A Perfectly Bad Time
India is chasing the future while confronting the past. As it builds diplomatic momentum and courts capital to become the world’s next supply chain anchor, it remains enmeshed in a regional rivalry that regularly drags both India and Pakistan—and the region—into crisis.
Just days after Indian Prime Minister Narendra Modi finalized a long-anticipated trade agreement with the United Kingdom, India launched strikes targeting what it described as terrorist infrastructure in Pakistan. These military operations followed a deadly attack on Hindu tourists in India’s Jammu and Kashmir, an attack it attributed to Pakistan-based militants.
Initial reports described aerial strikes on cross-border terrorist camps within Pakistan’s Azad Kashmir as well as Pakistan proper. Within 24 hours, Indian forces escalated with a second wave of drone attacks, reportedly hitting deeper targets in major Pakistani cities including Karachi, Lahore, Islamabad, and Rawalpindi. The escalation marks one of the most significant cross-border military engagements since the Balakot strikes of 2019 and the first time major Pakistani cities were targeted in aerial attacks since the 1971 war.
Pakistan has condemned the attacks and signaled intent to respond. While the scale and form of that response remains unclear, the timing of this escalation—immediately following a diplomatic win with the UK and amid India’s ongoing campaign to attract global supply chains—is strategically awkward. India’s pitch as the stable, Quad alternative to China just collided with the reality of a live security flashpoint.
Surface Stability and Perception Risk
While gross FDI inflows into India remain strong at $48.6 billion in the April-October 2024 period—the highest since 2011-12, net FDI has fallen to a 12-year low. In April-October 2024, net FDI inflows dropped to $1.4 billion, down from $11.5 billion in the corresponding period the previous year. Declining net FDI is due to repatriation and disinvestment by foreign companies, which increased to $34.1 billion in the April-October 2024 period, up from $26.4 billion in the same period of the previous year. This figure has been increasing since 2017-18.
As conflict with Pakistan broke out earlier this week, markets were initially unfazed. The NIFTY 50 index dipped modestly, while Indian bond yields and the rupee remained largely stable, consistent with past flare-ups in 2019 and 2020, when military tensions produced only short-term volatility.
The current India-Pakistan tensions won’t appear in any official investor rationale. But regional instability becomes part of the ambient risk environment, quietly shaping how investors underwrite the India opportunity. When national security flare-ups coincide with major economic announcements, the message to the global investment community becomes harder to manage. And harder to ignore.
While India’s long-term fundamentals remain strong, global investors recalibrate not just on data, but on perception. Security escalations between nuclear-armed countries with a history of violence undercuts the story India is trying to sell: that it is ready, reliable, and regionally in control.
Sectoral Fault Lines
While the broader Indian economy may be resilient, the distribution of exposure is uneven. Different sectors will internalize geopolitical instability in different ways, and some carry significantly more reputational and operational risk than others.
Large scale, capital-intensive manufacturing relocations are not just about cost—they are about stability. Manufacturing relocation requires long planning horizons, logistical reconfiguration, and board-level confidence that the destination country is geopolitically predictable. Recurring India-Pakistan escalations, especially those involving airspace closures, aerial dogfights, and missile and drone attacks in densely populated urban areas have the potential to raise more than a few red flags. It remains to be seen if this is enough to reverse decisions, but it is likely to slow them down.
a. Electronics and Global Manufacturing
Apple has announced plans to shift a substantial portion of its manufacturing for U.S.-bound iPhones to India by the end of 2026. This is just one of many examples of multinationals reallocating supply chains in response to U.S.-China trade tensions. India has positioned itself as a leading beneficiary of this trend, supported by production-linked incentives (PLI) and a pro-manufacturing policy environment.
b. Automotive and EV Supply Chains
Japanese firms including Suzuki and Toyota have committed billions toward EV production in India. These investments are closely tied to India’s domestic market opportunity, but also intended to serve as regional export bases. Military escalations that increase insurance costs, disrupt logistics, or signal regional fragility could subtly shift how India features in corporate supply chain strategies.
c. IT and Services
India’s $200 billion IT export sector is less physically exposed—but highly perception-sensitive. Clients entrusting India-based teams with mission-critical operations rely on assumptions of operational continuity. Escalations that dominate international headlines—even if geographically distant from tech hubs—introduce reputational noise that U.S. based procurement and risk teams must account for.
d. Tourism, Real Estate, Construction, and Hospitality
Regions like Indian Jammu and Kashmir will inevitably see major drops in tourist activity. But deeper concern arises if Pakistan retaliates with attacks that affect Indian economic centers. If future headlines place drone strikes or counterstrikes within visual range of Mumbai or Gurugram—however limited—the implications for foreign-owned investments in those areas could be significant.
e. Drugs, Pharma, Chemicals
Potential for delays in project execution and increased risk premiums, but limited direct impact other than concern about supply chain interruptions and long-term reliance on India.
The core issue is not panic, but pattern recognition. Foreign firms don't need to see war to revise exposure. They just need to see risk persistence.
The China Contrast
India’s supply chain pitch to the world rests on a clear premise: that it offers many of China’s benefits—scale, labor, capacity—with fewer of its geopolitical liabilities.
That premise is now under strain.
To be clear, China is not without its own risks. U.S.-China decoupling continues. Taiwan remains a potential flashpoint. But one critical difference is that China has mastered the art of managing external perceptions, even amid rising tensions. China maintains a stable global narrative of control, continuity, and long-term orientation. Foreign firms know what they’re getting.
