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Hypothetically
In the aftermath of the horrific Pahalgam attack on April 22, 2025, which claimed the lives of 26 tourists in Indian-administered Kashmir, India has deployed a strategy more devastating than any military operation: economic warfare. Rather than responding with conventional military force, India implemented three strategic economic actions designed to apply maximum pressure on Pakistan’s already fragile economy. This unprecedented “economic surgical strike” targets Pakistan’s fundamental vulnerabilities without firing a single bullet, potentially causing more lasting damage than any military operation could achieve. These measures are effectively a non-kinetic “surgical strike,” designed to target Pakistan’s economy and infrastructure without firing a single shot. In each case the strategic intent is clear: to punish Pakistan for harbouring or sponsoring terrorists, and to exploit Pakistan’s underlying economic vulnerabilities.
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The Focus
- India responded to the April 22 Pahalgam terror attack, which killed 26 tourists, by launching a comprehensive economic offensive against Pakistan, including suspending the Indus Waters Treaty, halting all trade, and closing Indian airspace and ports to Pakistani ships and airlines.
- The suspension of the Indus Waters Treaty threatens Pakistan’s agriculture (24% of GDP, 40% workforce) and energy sectors (30% hydropower), risking food shortages, power outages, and a projected GDP decline of 1.5–2%.
- By halting all bilateral trade, including through third countries, India has disrupted key Pakistani industries that rely on Indian imports, such as pharmaceuticals, chemicals, and food products, compounding inflation and supply shortages in Pakistan’s already fragile economy.
- The closure of Indian airspace and ports to Pakistani aircraft and ships has increased transit times and costs for Pakistan’s exports and imports, further straining its struggling logistics and reducing port revenues.
- The cumulative economic impact on Pakistan from these measures is estimated at $15–20 billion annually, with indirect effects on GDP growth, employment, and inflation.
- Pakistan’s economy was already under severe stress before these actions, with high inflation, low foreign reserves, and heavy IMF dependency, making it especially vulnerable to India’s economic pressure.
- India’s actions serve as a warning to neighbouring countries like Nepal, Bangladesh, and Sri Lanka, demonstrating the potential costs of antagonizing India and incentivizing these countries to maintain cooperative relation.
- The disruption of informal and rerouted trade (estimated at up to $10 billion annually) through third countries like Dubai and Singapore is also being targeted by India, closing loopholes that previously softened the impact of official trade bans.
- India’s economic strategy is seen as a more sustainable and globally acceptable alternative to military action, applying long-term pressure on Pakistan to address cross-border terrorism.
- India retains further non-military options to intensify economic pressure, such as influencing remittance flows, leveraging international financial institutions, and accelerating regional connectivity projects that bypass Pakistan.
Suspension of the Indus Waters Treaty
Photo Courtesy: en.m.wikipedia.org/wiki/File:Indus_flooding_2010_en.svg
A map of the Indus River basin. Under the Indus Waters Treaty India agreed to release nearly all western-river flows to Pakistan. Suspending the treaty allows India to withhold water data and store more water upstream (thick blue lines show Indus tributaries). India’s suspension of the 1960 Indus Waters Treaty is a drastic move. The Indus basin is Pakistan’s lifeline: roughly 80–90% of Pakistan’s renewable water resources originate outside its borders (mainly in India). Agriculture claims about 94% of Pakistan’s water withdrawals, and the irrigated Indus plains constitute the backbone of its economy, about 22.9% of GDP and 24.4% of exports depend on these waters. Nearly 90% of Pakistan’s crops are watered by the Indus system, and about one‐fifth of its electricity comes from Indus hydropower plants. In short, Indian control of the Indus flows gives it immense leverage over Pakistan’s food and power supply.
The strategic intent behind suspending the treaty is to squeeze Pakistan’s economy and force political concessions. By holding the treaty “in abeyance,” India is no longer legally obliged to share river data (flow levels and flood forecasts) with Pakistan, and it can exceed the water releases normally guaranteed during dry seasons. In practice India could store more water upstream (in existing dams) and delay releases, leaving Pakistan in the dark on water availability. Pakistani officials have warned this could be an “act of war”. Even a minor reduction in Indus flows would have a big impact: cotton and paddy (rice), both water-intensive, would suffer. Cotton alone drives over 60% of Pakistan’s exports and about 8.5% of its GDP, so any shortfall could crater foreign earnings. A published analysis noted that “if India decides to hold back more water…Pakistan’s farmers might struggle to sow key crops like cotton and paddy on time,” potentially triggering food shortages and surging inflation.
