India-Pakistan crisis: The latest intense armed conflict elevates the risk of future military escalation between India and Pakistan

Event

Following the terrorist attack that took place on 22 April in the Indian Kashmir, New Delhi blamed Islamabad’s responsibility in supporting Islamist militant groups’ activities against India. In reaction, India suspended the Indus Waters Treaty – essential to Pakistan’s Punjab agriculture – and launched retaliatory strikes against targets in Pakistan’s Kashmir and Punjab province, triggering a wave of tit-for-tat strikes between the neighbouring countries. After four days of the worst intense armed conflict in decades, India and Pakistan agreed on a fragile ceasefire with the mediation of the USA.

Impact

The unresolved dispute around Kashmir has poisoned bilateral relations since India’s partition in 1947 and remains a key source of contention. The Indian government’s decision in 2019 to abrogate the special autonomy status of India’s Jammu and Kashmir state led to high local military presence and kept tensions vivid since then. The nationalist Hindu government in India, the ruling influence of the army in Pakistan, and difficulties to discern the truth in a wave of disinformation during the conflict, have been exacerbating risks. The fact that both countries are nuclear powers elevates uncertainty in periods of military escalation, given heightened risks of miscalculation. Still, nuclear deterrence as well as China’s support to Pakistan mitigate the risks of an all-out war. Moreover, despite its initial reluctance to be involved, the mediation of the USA, which showed its willingness to prevent escalation risks and maintain stability between the two nuclear powers, has helped to reach a ceasefire.

However, given the severity of the strikes (hitting targets outside Kashmir), the high level of tensions and the defiant statements from both capitals, the ceasefire seems very fragile. Worryingly, a threshold has probably been passed, whereby India’s army is ready to consider any future terrorist attacks acts of war. Indeed, domestic pressures from Modi’s supporters and across the whole political spectrum are very high and advocate acting strongly against Pakistan. The prospect of resolving the Kashmir crisis by force has probably gained more support within the population. In such a climate, expected to remain very tense, a resumption of military strikes cannot be ruled out for the coming months.

The fact that both capitals claimed victory eases nevertheless a little those pressures, as does the use of a hotline between New Delhi and Islamabad. Looking ahead, Pakistan says to be open to talks on Kashmir, the Indus Waters Treaty and alleged respective support to insurgent groups. However, India will want to rule out any external mediation in what it considers an internal matter, i.e. Kashmir.

A resumption of the military conflict in the coming months would have a detrimental impact on the political risk outlook and economy of both countries. For India, the slowing GDP growth since 2024 and uncertain trade negotiations with the USA could affect confidence and future investments, particularly those related to shifting supply chains, expected to relatively benefit India. As for Pakistan, despite a further IMF loan disbursement of USD 1 billion on 14 May, the economy is expected to continue to struggle amid the difficult socio-economic context, political instability, worsening domestic security, and in the face of a global trade war and economic slowdown. Hence, a heightened conflict with India would only exacerbate already high country risks.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com