The Geopolitical and Economic Aftershocks: Analyzing the Pahalgam Attack and Operation Sindoor.

 

The Geopolitical and Economic Aftershocks: Analyzing the Pahalgam Attack and Operation Sindoor.

 

Executive Summary

This report presents a comprehensive analysis of the 2025 Pahalgam terrorist attack and India's subsequent military response, Operation Sindoor, with a primary focus on their profound economic implications. The Pahalgam attack, a deliberate targeting of civilians, particularly Hindu tourists, severely disrupted Jammu & Kashmir's burgeoning tourism sector and its interconnected economy, reversing a period of significant economic recovery. Operation Sindoor, India's calibrated retaliatory strikes, demonstrated a recalibrated deterrence posture, but also introduced cross-border economic disruptions and highlighted the inherent costs of such a strategy. The events underscore the fragile interplay between security and economic stability, particularly in conflict-prone regions, and the broader strategic calculus involving economic leverage in interstate relations.

1. Introduction: Contextualizing the Crisis

Prior to the 2025 Pahalgam attack, Jammu & Kashmir (J&K) had entered a period marked by cautious economic optimism and a notable reduction in terror incidents. Data indicates a significant decline in such events, from 228 in 2018 to just 46 in 2023. This improvement was closely linked to the Indian government's concerted efforts emphasizing J&K's full integration into the Indian Union, a strategy aimed at fostering lasting peace, attracting economic investment, and consolidating democratic processes.

The economic landscape reflected this positive trend. The region's real Gross State Domestic Product (GSDP) for FY25 was projected to grow by 7.06%, a rate that outstripped India's overall GDP growth. Concurrently, the nominal GSDP was anticipated to reach Rs 2.65 lakh crore, with per capita income rising to Rs 1,54,703, marking a 10.6% year-on-year growth. Tourism had emerged as a vital economic pillar, contributing an estimated 7-8% of the region's GSDP, valued between Rs 18,500 and Rs 21,200 crore annually. The sector had experienced record numbers in 2024, with 2.36 crore tourist arrivals, including 65,000 foreign visitors. This robust economic revival was widely perceived as a tangible benefit of the consolidated peacebuilding efforts in the region.

However, this period of economic progress, while significant, was inherently susceptible to security shocks. The rapid and devastating impact of the Pahalgam attack, as detailed in subsequent sections, clearly demonstrated that the economic gains were built upon a precarious security foundation. This highlights a critical vulnerability: economic development, even when robust, can be quickly undermined if underlying security challenges are not comprehensively addressed. Such a scenario suggests that a "peace dividend," though beneficial, remains fragile and can be easily disrupted by singular, high-impact events.

The 2025 Pahalgam attack on April 22 brutally aimed to disrupt this positive trajectory. India's subsequent response, Operation Sindoor, launched on May 7, was a swift and calculated military action, signaling a significant recalibration of its counter-terrorism strategy. The nature of the attack, particularly its targeting of tourists and the communal selection method employed by the perpetrators, suggests a strategic intent beyond merely inflicting casualties. The perpetrators sought to actively undermine the economic recovery and incite communal disharmony, thereby destabilizing the region from within. By striking at the heart of the tourism sector, a key driver of J&K's economic revival, and by using a method designed to provoke sectarian divisions, the attackers aimed to sow widespread fear, deter future tourism, and disrupt social cohesion. This approach transcends a simple act of violence, representing a calculated strategy of economic and social sabotage.

2. The Pahalgam Attack: A Catalyst for Instability

The 2025 Pahalgam attack unfolded on April 22, 2025, near Pahalgam in the picturesque Baisaran Valley, located within the Anantnag district of Jammu and Kashmir. This area, a popular tourist destination surrounded by dense pine forests, is primarily accessible by foot or horseback.

