Conflict With Pakistan Undermines India’s Geoeconomic Fortunes

The world’s fastest growing economy faces serious headwinds because of its worsening conflict with its western neighbor. While it did not last more than 87 hours, the May 2025 war between India and Pakistan underscored the fragility of the security environment in South Asia. Already faced with serious constraints this conflict places further limits on Indian ability to take some of the bite out of China’s manufacturing dominance. U.S. President Donald Trump has repeatedly stated that he leveraged trade as a tool to prevent a wider war between the two sides, however, his administration will need to engage in sustained diplomacy to create the conditions in which India can focus on significantly enhancing its industrial capacity.

During a meeting on July 14 with North Atlantic Treaty Organization Secretary General Mark Rutte, Trump reiterated that Washington averted a war between New Delhi and Islamabad that could have gone nuclear had the fighting continued for another week, reminding the world that both Asian nations have nuclear weapons. Trump said he used trade to stop the escalating conflict from spiraling out of control by telling both sides that “we’re not going to talk to you about trade unless you get this thing settled.” Then, on July 16 Trump told reporters that his administration was “very close” to finalizing a trade deal with India as talks between American and Indian officials are underway. The negotiators hope to reach an interim deal by the extended Aug 1 deadline when the Trump White House has said reciprocal tariffs on India would be increased from the current 10% baseline to 27%.

It will likely be sometime in the fall that the Americans and the Indians clinch a deal. Such an agreement with its strategic South Asian ally is of course part of the Trump administration’s efforts to reset American global trade relations. However, the United States sees India as integral to its highest foreign policy priority, i.e., the imperative to counter China. The Indian role in America’s China strategy has two different dimensions: military and economic.

China Containing U.S-India Military Alignment

The military angle has received a great deal of attention for the better part of the past decade. Washington’s November 2017 decision to revive the Quadrilateral Security Dialogue (Quad) was designed to bring India into the security architecture of the Western Pacific together with allies Japan and Australia. Likewise, the May 2018 move by the Department of Defense to include the Indian Ocean basin under the remit of its old Pacific Command (renamed as the Indo-Pacific Command) was aimed at further integrating India into its strategic plans vis-a-vis China.

The Chinese response has been to ensure that India is tied down on its northern Himalayan flank as illustrated by the June 2020 border clash between Chinese and Indian forces in which both sides lost soldiers. In this way, New Delhi has fewer resources for its military modernization efforts needed to become an effective American partner in the Asian maritime space. China is sustaining pressure on India with a huge military buildup on the border. Meanwhile, Beijing is a key ally of Pakistan, which relies on Chinese military hardware for 81 percent of its defense needs, a 30 percent spike in just the past decade

The Americans understand that it will take several years before the Indian military will be able to assume the desired role, which isn’t a major problem. Despite making significant advances in the past five years, China is still far from being a serious military competitor to the United States. That said, Beijing does pose an immediate threat in the economic and technological spheres. America, therefore, must reduce its dependency on China’s manufacturing output, which is where the U.S. has been hoping the Indians would be able to play a key role.

Compounding of Legacy Factors Inhibiting India’s Industrial Potential

Given its large market, young work force, and increasing investments in infrastructure development India has great potential. However, New Delhi must address a number of chronic systemic issues that prevent the world’s fourth largest economy ($4.19 trillion by nominal gross domestic product) from becoming a competitive manufacturing destination. These include but are not limited to: infrastructure deficiencies (both in terms of transportation and reliable and cost-effective power supply), complex regulatory environment and bureaucratic roadblocks, and legal barriers and political hurdles to land acquisition.

In addition, a very small percentage of the labor pool of the world’s most populous nation consists of skilled industrial workers. India also suffers from underdeveloped supply chains needed for components. Furthermore, among Asian manufacturing nations, India is the least integrated into the global value chains. In order to truly unlock its manufacturing potential the Indian government will need to prioritize infrastructure modernization, regulatory reform, labor skilling, and global integration. Despite all this, the World Bank considered India the world’s fastest growing economy in 2024. These economic growing pains have multifaceted impacts.

What renders the above circumstances an even bigger challenge is the conflict with Pakistan. The Indian government has said that all future terrorist attacks from Pakistan-based groups will be treated as an act of war, which means the fighting we saw in early May could become the norm. Further aggravating the situation is India’s move to suspend the 1960 Indus Waters Treaty, which is a river-sharing agreement between the two neighbors. What this evolving situation does is scares away foreign investors who are highly sensitive to disruptions to supply chains and exports amid geopolitical uncertainty. There is also the matter of vulnerability to infrastructure and production areas close to the Pakistani border in northern and western India.

Airspace closures and restrictions on access to ports is another key related risk. An atmosphere of regional conflict means Indian spending will be geared towards national defense needs. In essence, a redirection of scarce resources that ought to be invested to rectify longstanding structural problems holding India back from the path towards emerging as a serious alternative to China’s manufacturing prowess. Moreover, Indian diplomatic bandwidth is also consumed by the need for conflict management as opposed to engagements that could enhance the country’s factory firepower.

From the American perspective an India focused on conflict with Pakistan undermines the U.S. need to reduce exposure to China. In fact, India embroiled in conflict with Pakistan works to the Chinese advantage. It helps Beijing keep Washington within its economic orbit. In the meantime the Chinese continue to develop their military capabilities to eventually challenge American global dominance.

The Trump White House must thus move beyond tactical level diplomatic moves that can at best produce ceasefires as the one that took place between New Delhi and Islamabad on May 10. Certainly, the United States does not have the ability to resolve the nearly 80-year old South Asian rivalry. But what it can do is to engage in strategic mediation between the two sides that can produce long-term calm in the region, which can allow India to focus on geoeconomic competition with China. Such a move also has the potential to help Pakistan address its own chronic economic and financial problems and thus reduce its alignment with China.