An Unsettling New Normal for India-Pakistan Relations

By Michael Kugelman and Vandana Seth

In the coming months, all-out war between the two nuclear-armed rivals is unlikely. However, prolonged tensions are ensured while limited conflict is highly possible, if not inevitable. Even cultural safe spaces for bilateral cooperation have been poisoned by politics – an ominous indication of the troubled relationship’s dangerous direction.


To say that 2016 was a rough year for India-Pakistan relations might be an understatement.

It began with a brazen assault on an Indian military base in the town of Pathankot. New Delhi blamed Jaish-e-Mohammed (JeM), a Pakistani terror group with links to Pakistani intelligence, for the raid. Seven soldiers died.

In March, Pakistan claimed to have arrested an Indian spy in Baluchistan, a province plagued by a separatist insurgency that Pakistan has long accused India of helping stoke.

As Indian security forces reacted to the unrest with brutal tactics, including shooting children with pellet guns, Pakistan denounced what it described as an Indian “reign of terror” in Kashmir.

The summer months brought an uprising in Jammu and Kashmir. This is the Muslim-majority, India-administered state that Pakistan has long claimed as its own and has triggered multiple wars between the nuclear-armed rivals. As Indian security forces reacted to the unrest with brutal tactics, including shooting children with pellet guns, Pakistan denounced what it described as an Indian “reign of terror” in Kashmir.[1] Islamabad also accused India of meddling in and destabilising Pakistan. India responded to this intensifying rhetorical tit-for-tat by lambasting Pakistan for its military’s abusive actions in Baluchistan.

And then came September.

On the 18th of that month, terrorists assaulted an Indian Army base in the Kashmiri town of Uri, killing nearly 20 soldiers in the deadliest single attack on the Indian military in decades. India again blamed JeM.


Both sides beat the war drums vociferously amid a backbeat of bombastic and bellicose rhetoric. Then, on the 29th, New Delhi claimed to have carried out what it called a “surgical strike” along the Line of Control (LoC), the disputed border that divides India- and Pakistan-administered Kashmir. The operation, according to India, killed multiple Pakistani militants planning to stage more attacks in India.

Pakistan, for its part, denied the attack happened at all.

Also in September, India announced a campaign to isolate Pakistan diplomatically until Islamabad takes more robust action against terrorists on its soil. New Delhi prevailed on several member countries of the South Asian Association for Regional Cooperation to join India in boycotting the group’s planned meeting for November in Islamabad, prompting an embarrassed Pakistan to cancel the event. In December, India used another regional summit, the Heart of Asia conference, as a forum to excoriate Pakistan for its failure to curb terror.

Then, in 2016’s final weeks, cross-border firing along the LoC rose to levels of intensity arguably not seen in years.

Fortunately, India and Pakistan didn’t go to war. And they’re unlikely to go to war anytime soon, thanks in great part to the deterrent of nuclear weapons. Because Pakistan refuses to adopt a no-first-use policy, it can hypothetically respond to any Indian use of conventional military force with a nuclear strike. The three major wars fought by India and Pakistan all occurred before 1998, when both became declared nuclear weapons states.


Anxious Months Ahead

This isn’t to say that tensions on the Subcontinent are about to ease. Rather, bilateral ties will remain on tenterhooks, and limited conflict is highly possible if not inevitable.

The current political dynamics of India-Pakistan relations forestall any immediate prospects for de-escalation. To be sure, temperatures may cool enough on each side to allow for a resumption of high-level diplomacy. A sustained period of détente, however, is unlikely. India’s Hindu nationalist government has taken a hard line on Pakistan after earlier efforts to extend an olive branch failed to achieve what India wants most – Pakistani crackdowns against anti-India terrorists on Pakistani soil. Instead, Indian outreach may have prompted the opposite effect. The Pathankot attack came just days after a surprise Christmas Day visit to Pakistan by Indian Prime Minister Narendra Modi.