The assault was carried out by five armed terrorists, identified as operatives of Lashkar-e-Taiba and The Resistance Front, a known proxy of the Pakistan-based Lashkar-e-Taiba. The militants were equipped with M4 carbines and AK-47s. Their modus operandi involved storming a village and, chillingly, interrogating individuals about their religious identity, specifically asking, "Hindu hai, muslim hai?" (Are you Hindu? Are you Muslim?), before selectively executing victims.

The attack resulted in a tragic loss of life, with 26 fatalities and 20 individuals sustaining injuries. Among those killed, 25 were tourists, while one was a local Muslim pony operator who courageously attempted to disarm the attackers. Initial reports indicated that 25 of the 26 victims were Hindus, with one later identified as a Christian tourist. The casualties included several newlywed couples, with men reportedly shot point-blank in front of their wives, and three Indian government officials from the Indian Air Force, Indian Navy, and Intelligence Bureau. This incident marked the deadliest attack on civilians in India since the 2008 Mumbai attacks.

The immediate aftermath saw a swift and decisive security and political response from India, characterized as a "dramatic and multi-level response". The attack was unequivocally condemned as a "clear attempt to incite communal violence" and was interpreted as a strategic shift from traditional cross-border attacks to a more insidious tactic aimed at "dividing India from within".

The targeting of tourists and the communal screening method employed by the perpetrators were designed to maximize psychological impact, fostering widespread fear and distrust. This directly undermines the sense of security that is fundamental for both tourism and investment. The details of the attack, including the use of high-powered weaponry, the deliberate questioning of religious identity, and the brutal execution of individuals in front of their loved ones, point to a calculated strategy to create pervasive terror and disrupt the social fabric. The objective extends beyond mere physical casualties; it aims to shatter the psychological confidence of potential visitors and residents alike. The ultimate goal is to render J&K an unsafe destination, thereby eroding the narrative of "positive peacebuilding"  and deterring future economic activity, particularly in the tourism sector, which thrives on a perception of safety and tranquility.

Furthermore, this attack directly challenged India's narrative of J&K's integration and its return to normalcy. By pushing the region "back into the centre of South Asia's unresolved tensions" , the incident starkly contradicted the widely held belief that "terrorism was history" in the region. The severity and specific targeting of the attack, especially at the onset of the peak tourist season, effectively "upended"  the fragile economic revival. This demonstrated that despite positive economic indicators and concerted efforts towards peace, underlying instability persisted. Such an event inevitably undermines the credibility of integration efforts in the eyes of both domestic and international observers, signaling that the path to complete stability remains fraught with challenges.

Table 1: Casualties of the 2025 Pahalgam Attack | -

This table provides a quantitative overview of the human cost, immediately highlighting the scale of the tragedy. The geographic spread of victims, originating from various Indian states and Nepal, demonstrates that the human impact of the attack extended far beyond a localized issue within J&K, affecting families and communities across the nation and even internationally. This broad reach reinforces the understanding that the attack was designed to spread fear and deter tourism across India, not just within the immediate region. A quantitative breakdown of casualties also serves to underscore the severity of the incident, often evoking stronger public and political responses, which in turn can influence the urgency and nature of government intervention and support measures for affected regions and families.

3. Operation Sindoor: India's Recalibrated Deterrence

Operation Sindoor was launched on May 7, 2025, as India's direct military response to the Pahalgam terror attack. The primary objectives of this operation were clear: to eliminate terror launchpads and neutralize over 100 terrorists affiliated with prominent groups such as Jaish-e-Mohammed, Lashkar-e-Taiba, and Hizbul Mujahideen. This military action was strategically designed to recalibrate India's approach to Pakistan and terrorism, signaling a shift towards a "calibrated cost-imposition strategy". This strategy aimed to demonstrate India's military strength and discipline while deliberately avoiding full-scale escalation. Defence Minister Rajnath Singh explicitly stated that India possessed the capacity to inflict far greater damage but chose to exercise restraint, underscoring a measured yet firm response. This new approach also redefined India's diplomatic stance, asserting that any future dialogue with Pakistan would be focused "only about terrorism and Pakistan-occupied Kashmir (PoK)".

