Dr Samir Sarkar & Prof. (Dr) Pradeep Kumar Jain
(He can be reached at pkjain60@gmail.com)
In the rapidly evolving global economic landscape of 2025, India’s decision to pursue a ceasefire amidst escalating tensions with Pakistan represents a profound exercise in strategic rationality. Conventional wisdom might suggest that nations must respond forcefully to provocations to safeguard sovereignty. However, in the context of India’s current geopolitical stature and unprecedented economic opportunities, the rationality of military escalation needed careful reconsideration. Rather than succumbing to the temptations of military confrontation, India recognised the asymmetric stakes and long-term opportunity costs inherent in escalation. Given its emerging role in global trade realignment, its ambition to become a $5 trillion economy, and its increasingly central position in global supply chains, India’s leadership chose to prioritize stability, economic advancement, and global credibility.
India’s leadership, by opting for a ceasefire, not only diffused immediate tensions but also decisively prioritised long-term national interest.
Short-term economic instability remains a near-inevitable consequence of military conflict, even when localized. During the Kargil conflict (1999), the Sensex dipped initially by nearly 3% before recovering, while inflation rose sharply from 4% to nearly 6%. Fiscal deficits widened as emergency defence expenditure rose, straining India’s fragile post-liberalization economy. In today’s far more globally integrated environment, the consequences would have been more severe. India’s financial markets are directly linked to global investment flows; as of 2024, foreign investors held approximately Rs 55 lakh crore in Indian equities. Conflict would have triggered sharp outflows, currency depreciation, bond yield spikes, and stock market losses. A mere 2% fall in stock indices could temporarily erase wealth equivalent to over 1.5% of India’s GDP. Similarly, airspace closures during past India-Pakistan standoffs forced commercial aviation rerouting, raising logistic costs. In 2025, Pakistan’s airspace closure increased Air India’s annual operational costs by an estimated $600 million.
Expanded conflict would have disrupted not just air travel but seaborne trade as well, with insurance premiums for shipping in South Asian waters surging, like war-risk premiums seen during the Gulf conflicts. Moreover, consumer sentiment would have deteriorated, undermining domestic consumption, which accounts for nearly 60% of India’s GDP. An erosion of consumer confidence during conflict phases, as documented during past Indo-Pak escalations, leads to declines in sectors like tourism, retail, hospitality, and discretionary manufacturing. Thus, the ceasefire immediately stabilized investor sentiment, prevented capital flight, preserved currency stability, and ensured continuity in trade and domestic domesticconsumption.
The medium-term consequences of conflict are even more substantial, primarily through the destruction of emerging economic opportunities. The U.S.-China tariff war (escalating U.S. tariffs on Chinese goods to 125-145%) triggered a monumental $450 billion trade gap. If India captured merely 5-10% of the displaced Chinese exports to the U.S., it would mean an additional $20-30 billion in exports annually, equivalent to 0.5-0.7% incremental GDP growth. Sectors such as textiles (already exporting $36 billion in 2023-24), electronics (with iPhone exports from India crossing $12.1 billion), pharmaceuticals, and automotive components stand to benefit disproportionately. Global trade data (UNCTAD, 2024) already indicates India gaining share in U.S. electronics and machinery imports at China’s expense. Any military escalation would have forced U.S. and European importers to reassess India’s geopolitical risk premium, diverting orders to Vietnam, Mexico, or Indonesia.
India attracted record FDI inflows of ~$70 billion in 2023-24, reflecting growing investor confidence in political stability and reform momentum. Companies adopting a China-plus-one strategy, Apple, Tesla, Samsung, and major European manufacturers selected India precisely for its perceived long-term stability. War would have risked reversing these trends.
A conservative estimate suggests even a 10-15% reduction in FDI inflow post-conflict would cost India $7-10 billion annually. Over five years, factoring in multiplier effects, this translates to a cumulative GDP loss of $100-150 billion, lost employment opportunities, and missed technological spillovers.
Reform momentum is a critical driver of medium-term productivity. Since 2014, India has introduced transformative reforms such as GST implementation, the Insolvency and Bankruptcy Code (IBC), labour law modernization, and production-linked incentive (PLI) schemes. War would have consumed political bandwidth, stalling the next generation of reforms – including agricultural market modernization, land acquisition easing, and logistics enhancement. As global examples show (e.g., South Korea’s post-Korean War reforms vs. conflict-locked Middle Eastern economies), peaceful reform periods correlate strongly with sustainable growth transitions. Thus, the ceasefire preserved India’s ability to exploit global trade realignment, attract supply chain relocations, and advance domestic structural reforms uninterrupted.
