Danger zone: Posturing against Pakistan can be costly for India
The next major crisis with Pakistan could derail our economic growth and hurt Narendra Modi’s domestic standing.
After effectively “scuppering” the much-anticipated meeting between the Indian and Pakistani national security advisers in late August, observers noted that the Narendra Modi government had “abandoned” comprehensive talks for circumscribed dialogue. A number of pundits applauded the strong message to Pakistan as well as the patent disinterest in reviving links. The Indian Army followed with a statement that it was preparing for a short, swift war with Pakistan to retaliate if provoked and impose severe costs to bolster deterrence. Both the cold shoulder to talks and the re-brandishing of this “Cold Start” option are intended to signal toughness abroad and at home, but actually expose India to grave vulnerabilities.
The danger of such posturing is that any crisis or limited confrontation carries some risk of nuclear escalation. And by severely constraining contacts between key officials, diplomats, and security forces in order to punish Pakistan, India limits channels of communication and institutional mechanisms of dialogue necessary to manage crises, or facilitate a climbdown from militarised standoffs. After all, hotlines offer little restraint without relationships built on direct and ongoing dialogue. It is one thing to talk about using a gun for the sake of deterrence, but quite another to brandish it while the safety is off.
Bracketing questions of limited war’s strategic utility or Indian resolve and capability, another angle must be considered. If the next major crisis escalates to a confrontation, the costs could jeopardise India’s broader economic strategy as well as PM Modi’s standing with his political base. Crises and wars introduce tremendous volatility and uncertainty that could derail Indian economic growth, its great power aspirations, and the security of the BJP’s political base.
With China’s economy faltering, India has sought to capitalise on a window of opportunity to outpace Chinese growth by drawing a larger share of capital and foreign direct investment (FDI). A core part of the Modi government’s economic strategy is to attract FDI for its “Make in India” campaign to boost India’s domestic manufacturing, job creation, and trade balance. However, with a slowdown in growth rates, and investors in “wait-and-see mode,” a crisis or conflict could squander this opportunity.
A crisis that spirals beyond cross-border shelling to major militarised actions can negatively affect the macroeconomic outlook through the direct costs of mobilisation, degradation of materiel and infrastructure, as well as downstream effects of reduced investor confidence, higher risk premiums on trade, and deterred tourism. There is a well-recognised general relationship between conflict, instability and economic growth, but some research suggests specifically militarised disputes negatively impact FDI if investments are mobile assets like manufacturing, as opposed to immobile assets like oil. Some research suggests a crisis need not even escalate for firms to limit FDI in anticipation of conflict.
Major crises punctuating the past two decades provide evidence for these abstract theoretical expectations. The 1998 nuclear tests, 1999 Kargil conflict, the 2001-02 “Twin Peaks” crisis, and 2008 Mumbai crisis produced significant direct and indirect costs that negatively affected GDP growth. One research group estimated the initial costs of the 2001-02 crisis totalled $2.7 billion or almost 0.5% of India’s GDP, but this does not account for indirect costs.
A crude examination of monthly data reveals that FDI in India took a major hit after these crises. When comparing average FDI levels six months before and after each crisis, FDI dropped roughly 30% on average with the largest decline following the Twin Peaks crisis. Even after periods of limited mobilisation but heightened tensions in 1998 and 2008, FDI fell at least 20%. Since 1995, the only periods of negative growth in tourism and tourist revenue occurred when tensions escalated, often related to issuance of travel advisories and closing of air space.
India’s overall GDP growth reflected these costs. Quarterly GDP growth slowed slightly during the 1998 crisis and Kargil conflict, significantly during the Twin Peaks crisis (to roughly .5%), and was negative after the 2008 crisis, where the Mumbai attack itself may not have been as detrimental to the economy as the subsequent standoff. A moderate negative correlation appears to exist between periods of crisis escalation and quarterly economic growth. Though hardly definitive analysis, there is strong reason to believe the next crisis between India and Pakistan could be very costly to the Indian economy, no matter what the level of escalation or punishment meted out. There would be little comfort if Pakistan incurred steeper economic costs. India’s great power aspirations depend on sustained, globally competitive growth rates, not relative regional economic gains.
Even if India seeks to keep a confrontation limited, recent analysis suggests Pakistan maintains the conventional capability to deny India a victory on the cheap. Recent American and Israeli military experiences serve as a cautionary tale: the length, scale, and costs of conflicts are rarely predictable, and even a military “victory” often does not change the adversary’s strategic calculus or behaviour.
Moreover, courting confrontation without buffers of dialogue incurs political risks. Public opinion research shows 74% of the Indian public expects the economy to improve in the coming year. Should a crisis deny fulfilment of these expectations or trigger an economic slowdown, the Modi government - which was elected to office for its ability to deliver improved macroeconomic performance far above law and order or foreign policy leadership - could suffer a loss of public confidence, and further complicate his agenda.
The Modi government has made bold moves to place India’s economic agenda at the centre of its grand strategy. Ultimately the prime minister’s economic and political agenda and India’s great power aspirations would be best safeguarded with less brinksmanship in confrontations along with robust avenues of outreach and communication with Pakistan to de-escalate a crisis or conflict before they spiral out of control.
(Sameer Lalwani is deputy director, South Asia Program at the Stimson Center. The views expressed are personal.)