India, by contrast, appears to sit at the mercy of regional volatility, and at times appears to lean into escalation for political signaling purposes. The challenge is not just the conflict—it’s the narrative incoherence. One day, India courts global investors with talk of friendshoring and free trade. The next, headlines carry images of drone strikes and aerial combat.
This doesn’t negate India’s long-term potential. But it raises the question: can a country competing for manufacturing investment in a post-China world afford to telegraph this level of geopolitical unpredictability?
The answer doesn’t require dramatic reversals from investors. It simply means India remains a strong alternative but will struggle to be the default option.
Why India Must Rethink the Structure—Not Just the Symptoms—of Escalation
India’s global economic ambitions are no longer aspirational—they are in play. Supply chain diversification away from China is real. Trade agreements with developed economies are being signed. Multinational firms are committing long-term capital. India’s elevation in the strategic hierarchy is well underway.
But strategic ambition comes with reputational risk. And reputational risk compounds fastest at the intersection of foreign policy and economic signaling.
The question is no longer whether India can exert force—it can. The question is whether the structure of its crisis posture is compatible with its desired economic trajectory. India’s policymakers must acknowledge that economic strength and geopolitical signaling now share the same stage, and must therefore be managed with strategic coherence.
Did you read my article ‘escalation was always rational’ from April 26? I discussed how today’s escalation risks are not the product of irrational leaders, but of a strategic environment where bounded rationality, degraded communication, and multi-domain escalation pressures systematically drive both India and Pakistan towards danger.
When India escalates without clear communication pathways, or when it introduces new coercive tools like the suspension of the Indus Waters Treaty, the intended signal—to impose costs, to reestablish deterrence—is accompanied by an unintended one: that India may increasingly treat crisis escalation with Pakistan as an unconstrained space. That perception, regardless of whether it is accurate, affects how global investors, partners, and competitors model India’s future.
This is not a theoretical concern. Strategic investors operate under bounded rationality too. They don’t evaluate escalation by parsing backchannel nuance—they respond to headlines, uncertainty premiums, and political trendlines. In that sense, even managed crises impose economic costs.
Having spent a decade in China, I find here the China–Taiwan comparison is instructive—though in narrow terms. Despite deep hostility, their ability to compartmentalize economic signaling from military tension has largely held. Cross-Strait investment from Taiwan into China remains significant: 45,000+ separate investments totaling over $206 billion between 1991 and 2023. In 2023 the value of Cross-Strait trade reached $165.97 billion. The two economies also remain deeply embedded in shared supply chains, and many multinational actors continue to operate with one leg in each location, not because the risk isn’t real—but because the risk feels bounded.
Even if India does not emulate the China-Taiwan model in managing its relationship with Pakistan, it does need to build a playbook that acknowledges how its crisis posture is now entangled with its own investment story. That means restoring trusted signaling channels, insulating certain domains from escalation, and recognizing that every escalation carries collateral impact across the commercial theater.
In a world where perception moves capital, restraint and circumspection is no longer just a moral or diplomatic virtue, it’s a strategic asset. And it must be architected as deliberately as the next missile system or export corridor.
Two Ways to Read the Signal
India’s position as a global destination for investment is not under immediate threat. But this latest flare-up—and its juxtaposition with India’s global economic push—highlights a deeper contradiction that will only become more consequential over time.
Cold Logic
The world won’t punish India for regional instability. But it will quietly price it in.
Over time, the Pakistan discount will accumulate, not in dramatic exits, but in deferred decisions, muted expansions, and quietly downgraded boardroom risk scores. The cost isn’t loud. But it’s real.
If India wants to anchor the post-China supply chain realignment, it must act like a country that others can build around. That means treating perception as a strategic variable. It means managing escalation with the same discipline it applies to monetary policy or trade negotiation.
Historical Irony
India is closer than ever to the global economic seat it has long aspired to. But just as it begins to attract premium manufacturing relocations and secure its role as Washington’s preferred partner in the Indo-Pacific, it risks being defined not by its ascent but by the volatility of its neighborhood relationships.
The irony is sharp: India wants to replace China. But if the rhythm of violent confrontation with nuclear-armed Pakistan becomes normalized—every few years, another crisis—the world will not see India as a stabilizing alternative. It will see another strategic exposure to manage.
The Strategic Imperative
If India wants to move on from being hyphenated with Pakistan as a dyadic pair, it must stop letting each confrontation define the region’s narrative arc. That means reducing the frequency (not retaliating every time with visible force), scale (limiting the geographic and symbolic reach of retaliatory actions), and strategic centrality (ensuring Pakistan does not dominate its diplomatic bandwidth or economic narrative) of its responses.
This does not mean downplaying security threats. It means developing a calibrated, pre-communicated response doctrine that emphasizes long-term pressure—economic, diplomatic, and non-public—over high-visibility, high-escalation strikes.
Prioritizing its own economic self-interest, India could instead lean more heavily on quiet diplomatic tools—such as multilateral forums, or targeted economic pressure, or non-public signaling—methods that impose costs without reshaping global headlines or triggering investor concern.
In short: regional stability may depend less on whose response is louder, and more on whose strategy is longer. A posture shaped by restraint and economic vision, not reaction, is what will ultimately build global trust.
Until then, India may continue to earn international standing—but not yet the full confidence of global capital.
As someone born in Pakistan and deeply connected via family and friends to the entire South Asia region, I write this not to offer counsel, but out of concern for the structural fragility these repeated crises expose—and what they cost all of us who care about peace, progress, and dignity in the region.