The scope of Operation Sindoor involved coordinated strikes across multiple sectors, utilizing a combination of stand-off cruise missiles, armed drones, and synchronized aerial attacks. Key targets included radar systems, airfields, and communication hubs located across 11 Pakistani airbases. A significant aspect of the operation was its execution "without mobilising its army or issuing nuclear threats" , which highlights a precise and limited military action, emphasizing surgical strikes over broader military engagement.

The immediate outcomes of Operation Sindoor saw hostilities cease with a mutual understanding announced on May 10, 2025, following Pakistan's retaliation with cross-border shelling and drone incursions. The operation effectively reinforced India's "new counter-terror redlines," signaling the executive's willingness to shoulder considerable risks in response to provocations, thereby solidifying a robust deterrence posture against Rawalpindi. The effectiveness of the operation was partly attributed to India's ongoing indigenization drive under the 'Make in India' program, emphasizing its crucial role in enhancing national security capabilities.

Operation Sindoor was not merely a military engagement; it also constituted a critical front in an information war, where the management of international perception significantly influenced diplomatic and economic interpretations of the conflict. Despite India achieving its military objectives with "technological precision" and Pakistan suffering "heavier casualties" , the global media narrative often presented a different picture. Many international outlets portrayed a "resilient Pakistan" while casting India as the "aggressor—militarily impulsive, diplomatically isolated, and ideologically regressive". This "dissonance—between battlefield realities and international reporting"  underscores a significant "battle for narrative supremacy". The fact that even successful military operations can be undermined if the narrative is lost globally points to the complex interplay of military action and strategic communication. A negative international perception, such as India being seen as an "aggressor," can have tangible economic and diplomatic consequences, potentially impacting foreign investment, aid, and diplomatic relations, thereby adding an indirect economic cost to the operation. Pakistan's perceived narrative dominance was attributed to a network of sympathetic scholars, ideologically aligned journalists, and a calculated exploitation of liberal anxieties surrounding nationalism, Kashmir, and minority rights. This also highlighted what some analysts view as India's "systemic neglect of narrative-building as an extension of strategic policy".

India's response, particularly the "calibrated cost-imposition strategy"  and the focus on Pakistan's "weak economic foundation" , suggests a deliberate shift towards using economic vulnerability as a key component of its deterrence strategy against state-sponsored terrorism. Operation Sindoor, as a "recalibration" of India's stance and a "calibrated cost-imposition strategy" , aligns with the concept of "punishment deterrence" aimed at raising "costs for the adversary's actions". The strategic calculus here is informed by Pakistan's "weak economic foundation" and its reliance on "international loan bailouts," implying that it "can only endure limited pain from military adventurism". This indicates that India is strategically leveraging Pakistan's economic fragility to deter future provocations, effectively making economic stability a critical vulnerability in the broader geopolitical calculus. This represents a long-term strategic play where economic pressure is employed as a tool of statecraft.

4. Economic Impact on Jammu & Kashmir: A Fragile Revival Upended

The Pahalgam attack delivered a severe blow to Jammu & Kashmir's burgeoning economy, particularly its vital tourism sector, which had been a cornerstone of the region's recent economic revival.

4.1. Devastation of the Tourism Ecosystem

The timing of the attack was particularly damaging, occurring at the "start of peak season (April to October)". This immediately triggered a "tourist drought"  and widespread "mass cancellations". Some segments of the tourism industry, notably those catering to tourists from West Bengal, which accounts for approximately 30% of Kashmir's tourist inflow, reported up to 90% cancellations.