Real-life impact: No country has ever fully broken the Indus Treaty, so there is no direct historical precedent. However, analysts and officials emphasize that Pakistan is uniquely exposed. For example, “Pakistan’s agriculture claims 94% of water withdrawals… the Indus waters more than 90% of the nation’s crops,” highlighting Pakistan’s scant fallback if flows are disrupted. In the short term, farmers would face uncertainty and possible crop losses. Over the longer term, new dam projects can marginally boost India’s storage but only slowly and at great cost. Meanwhile Pakistani households would feel the strain via higher food prices: staples like flour and rice would become scarcer, stoking inflation. Energy could also tighten: currently about 20% of Pakistan’s electricity is hydropower, all on Indus waters. Reduced flows would cut hydropower output, forcing more expensive fuel imports for thermal plants, again raising costs. Public perception in Pakistan would likely be dire as the opposition politicians would call the government incompetent, rural protests could erupt over water shortages, and the narrative would be that India is using “water terrorism” to punish civilians.
Pakistan’s vulnerability: All of this exploits Pakistan’s chronic fiscal and currency weaknesses. Prior to April 2025, Pakistan had just emerged from an economic crisis: reserves plunged to under $4 billion in mid-2023 (barely a fortnight of imports) before IMF-backed support helped lift them toward ~$8–12 billion by early 2025. Its budget deficit hovers near 6–7% of GDP, financed mainly by costly debt. Even a modest shock to agriculture (say a 10% fall in output) can widen the fiscal shortfall, erode reserves, and trigger debt default fears. In short, cutting off the Indus taps hits Pakistan where it’s most fragile: its breadbasket and hydropower generation.
Economic Impact of the Suspension
While the suspension of the Indus Waters Treaty does not mean India can immediately stop water from flowing to Pakistan, it does have several significant immediate and long-term impacts:
- Information Withholding: The treaty requires India to share river data like discharge levels and flood forecasts with Pakistan, which is essential for agricultural planning and flood management. Without this information, Pakistan faces increased risk of both droughts and floods.
- Minimum Flow Requirements: India is no longer bound to ensure minimum water flow during dry seasons, allowing it to store more water upstream without consultation with Pakistan.
- Water Storage and Timing: India can alter the timing of water releases from its existing dams and reservoirs, potentially disrupting Pakistan’s agricultural planting seasons.
The economic implications are substantial. With water levels already critically low in key reservoirs like the Tarbela Dam on the Indus River, additional reductions could be catastrophic. A 20% reduction in agricultural output due to water management issues could cost Pakistan approximately $11-13 billion annually. The cotton sector alone could face losses of $2-3 billion if yields drop significantly due to water shortages at critical growing periods.
The power generation impact is equally concerning. Hydropower accounts for about 30% of Pakistan’s electricity generation capacity. Water flow disruptions could reduce this output by 15-20%, requiring expensive alternative power sources or leading to increased load-shedding, which already costs the Pakistani economy an estimated $4-5 billion annually in lost productivity.
Suspension of All Trade
Next, India halted formal trade with Pakistan. Bilateral trade was already tiny compared to the two economies, as India exported only about $447 million to Pakistan in the last 2023–24 fiscal year, while Pakistani exports to India were virtually zero. (For context, total Indian exports in that period exceeded $800 billion.) Much of even that small trade was in essentials: pharmaceuticals, chemicals, sugar, and auto parts. Nonetheless, suspending trade (including all third-country re-exports) sends a strong message and removes any remaining economic links.
Strategic intent: The goal is to tighten the noose. By slashing supply of critical goods, India hopes to amplify economic pain on Pakistan and pressure its government. Officials have explicitly said the trade halt is meant to “make them realise that…sponsoring terrorism is against the interests of peace and stability”. In effect, India is saying: if Pakistan sponsor or abets terrorists, even everyday commerce will be cut off. This also simplifies security screening (no need to vet trucks and containers) and demonstrates resolve.
Real-life impact: In 2019, after the Pulwama attack, India revoked Pakistan’s MFN status and slapped 200% duties on its goods. Pakistani exports to India collapsed from $547 million in 2019 to just $0.48 million by 2024. Pakistan maintained a formal trade ban then and only later resumed limited imports for food items when inflation worsened. That episode showed how quickly Pakistani export industries can die without any market, and how consumers suffer when staple imports stop.
Economic Losses in Dollar Terms
The direct impact of the trade suspension on Pakistan’s economy can be estimated at approximately $3-4 billion annually, considering both official trade and the substantial unofficial trade that occurs through third countries like the UAE.