India has likely concluded that formal dialogue with Pakistan simply makes little sense. Over the last two years, the powerful Pakistani military – which is more hostile to India than is the Pakistani government – has cut an increasingly beleaguered Prime Minister Nawaz Sharif down to size. The premier has been weakened by anti-government protests and revelations in the Panama Papers about his children’s offshore assets. Sharif’s policy space has shrunk significantly, and the military enjoys full control over the policy of India

In November, Pakistan’s military experienced a leadership transition when Qamar Javed Bajwa replaced Raheel Sharif as army chief. Bajwa’s arrival is unlikely to change the military’s staunch anti-India position. Indeed, in one of his first speeches, Bajwa vowed that any Indian provocation along the LoC “must be responded to with full force.”[2]

The new normal of India-Pakistan relations is likely to be one of prolonged tensions, but also one of limited and covert hostilities. India, emboldened by the “surgical strike” it claims to have carried out in September, could launch limited, lightning counter-terror strikes (or even strikes on military targets) on Pakistani territory, most likely in Pakistan-administered Kashmir. In retaliation, Pakistan could encourage JeM and other anti-India terror groups to stage attacks in India. This covert war would fall short of nuclear red lines, and it would give each side plausible deniability.

It’s unlikely this form of conflict would lead to a hot war. Still, several potential triggers could prompt troop mobilisations along the LoC or other escalatory moves. These include an Indian air strike on a major Pakistani military target; a catastrophic terrorist attack in India on the scale of the 2008 Mumbai tragedy, which killed 166 people; or a rapid succession of terrorist assaults in India that renders limited responses politically untenable for New Delhi. In these circumstances, unsettling questions about the strength of the nuclear deterrent – and how much force could be used before running up against nuclear red lines – would loom large.


Economic Implications

It’s worth examining not just the security ramifications of a prolonged bilateral stalemate, but also the economic consequences.

Consider the impact of extended tensions on stock markets and investor perceptions. The good news is that stock markets in India have historically not been deleteriously affected by India-Pakistan tensions. They’ve weathered terror attacks quite well – I ncluding catastrophic ones. In a 2016 Investopedia assessment, Elvis Picardo notes that after multiple blasts in the city of Mumbai killed more than 250 people on March 12, 1993 (a Friday), the city “reopened for business as usual on Monday” and there was “little impact” on financial markets and the Indian economy. Additionally, Picardo points out that when Mumbai was hit again in November 2008, India’s Sensex stock market index “hardly registered a blip” on the day of the attack. While it experienced declines in the succeeding days, the Sensex year-end position was higher than on the day before the attack.

The conclusion? “Investors treat terror attacks as one-off events,” Picardo writes, and “their negative effect tends to only be temporary.”[3] Similarly, investment analysts contend that one-off acts of limited conflict – such as India’s “surgical strike” – inflict little damage on markets.[4]

This is reassuring. However, markets may react quite differently if India were to suffer a series of attacks – say several within the same month. This could shift investor perceptions and cause them to believe that these strikes no long represent one-offs. Another factor driving investor perceptions is the location of attacks. Over the last two years, most major terror strikes in India have occurred in relatively remote regions of Kashmir or in small towns or cities in nearby Punjab state. However, a rapid-fire series of strikes in a single major city could spook investors in a big way, given that many would regard large urban spaces as their preferred locations to do business. To be sure, an actual shooting war between India and Pakistan would also be damaging for markets and would be extremely worrisome for investors.

Another economic consideration about extended India-Pakistan tensions is the impact on trade. Historically, the two countries have often continued to engage in bilateral commerce even when relations are strained. In the early 1950s, India was Pakistan’s largest trading partner despite a wilting of political relations. In 1965, a year when the two countries went to war, nine branches of six Indian banks were operating in Pakistan.[5] Consider as well that total annual bilateral trade volumes expanded from $345 million in 2003-04 to $2.3 billion in 2014-15 – a period often fraught with tension.

Significantly, however, trade has stalled during the most recent crisis in relations. After reaching $2.7 billion in 2013-14, it fell to $2.6 billion in 2015-16.[6]

Because Pakistan refuses to adopt a no-first-use policy, it can hypothetically respond to any Indian use of conventional military force with a nuclear strike.

Curtailed trade is bad news because it generates harmful economic consequences. When formal bilateral trade languishes, informal trade flourishes. Indeed, decreased formal trade volumes suggest intensified levels of informal trade. This means reduced financial windfalls for each government, given that informal trade doesn’t generate revenue for governments in the form of taxes, tariffs, and so on. With informal trade, this revenue all accrues to private buyers and sellers, as well as intermediaries and smugglers.