The "elaborate tourism ecosystem" of Kashmir, a complex network comprising over 1,500 houseboats, 3,000+ hotel rooms, and countless taxi operators, tour guides, and pony handlers, was "hit ruinously". Many operators who had invested heavily, taking loans or selling assets in anticipation of continued growth, now face the collapse of their ventures. Local businesses, such as shopkeepers in the bustling Lal Chowk, reported a steep decline in footfall, with some estimating a business downturn of over 70%. Similarly, taxi drivers, shikara operators, and pony handlers in key tourist hubs like Gulmarg and Pahalgam found themselves without work for days, leading to fears of being unable to repay their bank loans.

The decline in tourism in J&K triggered a severe negative multiplier effect, cascading economic distress far beyond the direct tourism sector into interconnected ancillary industries and local livelihoods. When tourists visit, it is not just hotels and travel agencies that benefit; local cab drivers, handicraft sellers, restaurants, and even vegetable vendors experience increased activity. The attack effectively "broke" this entire chain. The "elaborate tourism ecosystem"  and its "interdependencies and inter-linkages with the broader domestic economy"  mean that a shock to one part quickly propagates throughout the system. This immediate and widespread impact on various economic actors confirms the vulnerability of highly interdependent regional economies to single-point shocks, illustrating the multiplier effect in reverse.

4.2. Ripple Effects Across Ancillary Sectors

The economic slump was not confined to tourism alone; it permeated other sectors, revealing the "deep interdependence of the region's economic fabric".

 * Horticulture: Apricot farmers in Udhampur, for instance, faced ruin as their bumper crop, which has a short shelf life of 10-15 days, rotted due to the absence of buyers. Mohammad Bashir, a local farmer, reported a significant reduction in his income, underscoring the direct impact on agricultural livelihoods.

 * Handicrafts, Shawls, Carpets, and Local Retail: These sectors, heavily reliant on tourist demand for their products, also experienced a severe downturn in sales and production.

 * Transport and Logistics: Transporters, particularly those whose businesses were linked to the tourism sector, found themselves in distress due to reduced demand for their services.

 * Banking and Loan Defaults: As businesses struggled with plummeting revenues, an increase in loan defaults is anticipated. Business leaders have urgently appealed to the government for financial aid, including soft loans and moratoriums on existing debts, to prevent widespread bankruptcies.

 * Agriculture: Even the broader agricultural sector, which often benefits from seasonal demand generated by tourism, is expected to suffer indirect consequences.

4.3. Investment Climate and Development Projects

The attack delivered a significant "body blow to the overall environment of safety and security and investor confidence". This erosion of confidence is likely to lead to the pausing of infrastructure and real estate projects that were linked to the anticipated growth in tourism. The "rude shattering of the widely held belief that terrorism was history will hit income, output, and employment and cripple lives and livelihoods across the development spectrum", affecting not only tourism but also retail, handicrafts, shawls, and carpets.

4.4. Employment and Livelihoods

The tourism sector is a major employer, sustaining "thousands of informal jobs and seasonal livelihoods". The loss of the tourist season directly translates into "lost wages, fewer opportunities, and a slowdown in consumption" across the region. Unemployment, which had shown a positive trend, falling to 6.1% in 2023–24, is now expected to rise again. Furthermore, a booming start-up environment, which had seen a remarkable 287% increase in DPIIT-registered ventures since 2020, now faces stagnation.

The attack not only caused immediate economic losses but also jeopardized nascent efforts towards economic diversification and long-term financial stability. The stagnation of the start-up environment and the expectation of loan defaults indicate that the impact extends beyond lost current revenue to undermining future economic growth engines and creating financial instability for individuals and businesses. This can lead to a prolonged period of economic stagnation, increasing the region's dependence on government support and making it less resilient to future shocks. The assessment that the "damage will take years to repair" reinforces the profound and enduring nature of these long-term economic consequences.

This table provides a direct, quantitative comparison of the economic situation in J&K before and immediately after the Pahalgam attack. It visually demonstrates how quickly positive trends in GSDP growth, tourist arrivals, and falling unemployment can be reversed by a single security incident, reinforcing the understanding of the region's "fragile revival." The concrete data points presented here also serve to justify the urgent calls from business leaders for government intervention, including relief measures, tax waivers, and targeted support for affected sectors. By establishing this baseline, the table also lays the foundation for assessing the effectiveness of future recovery efforts and policy responses.