However, the secondary effects are potentially much larger:
- Increased Input Costs: Pakistani manufacturers, particularly in the textile sector, face 15-20% higher costs for inputs previously sourced from India, reducing their competitiveness in international markets. This could reduce export earnings by an estimated $1.5-2 billion annually.
- Consumer Price Increases: The cost of various consumer goods, particularly medicines and certain food items, has increased by 20-30% due to the need to source from more expensive markets, adding to inflationary pressures in an already struggling economy.
- Transit Trade Losses: Pakistan’s policy of denying India access to Afghanistan through its territory has also backfired, as it loses potential transit fee income estimated at $100-150 million annually.
The total economic impact of the trade suspension, including direct trade losses and secondary effects on manufacturing competitiveness and consumer prices, could amount to $5-7 billion annually, further straining Pakistan’s balance of payments and foreign exchange reserves.
Political Fallout: Now, with a complete trade ban, Pakistan faces shortages of even those essential imports. Pakistanis likely would see medicine and sugar scarcities first. One business leader warned that Pakistan’s “pharma sector…will be affected, if supplies from India are affected”. Inflation (currently low at ~2–3%) would rebound sharply as basic goods become dearer. Industries that relied on Indian parts (chemicals for plastics, auto parts) would face production halts or price spikes. Public perception will turn on the government – already unpopular when inflation hit 40% in 2023, Pakistanis now facing new shortages could blame the civilian leadership or the military establishment for precipitating the crisis.
Notably, any attempt by Pakistan to circumvent the ban (e.g. importing Indian goods via third countries) is also likely to be stopped. The government has indicated it will block “routes through third countries” and even transit trade. In effect, Pakistan could be locked out of a $10–12 billion worth of annual trade that had grown up informally. The loss of such access would hit especially hard on staple commodities like tea, sugar, and industrial raw materials, since Pakistan has limited alternative suppliers. On net, analysts put the trade disruption losses in the billions of dollars, a significant hit for an economy battling inflation and debt.
Denial of Indian Airspace to Pakistani Aircraft
India’s third action is to bar Pakistani airlines from flying through Indian airspace. This is largely symbolic but still disruptive. Pakistan’s main international routes (to China, Central Asia, and the Middle East) are relatively short and often do not normally cross Indian airspace, for instance, flights to Saudi Arabia fly west over Iran. However, some routes (e.g. to Africa or Europe) can skirt close to Indian corridors. Denying Indian air corridors will force Pakistani planes to reroute, burn extra fuel, and possibly make additional stops.
Strategic intent: This move signals that Pakistan has lost even peacetime aviation convenience. It also serves as a reciprocity measure: Pakistan had previously barred Indian carriers (e.g. after Pulwama 2019, Pakistan closed its airspace to Air India, forcing them to reroute). Now India shows it can play the same card. The main aim is to make international travel less smooth for Pakistanis (especially diplomats and businessmen) and to complicate potential military logistics.
Real-life impact: The effect on the general populace will be small compared to the other sanctions. Business travellers may grumble about delays; some cargo (urgent medical equipment, perishables) may suffer longer transit times. Pakistani public might see this as one more sign of isolation, but it won’t directly cause consumer shortages or inflation. In fact, it may even give some PR relief to India: it shows India is willing to take pains itself (its own carriers will also have to reroute via other neighbours, incurring extra cost) to maintain pressure on Pakistan. Airlines have already signalled they will request subsidies from their governments to cover these extra costs.
Economic Impact in Dollar Terms
For PIA and other Pakistani carriers, the additional operating costs are estimated at $1.2-1.5 million daily, or approximately $400-550 million annually. This comes at a time when PIA is already struggling financially, having reported losses for several consecutive years.
Beyond the direct operational costs, there are significant secondary impacts:
- Reduced Competitiveness: The increased costs and longer travel times make Pakistani carriers less attractive to international travelers, potentially reducing their market share on key routes.
- Connectivity Reduction: The economic viability of certain routes may be compromised, potentially leading to route cancellations and reduced international connectivity for Pakistan.
- Tourism Impact: Pakistan’s nascent tourism industry, which the government has been trying to develop, faces another setback as increased travel costs and times discourage international visitors.
The total economic impact, including both direct operational costs and secondary effects on tourism and business travel, could amount to $700-900 million annually.
