The long-standing tensions between India and Pakistan have reached new and dangerous heights following a deadly terrorist attack on April 22, 2025, in Pahalgam, Kashmir. In the attack, 26 tourists were brutally killed, an event that has not only reignited military hostility but also sparked fears of severe economic consequences, both immediate and long-term. Beyond the devastating human loss, the fallout is threatening trade, agriculture, tourism, and regional stability across South Asia.

Escalating Diplomatic and Military Repercussions
India has directly blamed Pakistan-based militants for orchestrating the attack, an accusation that has been met with strong denial from Islamabad. In swift retaliation, New Delhi has expelled Pakistani diplomats and announced the suspension of two key agreements that had historically acted as stabilizing forces: the Indus Waters Treaty and the Simla Agreement.

The Indus Waters Treaty: A Delicate Lifeline
The Indus Waters Treaty, signed in 1960 under the auspices of the World Bank, has been crucial in managing the use of shared river systems between the two countries. Its suspension marks a dangerous escalation, as it threatens Pakistan’s access to vital water resources at a time when the country is already grappling with economic instability and food insecurity.

Border Tensions and the Risk of Armed Confrontation
Meanwhile, cross-border shelling along the Line of Control (LoC) has intensified, with both armies accusing each other of ceasefire violations. Tensions are now at their highest point since the Balakot air strikes of 2019, raising serious fears about the possibility of a prolonged military standoff—or worse, a full-scale conflict.

Economic Fallout: Trade, Agriculture, and Investment at Risk
The ripple effects on the economy are already being felt. Bilateral trade between India and Pakistan, although relatively limited due to previous hostilities, has all but ground to a halt. Informal trade routes, particularly those that exist through border areas, are also expected to suffer significant disruptions. More worrying is the suspension of the Indus Waters Treaty, which could have grave economic consequences for Pakistan. Around 90% of Pakistan’s agricultural sector depends on irrigation from the Indus River system, and any change in water flow could have devastating consequences for food security, employment, and rural incomes.

India too may not be immune. Investors are highly sensitive to geopolitical risks, and rising tensions could dampen foreign direct investment into India, particularly in sectors like manufacturing, logistics, and energy, where cross-border stability is critical. In recent years, India has positioned itself as a key global manufacturing hub, but prolonged instability could push multinationals to reconsider or delay their expansion plans.

Financial Markets React to Geopolitical Uncertainty
Financial markets have already shown signs of volatility, with the Indian Rupee and Pakistani Rupee both experiencing depreciation pressures. Stock markets in Mumbai and Karachi have registered losses amid fears that the situation could escalate into broader regional turmoil.

Global Implications and Strategic Alignments at Stake
Beyond regional concerns, tensions could also reverberate through global trade ties. Both India and Pakistan maintain crucial partnerships with major economies such as China and Russia. China, a close ally of Pakistan and a significant investor in the China-Pakistan Economic Corridor (CPEC), could view the crisis as a threat to its strategic interests and infrastructure projects. At the same time, India’s deepening trade and defense ties with Russia could come under pressure if Moscow is forced to choose between the two adversaries. The instability could therefore strain diplomatic relations and disrupt regional trade and investment flows involving these global powers.

Tourism Collapse in Kashmir and Beyond
The tourism sector is facing a near collapse in northern India, particularly in Jammu and Kashmir, where the Pahalgam massacre took place. Normally, this time of year would see an influx of tourists seeking to explore the region’s stunning landscapes, pilgrimage sites, and cultural heritage. Instead, mass cancellations are now pouring in. Tour operators, hoteliers, and airlines have reported booking rates plummeting by up to 70% compared to the same period last year. Local businesses that rely heavily on seasonal tourism are facing severe losses and potential layoffs.

The Indian government’s ambitious “Incredible India” campaign to promote tourism is now at risk, with the violence threatening to undo years of work rebuilding India’s image after the COVID-19 pandemic. If international governments issue formal travel advisories warning against travel to India, the fallout could spread beyond Kashmir to other popular tourist destinations like Rajasthan, Kerala, and Goa. Moreover, perceptions of instability could linger long after the immediate crisis subsides. Students, business travelers, and long-term foreign visitors may also reconsider travel to the region.

Humanitarian Crisis Brewing on Both Sides of the Border
The humanitarian consequences of the conflict also cannot be ignored. There is a growing likelihood of civilian displacement on both sides of the LoC as shelling and military deployments escalate. In border villages, thousands may be forced to flee, leading to the establishment of temporary camps, disruption of schooling, livelihoods, and health services, and pressure on local governments. Historically, such displacement has led to long-term trauma, particularly among children and the elderly, who are especially vulnerable to poor living conditions in makeshift camps.

Censorship, Information Control, and the Erosion of Civil Freedoms
Another major concern is the potential censorship of information. In times of conflict, both the Indian and Pakistani governments have been known to impose internet shutdowns, curfews, and media blackouts to control narratives and suppress dissent. As tensions escalate, restrictions on independent journalism, civil society commentary, and international media access may become more common. Such censorship would likely widen the trust gap between citizens and the state and could fuel misinformation, conspiracy theories, and social unrest.

Volatile Public Sentiment and Political Ramifications
Public sentiment in both countries remains highly volatile. In India, upcoming state elections and a surge in nationalist rhetoric could constrain the government’s ability to show restraint without appearing weak. Mass protests or rallies in support of military action may rise, further pressuring policymakers. In Pakistan, where economic collapse and political instability already dominate headlines, the public may either rally around anti-India sentiment or erupt in frustration if the government is seen as failing to respond adequately. This could further destabilize both societies and influence the course of political leadership in the coming months.

Calls for Restraint Amid Deteriorating Diplomacy
While both India and Pakistan have called for calm in public forums, their actions suggest a hardening of positions. India’s strong internal political pressures may make it difficult for the Prime Minister’s government to back down without backlash. On the other hand, Pakistan’s fragile leadership and economic turmoil limit its room for de-escalation. International actors, including the United Nations, United States, China, and Russia, have urged restraint and offered mediation, but diplomatic efforts so far appear ineffective in breaking the deadlock with India having launched attacks inside Pakistan said to be targeting Pakistan militants.

The Road Ahead: A High-Stakes Crossroads for South Asia
The path forward remains fraught with uncertainty. What is clear, however, is that the cost of continued hostility will be felt far beyond the military front lines. It will ripple through farms, businesses, global supply chains, communities, and institutions, deepening economic hardship, aggravating humanitarian challenges, and setting back regional development for years to come.