Conflict with Pak unlikely to hit India’s economy

The market clearly doesn’t relish the prospect of war or military tensions. This was apparent from the nearly 500-point drop in the Sensex on Thursday following news of the Indian army’s surgical strikes inside Pakistan.

The strikes, in retaliation to the Uri terror attack that killed 18 Indian soldiers, carry the risk of dragging India into a longer military conflict with Pakistan. That, if it happens, could dampen market sentiment further and could affect, in particular, foreign fund flows into the Indian stock market, at least in the short term.

A military conflict, besides impacting broader economic sentiment, could also put the brakes on trade with Pakistan, which has been ebbing and flowing over the years.

A recent report by ICRIER (Indian Council for Research on International Economic Relations) shows that India’s trade with Pakistan in 2015-16 was $2.61 billion, up about 11 per cent from $2.35 billion in 2014-15. But it’s been bumpy over the years – trade was the same at $2.61 billion in 2012-13 and higher than present at $2.7 billion in 2013-14.

Even so, India stands to lose more, given that it exports much more (three to four times) to Pakistan than it imports. ICRIER’s report also says that India’s trade potential with Pakistan is $10.9 billion, more than four times the current levels.

That said, if push comes to shove, disruption of trade with Pakistan should not pinch India too much, given that Pakistan accounts for an insignificant portion of India’s global trade.

Exports to Pakistan accounted for about 0.8 per cent of India’s total exports in 2015-16 while imports from the country formed 0.12 per cent of India’s total imports. Overall, trade with Pakistan accounted for just about 0.4 per cent of India’s total trade in 2015-16.

Cotton exporters may take a larger hit than others, given that the commodity accounted for nearly 30 per cent of all exports to Pakistan in 2015-16. Other products that India exports to Pakistan include polypropylene, chickpeas, woven fabrics and single yarn, but each of these products forms a small part (lower single digit percentage) of overall exports to the country.

Among the major products that India imports from Pakistan are light oils and preparations, and dates (each accounting for about 20 per cent of imports from the country).

While the market reacted negatively, listed Indian companies are unlikely to be impacted, given their negligible exposure to the Pakistani market. Most major companies do not seem to be doing big business with Pakistan, perhaps due to the significant risks in the country especially when it comes to India.

Of course, a risk of attack on facilities and installations could weigh on stocks of companies, especially those along the West Coast. But when the dust settles, the market and affected stocks will likely make a comeback, when long-term economic prospects trump short-term geo-political concerns.

When the Kargil conflict erupted in May 1999, the Sensex traded close to 3,400 levels, and by the time it was over in July that year, the index gained nearly 37 per cent to about 4,600 points. The market barometer today trades close to 28,000 levels.

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