Previous airspace closures between the two countries, such as the one following the Balakot airstrikes in 2019, demonstrated that Pakistan suffers disproportionately from such measures. While Indian carriers can relatively easily reroute around Pakistani airspace, the geography makes it much more difficult for Pakistani airlines to avoid Indian airspace when flying to destinations in East and Southeast Asia.
Pakistan’s Economic Fragility: A Perfect Storm
These three economic measures come at a particularly vulnerable time for Pakistan’s economy, which was already facing multiple crises before the Pahalgam attack and India’s response.
Pre-existing Economic Challenges
Pakistan’s economy has been struggling with several fundamental issues:
- Foreign Exchange Crisis: Pakistan’s foreign exchange reserves had fallen to critically low levels, covering less than two months of imports, far below the recommended three-month minimum.
- IMF Dependency: The country has been dependent on International Monetary Fund (IMF) support, with its 23rd IMF program in 75 years of independence requiring strict fiscal discipline and economic reforms.
- Inflation Crisis: Pakistan has been battling inflation rates exceeding 20%, severely affecting purchasing power and social stability.
- Energy Sector Challenges: Circular debt in the energy sector, exceeding $14 billion, has led to regular power outages affecting industrial production and daily life.
- Agricultural Vulnerability: Climate change and water management issues were already affecting agricultural output before the suspension of the Indus Waters Treaty.
The Compounding Effect
India’s economic measures have created what economists are calling a “perfect storm” for Pakistan’s economy. The combination of water insecurity, trade disruption, and increased transportation costs affects virtually every sector of the economy simultaneously:
- Agricultural Production: Water uncertainty threatens the backbone of Pakistan’s economy and food security.
- Manufacturing Competitiveness: Higher input costs and energy shortages reduce the competitiveness of Pakistan’s exports.
- Transportation Costs: Increased air transportation costs affect both passenger travel and high-value air cargo.
- Investor Confidence: The combined economic pressures have further eroded already fragile investor confidence, leading to capital flight and reduced foreign direct investment.
The cumulative economic impact of India’s measures, combined with pre-existing challenges, could reduce Pakistan’s GDP growth by 2-3 percentage points annually, with total economic costs potentially exceeding $15-20 billion per year when all direct and indirect effects are considered.
Spillover Effects on Regional Economies
India’s economic actions against Pakistan have significant implications for other countries in the region, particularly Nepal, Bangladesh, and Sri Lanka. These nations are now reassessing their strategic positioning vis-à-vis India, recognizing both the benefits of cooperation and the potential costs of antagonism.
Impact on Nepal
Nepal, a landlocked country heavily dependent on India for trade and transit, has carefully observed the consequences of the India-Pakistan economic standoff. With approximately 60% of Nepal’s foreign trade flowing through India and almost complete dependency on India for petroleum products, Nepal’s vulnerability to potential Indian economic pressure is evident.
The economic losses Pakistan is sustaining serve as a powerful reminder to Nepal’s policymakers about the importance of maintaining cordial relations with India. In recent years, Nepal had occasionally tilted toward China in its foreign policy, particularly during the 2015-2016 border blockade crisis. However, the demonstration of India’s willingness to use economic levers against Pakistan has prompted a noticeable shift in Nepal’s approach.
In dollar terms, any similar disruption to Nepal’s trade routes through India could cost the Nepalese economy $4-5 billion annually, approximately 15% of its GDP. This potential vulnerability has influenced Nepal’s recent policy decisions, including its more balanced approach to border disputes with India and increased cooperation on security matters.
Impact on Bangladesh
Bangladesh, with its $460 billion economy and significant trade relationship with India ($15-18 billion annually), has also taken note of India’s economic response to the Pahalgam attack. As a country that has worked to balance relations between India and other regional powers, Bangladesh recognizes the economic benefits of maintaining positive relations with its larger neighbour.
The Bangladesh government has recently intensified its crackdown on anti-India militant groups operating from its territory, a move analysts connect directly to the demonstration of India’s economic leverage against Pakistan. With approximately 40% of Bangladesh’s land trade flowing through India and significant dependence on Indian imports for its garment industry, Bangladesh cannot afford disruptions similar to those affecting Pakistan.
The potential economic cost to Bangladesh of any serious deterioration in relations with India could exceed $10 billion annually, a powerful incentive for continued cooperation on security and economic issues.
Impact on Sri Lanka
Sri Lanka, which has historically balanced relations between India and China, has also recalibrated its approach following India’s economic actions against Pakistan. After experiencing a severe economic crisis that required international bailouts, Sri Lanka is particularly sensitive to any potential economic disruptions.
