India-Pakistan Conflict: Can Both Nations Afford a Full-Scale War? Here's the Estimated Cost

70 terrorists. 9 Locations. Less than 1 Hour. A powerful retaliatory strike that brought the hammer down on Pakistan. India’s Operation Sindoor delivered a strong response to Pakistan’s deadly and barbaric Pahalgam attack, which claimed 26 innocent lives in Jammu and Kashmir.

While cross-border tensions have long been present, concerns are now growing that the conflict could take an uglier turn. In such times, one question always comes to mind: what price will both nations pay? Can both countries afford a full-scale war? Who will bear the brunt? While finding exact figures might be a fool's play, historical numbers surely provide a hint, if not a complete picture, of the price tag.

Estimates Signal a Pricey Affair

The overall cost of any type of war depends on several aspects. Be it the location of a country, the scale of conflict, who backs whom, the list is quite endless if one were to predict an exact number. But probabilities and estimates are always present to give a glimpse, if not the complete view, about what could unfold. In the context of an India-Pakistan conflict, a short-term conventional war might cost India anywhere between Rs 1,460 crore to Rs 5,000 crore per day, as per an analysis by the Foreign Affairs Forum.

The impact of a large-scale war can be even worse.

"A prolonged conflict, when accounting for broader macroeconomic impacts, could lead to catastrophic economic losses exceeding $17.8 billion (Rs 1.34 lakh crore) daily," the UAE-based Foreign Affairs Forum stated.

Historical data (2001-2002) signals that a military standoff with even limited confrontations can cost India $1.8 billion and Pakistan $1.2 billion. Not ignoring the series of events that might follow, including outflow of capital and currency depreciation. Pakistan's currency, which is already struggling, can potentially come down to Rs 285 per dollar.

The chaos doesn't end here

The above figures indicate the direct cost that both nations might incur owing to war. The chain of events that follows after any nation witnesses a large-scale military conflict often has an even disastrous impact. For instance, the formal trade between India and Pakistan, "valued at $1.2 billion annually, would cease entirely," as per FAF.

When the Pulwama incident happened, Pakistan's exports to India witnessed a sharp drop to $480,000 from $550 million. For India, the trade impact might be limited. "Trade between India and Pakistan is minimal, with India importing almost nothing from Pakistan and exporting goods worth about $1.2 billion annually, primarily pharmaceuticals, chemicals, and agricultural products," the analysis read.

Even stock market movements can pose a serious threat to investors' money. Just last week, Pakistan's benchmark index, the Karachi Stock Exchange witnessed a major crash. Today, following Operation Sindoor, Pakistan's stock market plunged by around 6,500 points. In contrast, India's benchmark indices remained relatively resilient.

"Historical data suggests that the Indian stock market has generally responded with resilience to serious geopolitical events. Except for the Parliament attack in 2001, all other incidents studied have led to positive market returns over the medium to long term," said Abhishek Jaiswal, Fund Manager at Finavenue.

As per Anand Rathi Research, the average equity market correction across conflicts was 7%, with a median correction of 3%.

What History Signals to Investors

Large-scale war events often take a hard toll on finances. However, if we see from the perspective of stock market movements, long-term impacts are often uncertain. For instance, despite an initial decline of 8.3% before the Kargil War in 1999, the index rebounded strongly with gains of 16.5% in the following month, as per an analysis by Finavenue. Conversely, the Parliament Attack in 2001 saw a market drop of 0.8% one month after the event, despite a 10% rally beforehand.

The Mumbai 26/11 attacks in 2008 occurred amid a global financial crisis, with D-street witnessing a decline of around 0.7% in three months. Events like the Uri surgical strikes and the Pulwama-Balakot incident had relatively muted or short-lived effects, with moderate gains over six to twelve months.