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Indian economy set to survive face-off with Pakistan

Local assets have rallied as foreigners bought the most stocks and bonds in Sep quarter since 3 months

Policy Pulse
Publish Date: Oct 3 2016 4:36PM | Updated Date: Oct 3 2016 4:39PM

Indian economy set to survive face-off with Pakistan
Relations between India and Pakistan have entered their worst phase in more than a decade, but the likelihood of a broader conflict is remote and analysts suggest the economic impact on South Asia’s two largest economies will be limited.
 
Security agencies in major Indian cities and towns are on alert for any attack in retaliation for the army killing militants in Pakistan, the Press Trust of India reported, citing the home ministry.
 
The directive comes after the government shifted villagers living along the border with Pakistan in the states of Jammu and Kashmir and Punjab.
 
India said on Thursday it had conducted surgical strikes on what it called terrorist launchpads inside Pakistan, after a deadly strike last month killed 19 Indian soldiers in Kashmir.
 
News of the strikes—which Pakistan called an “illusion” to cover cross-border shooting —sent Indian stocks and the rupee sliding but is unlikely to derail growth in India, now the world’s fastest-growing major economy.
 
Instead, Prime Minister Narendra Modi is set to continue his efforts to isolate Pakistan internationally and examine other ways to retaliate without sparking a conflict between the nuclear-armed rivals.
 
“Elevated tensions alone will not impact either economy or lower the attractiveness of either market to potential foreign investors,” said Sasha Riser-Kositsky, an Asia analyst at political risk firm Eurasia Group. “The Indian government is likely to stick to its effort to isolate Pakistan diplomatically rather than risk a military escalation that could more severely rattle markets and deter corporate investment.”
 
India’s $2.1 trillion economy is Asia’s third largest, and its growth is expected to keep surpassing most major peers, according to Bloomberg surveys. Local assets have rallied as foreigners bought the most stocks and bonds in the September quarter since the three months ending March 2015, as the government took steps to boost growth.
 
China and the US have considerable business interests in South Asia and any escalation could hurt the economies of both India and Pakistan. The two big powers have urged India and Pakistan not to further escalate the situation along their de-facto border.