India’s demonstration of economic leverage has influenced Sri Lanka’s recent decisions regarding port development and security cooperation. The Sri Lankan government has shown increased willingness to address Indian security concerns regarding Chinese investments in strategic infrastructure, recognizing that the economic costs of ignoring these concerns could be substantial.
In dollar terms, Sri Lanka’s economy, which is heavily dependent on tourism and exports, could face losses of $3-4 billion annually if it were to face similar economic pressure from India. This reality has translated into more careful consideration of Indian interests in Sri Lanka’s foreign and economic policy decisions.
Additional Economic Measures India Could Deploy
While the three main economic measures India has implemented are already applying significant pressure on Pakistan’s economy, several additional levers remain available should India choose to escalate its economic response further.
Targeting Remittances
Pakistan receives approximately $30-33 billion annually in remittances from its diaspora, constituting a critical source of foreign exchange. India could potentially work with key remittance-source countries, particularly in the Gulf Cooperation Council (GCC) region, to increase scrutiny of Pakistan-bound transfers under anti-terrorism financing provisions.
Even a 10% reduction in remittance flows could cost Pakistan’s economy $3-3.3 billion annually and significantly worsen its balance of payments crisis.
International Financial Institutions Influence
India’s growing economic clout gives it increasing influence in international financial institutions like the IMF, World Bank, and Asian Development Bank. While direct blocking of assistance to Pakistan would be difficult, India could advocate for stricter conditionalities on future assistance packages.
Given Pakistan’s dependence on IMF programs for economic stability, even modest additional conditions could force difficult economic reforms with significant political costs for the Pakistani government.
Regional Connectivity Initiatives
India could accelerate alternative regional connectivity initiatives that bypass Pakistan, such as:
- Expanding the International North-South Transport Corridor (INSTC) connecting India to Central Asia and Russia via Iran
- Developing the Chabahar Port in Iran as an alternative to Pakistani ports for Afghan trade
- Enhancing air connectivity between India and Central Asian republics
These initiatives would further isolate Pakistan economically and reduce its strategic relevance as a transit country, potentially costing its economy $1-2 billion annually in lost transit opportunities.
Digital and Services Trade Restrictions
India’s significant digital economy and services exports provide another potential lever. By restricting digital services and implementing stricter intellectual property enforcement against Pakistan-based operations, India could target emerging sectors of Pakistan’s economy.
While the immediate economic impact would be relatively modest ($200-300 million annually), the long-term effect of limiting Pakistan’s participation in the digital economy could be substantial.
Conclusion
India’s response to the Pahalgam attack represents a paradigm shift in its approach to cross-border terrorism. By deploying economic rather than military tools, India has crafted a response that applies sustained pressure on Pakistan’s fundamental vulnerabilities without risking international criticism for military escalation.
The combined impact of suspending the Indus Waters Treaty, halting bilateral trade, and closing Indian airspace to Pakistani aircraft creates multi-dimensional pressure on Pakistan’s already fragile economy. The estimated annual economic cost to Pakistan of these measures exceeds $15-20 billion when all direct and indirect effects are considered, representing approximately 5-6% of Pakistan’s GDP.
Moreover, these economic measures send a powerful message to other countries in the region about the potential costs of antagonizing India and the benefits of cooperation on security and economic issues. Countries like Nepal, Bangladesh, and Sri Lanka are already demonstrating increased sensitivity to Indian security concerns as a result.
While Pakistan may seek international support to mitigate these economic pressures, its options are limited. Traditional allies like China can provide some financial support but cannot replace the fundamental geographic and economic neighbourhood realities that give India significant leverage. International organizations like the World Bank may express concern about the suspension of the Indus Waters Treaty but have limited ability to force India to reverse its decision.
The most effective response for Pakistan would be addressing India’s core concern: cross-border terrorism. However, the complex relationship between Pakistan’s security establishment and militant groups makes such a response politically difficult internally.
As this economic pressure continues to build, Pakistan faces increasingly difficult choices. Each day the measures remain in place, Pakistan’s economic challenges compound, potentially leading to a level of economic distress that could trigger political instability or force fundamental policy changes.
India’s economic surgical strike thus achieves more than what military action could: sustained pressure that increases over time rather than creating a crisis that quickly subsides. Without firing a single bullet, India has implemented what may prove to be its most effective response yet to cross-border terrorism.
What is your opinion on the Hypothesis given in the Article above? Proven or Not? Please give your comments in the comment box given below!
An excellent analysis covering all facets of economic and strategic importance
Very very detailed study with perfectly summarized content