billion in 2015-16.6 Curtailed trade is bad news because it generates harmful economic consequences. When formal bilateral trade languishes, informal trade flourishes. Indeed, decreased formal trade volumes suggest intensified levels of informal trade. This means reduced financial windfalls for each government, given that informal trade doesn’t generate revenue for governments in the form of taxes, tariffs, and so on. With informal trade, this revenue all accrues to private buyers and sellers, as well as intermediaries and smugglers. Already, India-Pakistan informal trade exceeds formal trade. Recent projections contend that informal trade is twice that of formal trade.7 These high informal trade tallies underscore the strong potential for more formal trade, but current political tensions constrain efforts to capitalise on these opportunities. More broadly, India-Pakistan tensions threaten commercial cooperation. This includes the
www.worldfinancialreview.com
47