Tensions between India and Pakistan continued to escalate for a third day after India’s retaliatory military operation, dubbed Operation Sindoor, following a terror attack in Pahalgam that killed 26 civilians.
Late Friday night witnessed a fresh wave of drone activity across northern India, with several cities in blackout and residents reporting explosions in the skies.
Indian defence authorities said drones were spotted in 26 locations.
Authorities in New Delhi said Pakistan used nearly 400 drones to attack 36 locations, from Siachen to Sir Creek, the night of May 9, which Indian air defence systems were able to thwart.
However, Pakistan’s military dismissed India’s allegations of cross-border aggression as “phantom defence”.
Lt. Gen. Ahmed Sharif Chaudhry, the Pakistani army’s spokesperson, said during a press briefing, “They sent in their drone. They are getting a befitting response.”
He added that Pakistan would retaliate “at a time, place, and method of our choosing.”
While Chaudhry confirmed indirect communication between Indian and Pakistani security leadership, he reiterated that Pakistan had no role in the recent terrorist attack on Pahalgam, and challenged India’s claims of thwarted attacks on over a dozen cities.
Global concern mounts over threat of prolonged conflict
With both nations nuclear-armed and sharing a turbulent history, global observers have raised alarms about the potential for a wider conflagration.
Analysts note that both India and Pakistan appear to have developed a greater risk appetite for escalation, raising the likelihood of frequent military skirmishes.
While a full-scale war is still considered unlikely by most experts, even limited confrontations carry high economic and human costs.
The Kargil conflict is often cited as a benchmark, with estimates suggesting India then spent ₹14.6 billion per day, while Pakistan’s daily military expenditure touched ₹3.7 billion.
IMF considers approving a new $1.3 bn loan to Pakistan but country remains economically fragile
The economic strain of prolonged hostilities is expected to be far more severe for Pakistan, which is already battling multiple crises.
The Sharif government is grappling with a weakened mandate, an ongoing Islamist insurgency along the Afghan border, and separatist violence in Balochistan.
On the fiscal front, Islamabad’s troubles are pronounced.
Its external debt ballooned past $130 billion in 2024, with over 20% owed to China.
Meanwhile, foreign exchange reserves have hovered just above $15 billion, enough to cover only about three months of imports.
More than $22 billion in public external debt is due in FY25, including nearly $13 billion in bilateral deposits, according to Fitch.
In September 2024, Pakistan secured a $7 billion IMF bailout. Although this provided temporary respite, the country remains vulnerable.
The IMF on Friday reviewed its $1 billion Extended Fund Facility (EFF) and considered approving a new $1.3 billion Resilience and Sustainability Facility (RSF) loan.
However, India—an active IMF member—expressed scepticism about Pakistan’s ability to implement reforms, pointing to the country’s long history of unsuccessful bailouts.
“Had the previous programs succeeded, Pakistan would not have needed yet another bailout,” India said, questioning whether the problem lay in program design, enforcement, or Pakistan’s commitment.
India also strongly objected to the potential misuse of IMF funds, warning that continued financial support for a country accused of backing cross-border terrorism sends a troubling signal to the international community.
It cautioned that such assistance could damage the credibility of global institutions and donors, and undermine the very principles they claim to uphold.
Why Pakistan cannot risk a full-blown war
Just two days before India launched Operation Sindoor, Moody’s Ratings warned that prolonged hostilities would likely derail Pakistan’s fiscal consolidation and stall any progress on macroeconomic stability.
It added that increased tensions could impair Pakistan’s access to external financing and pressure already stretched foreign reserves.
Former Citigroup executive Yousuf Nazar echoed those concerns, writing in the Financial Times that Pakistan’s economy, especially its agriculture sector, was ill-equipped for another major shock.
Nazar warned that India’s suspension of the Indus Waters Treaty could further jeopardise the livelihoods of millions, as agriculture employs nearly 40% of Pakistan’s workforce.
“Combined with ongoing political instability and the lingering effects of the 2022 floods, the country is ill-prepared for another major shock. A single crisis could trigger economic collapse and mass suffering. For Islamabad, avoiding significant escalation could be a question of survival,” Nazar wrote in FT.
“Even if a full-scale war appears unlikely, the potential for limited hostilities — frequent in the fraught history of this rivalry — remains high. And short-lived escalations can still impose outsize economic and human costs, particularly on a country as vulnerable as Pakistan,” he added.
India more stable economically, but higher defence spending will come with repercussions
India, while relatively more economically stable, is also carefully evaluating the costs of sustained military preparedness.
With foreign exchange reserves of over $650 billion, India is better positioned to withstand shocks such as capital outflows or rising military expenditure.
However, these costs will not be negligible.
In the 2024 Union Budget, India allocated ₹6.21 lakh crore to defence spending.
That figure remains modest compared to China’s military budget of over $200 billion, but any further increase could place strain on fiscal resources.
Economist and journalist Mitali Mukherjee noted in Frontline that recent tax stimuli introduced to boost consumer demand have reduced government revenue by ₹1 trillion annually, potentially limiting future spending capacity.
“If India were to boost its military spend, it would find itself in a tricky bind,” she said.
Mukherjee said the most recent Union Budget was an admission that consumer spending needed urgent attention, and a tax stimulus was the answer.
“It is still unclear if there has been a meaningful improvement in eroding real purchasing power or in slowing personal loan growth. However, that tax stimulus has come with a downside; it means the government will lose 1 trillion rupees annually, which in turn will impact its revenues and restrict its ability to spend.”
Moody’s, in a separate assessment, stated that India’s macroeconomic conditions were likely to remain stable, even under a scenario of prolonged tension.
Strong public investment and robust private consumption were seen as buffers.
However, the agency added a note of caution: “Higher defence spending in such an eventuality would potentially weigh on New Delhi’s fiscal strength and slow its fiscal consolidation.”
A costly standoff with no clear end in sight
While both nations are taking measured steps to avoid full-scale war, the possibility of continued low-intensity conflict remains high.
Experts and financial institutions alike have begun to tally the costs in lost growth, rising debt, and long-term instability.
As night skies across northern India continue to flicker with drone strikes and air defence responses, the world watches with increasing concern.
The price of war, even one that never fully erupts, may already be unfolding in the form of diminished economic prospects, fragile diplomacy, and fractured domestic stability.
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