5. Broader Economic Implications for India

The repercussions of the Pahalgam attack and Operation Sindoor extend beyond the immediate confines of Jammu & Kashmir, impacting India's broader economic and strategic landscape.

5.1. Cross-Border Economic Fallout

India's assertive response to the Pahalgam attack included significant cross-border economic measures, signaling a recalibration of its engagement with Pakistan.

Attari Integrated Check Post (ICP) Closure: A key measure was the closure of the ICP at Attari, which serves as India's first land port. This crucial trade gateway handled a substantial ₹3,886.53 crore in trade during 2023–24, facilitating 6,871 cargo movements and 71,563 passenger crossings. The closure of this port is a "severe blow to small and medium traders on both sides" of the border. It also disrupts the flow of Afghan-origin goods that are routed through Pakistan to India. This decision signifies a "retreat from minimal trade cooperation" and overtly signals a "shift toward economic deterrence".

Suspension of Indus Waters Treaty (IWT): More consequentially, India suspended the Indus Waters Treaty (IWT), a landmark agreement signed in 1960 that had historically withstood periods of conflict between the two nations. This suspension effectively halts technical meetings, data sharing, and water flow notifications, thereby removing established stabilizing mechanisms. A potential implication is the fast-tracking of long-stalled hydroelectric projects within India, such as Pakal Dul, Ratle, Kiru, and Sawalkot, which have historically faced objections from Pakistan.

India's cross-border economic measures, including the Attari ICP closure and the IWT suspension, represent a strategic "economic weaponization" aimed at imposing costs on Pakistan. However, these actions inherently incur reciprocal economic costs for India, particularly for its border communities and traders. The explicit statement that the closure of Attari ICP is a "severe blow to small and medium traders on both sides" demonstrates that while the primary intent is to inflict economic pain on Pakistan, there is an unavoidable shared burden on India's own economic actors. This is not a unilateral economic leverage but a complex interdependence even amidst conflict. The IWT suspension, while potentially benefiting India's hydroelectric projects, simultaneously removes a "stabilizing mechanism" , suggesting a higher risk of broader instability that could have unforeseen economic consequences for India as well.

5.2. Economic Costs of Counter-Terrorism and Deterrence

India has increasingly adopted "deterrence by punishment strategies" against Pakistan's perceived support for terrorist organizations. This approach aims to "raise the costs for the adversary's actions by taking the offensive". While effective in the short term, a "default kinetic response"  as a deterrence strategy carries a sustained economic burden for India and risks limiting diplomatic flexibility, necessitating careful long-term cost-benefit analysis.

Adopting a default kinetic response limits India's flexibility in future crises, potentially leading to "reputational costs tied to the commitment trap," and can result in "potential domestic fallout from unmet public expectations". This points to the long-term economic implications of maintaining a high state of military readiness and engaging in punitive strikes. These are not one-off expenses but ongoing costs that divert resources, potentially impacting other developmental priorities and the overall national budget.

The strategy of leveraging Pakistan's economic fragility is a key component of this deterrence. Pakistan's "weak economic foundation" and its reliance on "international loan bailouts" mean it "can only endure limited pain from military adventurism". The objective is to impose "sufficiently severe, sustained, and targeted" costs to raise the threshold for future provocations, predicated on the assumption that Pakistan acts as a "rational state actor". The effectiveness of this strategy hinges on Pakistan's continued economic vulnerability and its rational response to economic pressure, which remains a variable in the complex geopolitical dynamic.

5.3. Impact on National Investor Sentiment

While the immediate economic impacts of the Pahalgam attack were concentrated in J&K, the incident, being the deadliest civilian attack since the 2008 Mumbai attacks , could broadly affect the perception of India's internal security environment among both domestic and international investors. Sustained security operations and cross-border tensions, as exemplified by Operation Sindoor, introduce an element of geopolitical risk that investors typically factor into their decisions. A heightened perception of risk, even if localized, can influence capital flows, investment decisions, and overall market confidence across the nation.