Wars have historically inflicted severe long-term economic damage. Libya’s GDP contracted by nearly 90% post-2011, Syria’s by over 60% since 2010, and Iraq’s by 50% post-2003.
Even Russia, despite energy wealth, suffered a 2.1% GDP decline in 2022 following its Ukraine conflict, coupled with technological isolation and long-term structural stagnation.
Had India escalated, a sustained rise in defence expenditure by 0.5-1% of GDP would have strained fiscal consolidation efforts, worsened public debt (nearly 83% of GDP), and crowded out productive investments in infrastructure, education, and healthcare.
Beyond fiscal metrics, conflict destroys human capital. A loss of thousands of young productive workers, displacement of border populations, loss of school years, and reduced health outcomes among war-affected regions – these intangible costs permanently lower national productivity and innovation potential. Historical evidence from Kashmir’s conflict-affected economy or Punjab during the insurgency era (1980s–90s) shows how sustained insecurity depresses investment, migration, and regional GDP for decades. Thus, India’s ceasefire decision preserved not only its immediate macroeconomic stability but also its
longer-term demographic dividend and innovation capacity.
India’s ceasefire decision aligns with the strategic models followed by successful post-war economic powers, notably Germany and Japan, which after World War II prioritized rebuilding education, industrial infrastructure, and technological capabilities instead of further militarization, enabling them to emerge as top three global economies within decades.
In sharp contrast, militarized economies such as Iraq, Syria, Afghanistan, and post-Soviet Russia following the Ukraine invasion have faced persistent economic stagnation and structural decay under perpetual conflict. Global financial institutions have reinforced the prudence of India’s approach. S&P Global Ratings has confirmed India’s sovereign rating stability is contingent upon “managed geopolitical risks”, while the World Bank’s 2025 report emphasized that political stability accounts for 30-40% of variance in FDI inflows among emerging economies. Additionally, the Brookings Institution (2025) found that nations avoiding conflict during critical development phases grew 2-3% faster annually over the following decade compared to their conflict-engaged peers. India’s ceasefire decision also becomes clearer when contrasted with Pakistan’s acute economic fragility; Pakistan’s (total IMF EFF programme size nearly $3 billion approved in 2023–24) A $1 billion IMF bailout in May 2025 merely delayed an impending default, while CPI inflation exceeding 30% in early 2025, as per the Pakistan Bureau of Statistics, a precarious external debt position, and dwindling reserves have left Pakistan with minimal incremental costs of conflict. Conversely, for India, with a dynamic, reform-driven economy and global integration, the cumulative opportunity cost of conflict would amount to trillions of dollars in lost trade, investment, and growth, making peace not just a diplomatic move but a strategic economic imperative. Critically synthesised, India’s ceasefire reflects a sophisticated understanding that comprehensive national power (CNP) in the 21st century derives more from economic scale, technological capacity, and global connectivity than military confrontation. Military strength, while essential, is better built upon an economic base capable of sustained funding, innovation, and technological modernization, precisely the path India’s ceasefire preserves.
Thus, the decision underscores strategic patience, economic foresight, and the exercise of hard-headed pragmatism over reactive emotionalism. It averted substantial short-, medium-, and long-term economic damages, preserved investor confidence, accelerated India’s global economic positioning, and maintained the integrity of domestic reform momentum. As Kofi Annan presciently observed, economic growth and peace are twin pillars; without peace, investment falters; without growth, peace cannot be sustained; military escalation risks slowing India’s path to a $5 trillion economy by 2028–29 and a $10 trillion economy by the mid-2030s. Economic prioritisation secures it. As George Bernard Shaw observed, peace is not only better than war but infinitely more arduous and infinitely more rewarding. Rational decision-making, not emotional reaction, must guide India’s path. A ceasefire today is not surrender; it is strategic wisdom. Pakistan has little left to lose, but India has everything to gain. By staying focused on peace and prosperity, India will rise stronger, richer, and more respected on the world stage. By opting for peace, India has chosen the pathway to sustainable greatness, where its rise as a global economic and strategic power remains not a matter of possibility but inevitability.