Already, India-Pakistan informal trade exceeds formal trade. Recent projections contend that informal trade is twice that of formal trade.[7] These high informal trade tallies underscore the strong potential for more formal trade, but current political tensions constrain efforts to capitalise on these opportunities.

More broadly, India-Pakistan tensions threaten commercial cooperation. This includes the Pakistan-India Joint Business Forum, an initiative established by each country’s commerce ministry in 2012. Comprised of top business leaders from each nation, it meets periodically to discuss how to facilitate trade normalisation. Despite the crisis in bilateral ties, the group still held a meeting in New Delhi last May.[8] Each side vowed “to create a level playing field” for investors.

That pledge came just a few months after India announced new business visa measures for Pakistani entrepreneurs. They allow visiting Pakistani businesspeople to travel to more Indian cities on the same visa than was permitted previously, and they’re no longer obligated to check in at Indian police stations. At the same time, these new policies stipulate that visa applicants must run an enterprise worth at least 10 million Indian rupees (about $150,000) – a regulation that rules out less wealthy Pakistani businesspeople.[9]


Safe Spaces Under Threat

The new normal of India-Pakistan relations is likely to be tense and tumultuous, thereby accentuating the importance of protecting remaining safe spaces for bilateral cooperation. Many of these safe spaces are found outside official, government-to-government channels. They’re found in the realm of trade, but also in the cultural sphere. Ominously, these spaces are increasingly getting poisoned by politics. An Indian cricket star recently called for an end to matches between the two countries, while Pakistan has sought to ban Indian television programming.[10]

The denial of cultural safe space for bilateral exchanges is disappointing, demoralising, and – given the extent of the entrenched enmity between India and Pakistan – dangerously destabilising.


About the Authors

Michael Kugelman is the Senior Associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, DC.


Vandana Seth is a research scholar based in India. She was recently in the United States on a Legislative Fellows Program sponsored by the US State Department.


1. “Uri Attack: India Diverting Attention from ‘Reign of Terror’ in Kashmir,” Says Pakistan,” Firstpost, September 19, 2016,
2. Pakistani Troops Will Respond With ‘Full Force’ To Indian Ceasefire Violations: COAS Gen Bajwa,” Dawn, December 2, 2016,
3. Elvis Picardo, “Don’t Hide from the Reality of How Terrorism Affects the Economy,” Investopedia, March 24, 2016, Research shows Pakistan’s Karachi Stock Exchange—in a nation that has suffered more terror assaults than India—bouncing back quickly from attacks as well. See Faheem Aslam and Hyoung-Goo Kang, “How Different Terror Attacks Affect Stock Markets, “ Defense and Peace Economics 26(6): 634-648.
4. Kartik Goyal and Rajhkumar K Shaaw, “India Markets React After Surgical Terror Strikes in Pakistan,” Bloomberg, September 29, 2016,
5. Michael Kugelman, “The Pakistan-India Trade Relationship: Prospects, Profits, and Pitfalls,” in Pakistan-India Trade: What Needs To Be Done? What Does It Matter? Eds. Michael Kugelman and Robert M. Hathaway (Washington, DC: Woodrow Wilson Center, 2013), 3.
6. Nisha Taneja, Samridhi Bimal, and Varsha Sivaram, “Recent Trends in India-Pakistan Trade,” ICRIER Data Sheet,
7. Dipti Jain, “The Dynamics of India-Pakistan Trade,” Livemint, July 21, 2016,
8. Nayanima Basu, “India, Pak Business Forum Vows to Augment Trade Ties,” The Hindu, May 4, 2016,
9. “India Toughens Business Visa Rules for Pakistani Entrepreneurs with ‘Rs10 Million Rule,’” Express Tribune, February 3, 2016,
10. “Cut All Ties with Pak. Till Terrorism Ends: Gambhir,” The Hindu, October 18, 2016, and Syed Raza Hassan, “Pakistan To Block Indian Content on TV, Radio as Tension Simmers,” Reuters, October 21, 2016,


The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.