The massacre in Pahalgam’s Baisaran meadow on April 22, 2025, where 26 lives, mostly tourists, were extinguished by The Resistance Front, a Lashkar-e-Taiba proxy, has cast a long shadow over the subcontinent. The attack, India’s deadliest civilian tragedy in two decades, has plunged India-Pakistan relations into a chilling abyss, reminiscent of the 2019 Pulwama crisis but with sharper economic stakes.
India’s retaliatory arsenal—suspending the 1960 Indus Waters Treaty, sealing the Attari-Wagah border, expelling Pakistani diplomats, and banning Pakistani nationals—has been met with Pakistan’s own defiance: a total trade embargo, airspace closure to Indian flights, and threats to unravel the 1972 Simla Agreement. As both nations dig in, the economic consequences are profound, threatening immediate stability and long-term prosperity. India’s $4.3 trillion economy and Pakistan’s $340 billion economy, vastly different in scale, face asymmetric but intertwined challenges. From tourism and trade disruptions to the looming spectre of water wars, this crisis could reshape both nations’ economic trajectories, with distinct yet interconnected perils.
For India, the immediate economic wound is in Jammu and Kashmir’s tourism sector, a vital engine for a region long battered by conflict. In 2024, Kashmir welcomed 3.5 million visitors, sustaining thousands of livelihoods, from shikara operators to handicraft sellers. The Pahalgam attack has shattered this fragile ecosystem, with cancellations nearing 90% and airlines evacuating 800 tourists from Maharashtra alone. The ripple effect threatens India’s broader tourism industry, which accounted for 6.8% of GDP in 2023, per the World Travel & Tourism Council. Fearful perceptions are dampening bookings in Himalayan states like Himachal Pradesh, where a solidarity bandh signalled national unease. A prolonged slump could cost India $1–2 billion in tourism revenue, undermining the government’s post-2019 narrative of Kashmir’s “normalcy.” Pakistan, by contrast, faces a less direct but still significant tourism hit. Its northern Gilgit-Baltistan region, a draw for adventure seekers, saw 1.2 million visitors in 2024, per Dawn, but rising tensions and global headlines of regional instability could deter foreigners, costing Pakistan’s $1 billion tourism sector millions in lost revenue. For Pakistan, where tourism is a smaller GDP contributor (2.9%), the impact is less severe but compounds an already strained economy.
Trade and logistics disruptions are another shared pain point, though the scales tip differently. India’s bilateral trade with Pakistan, a modest $2.4 billion annually, has been obliterated by Islamabad’s trade ban and India’s border closure, halting exchanges of pharmaceuticals and chemicals. For India, this is a minor blip in its $900 billion export market. However, Pakistan’s airspace closure, forcing Indian airlines to reroute flights to the Gulf, Europe, and North America, adds 15–20% to fuel costs, per Reuters, raising airfares and squeezing margins for carriers like Air India. This could dampen business travel and diaspora connectivity, critical for India’s commercial hubs. Pakistan’s trade losses are more acute. Its $350 million exports to India—fruits, cement, and leather—were a small but vital lifeline for border communities. The trade ban, coupled with India’s visa restrictions, cripples Pakistan’s already dwindling $27 billion export base, exacerbating its balance-of-payments crisis. Pakistan’s airspace closure, while a diplomatic jab, may backfire: its airlines, like PIA, rely on overflight fees from Indian carriers, a revenue stream now at risk. Both nations lose, but Pakistan’s smaller, import-dependent economy feels the pinch more acutely.
Financial markets reflect the crisis’s uneven toll. India’s BSE Sensex shed 589 points on April 25, rattled by geopolitical fears and global tariff concerns. X posts highlight investor jitters, with gold and the US dollar gaining as safe-haven bets. Foreign institutional investors, who injected $51 billion into India in 2024, are wary; a prolonged standoff could trigger capital flight, weakening the rupee and inflating import costs for oil, which India imports 80% of. Yet India’s 6.5% GDP growth forecast for FY26, per the IMF, offers resilience. Pakistan’s markets, already fragile, are teetering. The KSE-100 Index, down 5% year-to-date, faces further pressure, with the Pakistani rupee—already depreciated 20% since 2023—vulnerable to collapse. Pakistan’s $7 billion IMF bailout, secured in 2024, hangs by a thread; escalation could spook creditors, deepening its $130 billion external debt crisis. India’s $51 billion FDI inflow dwarfs Pakistan’s $1.8 billion, but both risk deterring investors if the crisis escalates. India’s manufacturing ambitions, buoyed by Apple’s planned iPhone production shift, could falter if instability persists, while Pakistan’s textile sector, 60% of its exports, faces supply chain disruptions from border closures.
Over the long term, India’s suspension of the Indus Waters Treaty looms as a seismic risk for both economies. The 1960 pact governs the Indus River system, vital for Pakistan’s agriculture (25% of its $340 billion GDP) and India’s Punjab and Haryana, which produce 50% of India’s grain. India’s vow to choke off Pakistan’s water, possibly via new dams, could cost $5–10 billion, diverting funds from health and education. Pakistan, where 90% of water use is agricultural, faces catastrophic losses: a 10% reduction in Indus flows could slash GDP by 5–7%, per water analysts, risking food insecurity for its 240 million people. India’s agricultural output, less dependent on the Indus, would face manageable disruptions, but the security costs of escalation are steep. Pakistan’s rhetoric—an “act of war” over water—raises the spectre of proxy conflicts, forcing India to bolster its $81 billion defence budget, crowding out social investments. Pakistan, with a $12 billion defence budget, can ill afford escalation, yet its internal volatility may fuel reckless gambits, perpetuating regional instability.
Kashmir’s economic integration, a pillar of India’s post-Article 370 strategy, hangs in the balance. The attack’s communal targeting of Hindu tourists threatens to reverse gains in per capita income, which outpaced many northern states since 2019, per the Lowy Institute. A sustained tourism slump could shave 0.5–1% off India’s GDP, stalling infrastructure and private investment. Pakistan’s northern regions, less integrated into its economy, face milder economic fallout, but the attack strengthens hardliners, risking further militarisation that diverts funds from its crumbling health and education systems. Both nations lose global credibility: India’s India-Middle East-Europe Economic Corridor and Pakistan’s China-Pakistan Economic Corridor could falter if instability dominates headlines. China’s silence, given its $60 billion stake in Pakistan, adds uncertainty, potentially sidelining both nations’ regional ambitions.
The crisis exposes stark asymmetries. India’s economic heft—12 times Pakistan’s GDP—offers a buffer, but its global aspirations make stability non-negotiable. Pakistan, teetering on economic collapse, risks more from isolation, with 40% inflation and 7% unemployment amplifying domestic unrest. Yet the fates are linked: Pakistan’s proxy warfare thrives on India’s vulnerabilities, and India’s aggressive posturing fuels Pakistan’s defiance. Diplomacy is the only path forward. India could leverage neutral mediators like Iran, which offered to broker talks, while Pakistan must temper its rhetoric to preserve IMF support. Economically, India needs tourism subsidies and investor assurances; Pakistan requires trade relief and debt restructuring. Without de-escalation, both risk a lose-lose spiral. Pahalgam’s scars demand not just resolve but a reckoning with the economic costs of enmity, for two nations whose futures remain perilously entwined.