Tensions between countries often raise concerns about their impact on the economy and financial markets. India and Pakistan, two neighbouring nations with a long history of conflict, have witnessed many such moments. From the Kargil War in 1999 to recent border tensions, both countries have faced situations that could shake economic stability. Yet, the responses of their economies and stock markets have varied greatly.
Wars often bring uncertainty, but history shows that economies can still display strength and resilience during such times.
This article looks at how both nations’ economies and stock markets have reacted during periods of conflict, especially focusing on the Kargil War and the recent Pahalgam terror attack. Let’s begin.
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India vs Pakistan: Tracking Economic Progress
During the Kargil War in 1999, India’s economy demonstrated remarkable resilience and even acceleration, making it a unique case among India’s wars where economic growth actually increased during the conflict. The Indian economy outperformed even the most optimistic forecasts — the IMF had predicted 5.2% growth in May 1999, later revising this to 5.7% in October, but the actual figure reached 6.8%.
Additionally, the nation’s growth remained strong in 2000, with the IMF again underestimating India’s resilience. India’s robust economy, supported by a large domestic market and ongoing reforms, helped shield it from the typical negative effects of war.
As mentioned in Business Today, in 2000, Pakistan’s GDP per capita was $733, significantly higher than India’s $442. This gap suggested that, at the time, Pakistan’s per capita economic output was greater than India’s.
Between 2014 and 2024, India’s GDP per capita jumped 74% from $1,560 to $2,711, while Pakistan’s rose only 11%, from $1,424 to $1,581. The global average grew 24% in the same period. This demonstrates that India has not only pulled ahead of Pakistan but also outpaced global growth in per capita income.
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India vs Pakistan: Defence Spending
In recent years, India has significantly boosted its defence capabilities through indigenous manufacturing and key acquisitions like the Rafale fighter jets. Pakistan, too, remains a major defence spender, but key contrasts between the two nations are shaped by their historical, economic, and geopolitical contexts.
According to the Stockholm International Peace Research Institute (SIPRI), global military spending rose by 9.4% in real terms in 2024, with the top five spenders contributing 60% of the total $1,635 billion. India ranked fifth globally, with a military budget of $86.1 billion in 2024–25 — a 1.6% increase. In contrast, Pakistan’s military expenditure stood at $10.2 billion, highlighting a significant difference in scale and strategic priorities.
India’s defence spending has seen steady growth over the past decade. As per Macrotrends data, it rose from $41 billion in 2013 to nearly $80 billion in 2024. While Pakistan’s military spending is much lower in comparison, it remains a substantial part of the national budget.
India’s higher spending reflects its efforts to modernise its forces and strengthen its strategic position. Pakistan, on the other hand, focuses on maintaining a credible deterrent. Despite this investment, India currently spends only 1.9% of its GDP on defence — below the 2.5% often considered necessary to effectively counter the dual threat from China and Pakistan.
Stock Market Reactions During the Kargil War
The Kargil War had a notable impact on the stock markets of both countries. However, the nature of this impact differed for each nation. In India, the BSE Sensex displayed strong resilience and optimism during and after the war.
The Sensex began at 3,378 points at the start of the war (May 3, 1999) and rose to 4,625 points by the end — an impressive growth of around 37%. Even a year later, the Sensex maintained positive momentum, closing at 4,335 points — reflecting a 28% gain from the war’s beginning. This indicates that investors had strong faith in the Indian economy, likely due to India’s favourable position in the war and its stable political situation at the time.
In contrast, Pakistan’s Karachi All Share Index also rose during the war, but at a much slower pace. It started at 1,119.22 points and ended the war period at 1,228.45 — a modest 10% increase.
Interestingly, despite this slower growth during the conflict, the Karachi market saw a substantial surge over the year, reaching 1,997.70 points — a 78% rise from its starting value. This delayed growth could be attributed to post-war recovery and policy adjustments, contrasting with the more immediate response seen in India’s market.
Market Reaction from Pahalgam Attack to Ceasefire
Amid renewed tensions between India and Pakistan, the Indian stock market once again showed notable resilience. Between April 23 and May 12, the BSE Sensex rose by 4%, moving from 79,595.59 to 82,429.90. This upward trend reflects investor confidence and a positive response to signs of de-escalation.
In contrast, Pakistan’s KSE All Share Index dropped 2% during the same period, falling from 73,872.66 to 72,310.04. Despite the ceasefire, the Pakistani market showed limited recovery — unlike India’s.
A closer look reveals that the Sensex is now trading above its April 22 level (the day of the Pahalgam terror attack), while Pakistan’s index, as of May 14, remains below its level from that day — highlighting stronger market sentiment in India.
Furthermore, after India’s missile strikes on terror camps, Pakistan’s KSE 100 Index crashed over 6% and triggered a trading halt, as reported by The Times of India. Meanwhile, Indian markets experienced no such trading halts during this period.
Comparing market reactions: the largest single-day fall in the KSE All Share Index was over 6% on May 8, while India’s Sensex fell by only 1.10% on May 9. This stark difference further underscores the Indian market’s resilience amid geopolitical tensions.
What Does This Mean for Investors?
During the Kargil War, although the markets were initially nervous, they demonstrated resilience — showing that staying invested with a long-term view can be rewarding, even during turbulent times. Investors should avoid panic selling. History shows that markets generally recover after wars or conflicts.
It’s also important to remember that stock markets are more influenced by overall economic health — such as GDP growth and corporate earnings — than by short-term political or military events. Despite the war, most sectors of the Indian economy remained stable, with minimal disruption to trade, investment, and currency markets.
What’s Next?
The Kargil War did not derail India’s economic progress; instead, the country emerged stronger — with robust growth, stable markets, and rising investor confidence. Today, India’s economic position remains solid, especially in comparison to Pakistan. Growth is expected to remain healthy in the 6.3% to 6.5% range.
Additionally, India’s retail inflation eased to a 6-year low of 3.16% in April. Industrial growth (IIP) stands at 3%, and GST collections recently hit Rs 2.37 lakh crore — one of the highest ever. These strong figures indicate that the economy is on the right path.
With reasonable market valuations, strong Q4 FY25 earnings, and positive expectations for the upcoming quarters, the outlook remains upbeat. Continued FII inflows and trade deals like the India–UK FTA further strengthen the growth momentum.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
