Increased Defence Spending: A Boon or a Burden on the Economy?

The escalating tensions between India and Pakistan, triggered by the devastating Pahalgam attack on April 22, 2025, and intensified by India’s Operation Sindoor on May 7, 2025, have far-reaching implications for India’s defence market and broader economy. While the conflict has spurred growth in certain sectors, it also poses significant risks. This article explores the pros and cons of the current situation, providing a balanced perspective on its economic and strategic impacts.

Pros for India’s Defence Market and Economy

1. Surge in Defence Sector Growth

The heightened tensions have catalyzed increased defence spending, benefiting India’s burgeoning defence industry. With the world’s third-largest defence budget, India is poised to allocate more funds to military modernization, procurement, and research and development (R&D). Companies like Bharat Electronics Limited (BEL), Hindustan Aeronautics Limited (HAL), Zen Technologies, and Solar Industries have seen stock surges of up to 20% amid fears of conflict, reflecting investor confidence. The sector’s focus on indigenous production under the “Make in India” initiative strengthens self-reliance, reducing import dependency.

2. Export Potential for Defence Equipment

India’s defence exports, targeting ₹50,000 crore, are gaining traction globally. The conflict provides a platform to showcase India’s capabilities in missiles, optics, and space technologies. Successful operations like Operation Sindoor, which targeted terrorist camps with precision, could attract international buyers, particularly from countries seeking cost-effective defence solutions. Private firms, contributing significantly to exports, stand to benefit from this global exposure.

3. Economic Insulation from Minimal Trade with Pakistan

India’s $4 trillion economy has negligible trade with Pakistan (less than 0.5% of total exports in 2024), insulating it from direct trade disruptions. Measures like suspending the Indus Waters Treaty and imposing airspace bans primarily hurt Pakistan’s economy, with its pharma sector and aviation revenues taking a hit. India, in contrast, faces minimal trade-related losses, allowing its markets to remain stable.

4. Market Resilience and Investor Confidence

Indian equity markets have historically shown resilience during Indo-Pak tensions, as seen during the Kargil War (1999) and Parliament Attack (2001). Post-Operation Sindoor, the Nifty 50 and BSE Sensex opened in the green on May 8, 2025, with Nifty above 24,400 and Sensex crossing 80,800. Strong domestic consumption and recent monetary loosening by the Reserve Bank of India bolster this stability, reinforcing India’s position as the fastest-growing major economy (6.5% GDP growth forecast for 2025).

5. Geopolitical Leverage and Strategic Dominance

India’s assertive response, including airstrikes and diplomatic measures, enhances its image as a regional power committed to countering terrorism. This strengthens India’s negotiating power in global trade deals, such as the ongoing US agreement to avoid tariffs. With a defence budget nine times larger than Pakistan’s and 1.5 million active personnel compared to Pakistan’s 660,000, India reinforces its strategic dominance in South Asia.

Cons for India’s Defence Market and Economy

1. Short-Term Market Volatility

Despite overall resilience, the Nifty 50 experienced a 0.6% dip at open post-Operation Sindoor, with the India VIX rising 11% in late April 2025 due to profit-taking. Foreign investors, who injected $1.5 billion into Indian equities in April–May 2025, may adopt a cautious stance if tensions escalate, potentially leading to capital flight. This could weaken the rupee and dampen market sentiment.

2. Fiscal Strain from Increased Defence Spending

A short-term conflict could cost India ₹1,460–₹5,000 crore per day, widening the fiscal deficit and diverting funds from infrastructure, welfare, and development programs. This reallocation could slow fiscal consolidation efforts, impacting India’s credit ratings and long-term economic stability. The reliance on imported aircraft and munitions further escalates costs, straining fiscal resources.

3. Regional Economic Disruptions

The Pahalgam attack has crippled Jammu & Kashmir’s tourism-driven economy, with widespread cancellations affecting hotels and aviation. While listed companies like Indian Hotels and IndiGo face limited exposure, regional businesses suffer significant losses. Pakistan’s airspace closure forces Indian airlines to take longer routes, increasing fuel costs and delays, which could erode airline margins.

4. Opportunity Costs and Delayed Development

Funds redirected to defence may delay critical infrastructure projects, such as highways and railways, and social programs, hindering long-term economic growth. The focus on conflict could also disrupt trade negotiations with the US, UK, and other partners, exposing India to potential tariffs and reducing export competitiveness.

5. Escalation Risks and Economic Catastrophe

A prolonged conflict or miscalculation could lead to an air war of attrition, bleeding India’s finances due to its reliance on imported defence equipment. Given both nations’ nuclear capabilities, escalation risks catastrophic economic and human losses. Even limited conflict could destabilize markets, deter foreign investment, and disrupt supply chains, particularly for oil imports.

6. Social and Communal Tensions

The conflict has fueled anti-Pakistan and anti-Kashmiri sentiment, risking communal violence and social unrest. Security measures in Kashmir, including detentions and demolitions, have drawn criticism for targeting innocents, potentially fueling insurgency. This could harm India’s global image, deter investment in manufacturing hubs, and polarize society, undermining economic stability.

The India-Pakistan tensions present a dual-edged sword for India’s defence market and economy. On one hand, the defence sector is poised for significant growth, with surging stocks, export potential, and increased spending reinforcing India’s strategic dominance. The economy’s minimal trade exposure to Pakistan and market resilience provide a strong foundation. On the other hand, short-term volatility, fiscal strain, regional disruptions, and escalation risks threaten economic stability. Social unrest and delayed development further complicate the outlook.

For India to maximize benefits and minimize losses, de-escalation is critical. Historical patterns suggest tensions may subside through diplomacy, as seen in past crises like Pulwama (2019). Investors should focus on large-cap and defensive stocks, while policymakers must balance defence priorities with long-term economic goals. By navigating this crisis carefully, India can leverage its defence market’s growth while safeguarding its economic trajectory.