This table quantifies the direct economic disruption caused by the closure of the Attari ICP, providing a concrete measure of the immediate trade loss resulting from this policy response. By listing specific trade categories and highlighting the impact on "small and medium traders," it underscores the human and business cost of the decision. This data visually demonstrates how economic levers are employed as part of a broader geopolitical strategy, offering empirical evidence for the concept of "economic weaponization." For policymakers, this information is crucial for assessing the direct economic consequences of such measures and weighing them against their strategic deterrence objectives.

6. Conclusion and Strategic Outlook

The 2025 Pahalgam attack and India's subsequent Operation Sindoor vividly illustrate the profound and complex interplay between security incidents and economic stability, particularly in conflict-prone regions like Jammu & Kashmir. The attack exposed the inherent fragility of J&K's economic revival, especially its tourism-dependent sectors, demonstrating how a single act of terror can reverse years of progress and inflict widespread economic distress through negative multiplier effects. Beyond immediate financial losses, the Pahalgam attack created a deep "confidence deficit" among tourists, investors, and local entrepreneurs, which is far more difficult and time-consuming to repair than physical damage. The disruption to the "overall environment of safety and security and investor confidence" , coupled with the collapsing bets of operators who had taken loans or sold assets , indicates a profound loss of trust and future expectation. Economic activity, particularly in sectors like tourism and investment, relies heavily on perceived stability and safety. The psychological impact of such a brutal attack means that even if security improves, the willingness of people to visit or invest will lag, leading to a prolonged period of underperformance. This "confidence deficit" represents a critical, non-quantifiable yet deeply impactful economic scar.

India's response, Operation Sindoor, marked a significant recalibration of its counter-terrorism strategy towards a calibrated punishment deterrence. While showcasing military resolve and precision, this strategy also carries its own economic implications, including disruptions to cross-border trade and the sustained costs of maintaining a robust security posture. The events highlight the critical importance of narrative shaping in the international arena, as perceptions can significantly influence diplomatic standing and economic confidence, sometimes overshadowing battlefield realities. The analysis has detailed military responses, economic impacts, and the "battle for narrative supremacy". The observation that Pakistan gained "diplomatic and perceptual ground" despite "suffering heavier casualties" underscores that military might alone is insufficient. This implies that national security and economic prosperity are not siloed but are deeply interdependent.

Potential Long-Term Consequences and Pathways to Recovery

For J&K: The immediate economic damage, including lost livelihoods, loan defaults, and stagnation in emerging sectors, risks a prolonged period of recovery. The challenge lies not just in rebuilding physical infrastructure but in restoring confidence among tourists and investors, which necessitates sustained security and targeted economic support. This support could include relief measures, tax waivers, and soft loans, as suggested by local business leaders. Addressing underlying grievances remains crucial, as economic development alone may not fully neutralize deep-seated insecurity.

For India's Deterrence Posture: The shift towards economic deterrence via measures like the Attari ICP closure and IWT suspension suggests a strategic willingness to impose costs on Pakistan. However, the long-term efficacy of this strategy depends on Pakistan's economic vulnerability and its rational state behavior. India must also carefully manage the reciprocal economic costs incurred by its own border communities and the potential for unintended escalation, which could have broader economic ramifications. The reliance on a "default kinetic response" as a deterrence strategy also carries a sustained economic burden for India, including ongoing military expenditure and opportunity costs, and risks limiting diplomatic flexibility. This necessitates a careful long-term cost-benefit analysis of such a posture.

Broader Geopolitical Context: The incident underscores the persistent challenge of cross-border terrorism and the imperative for comprehensive statecraft. Effective statecraft in complex security environments requires a seamless integration of military deterrence, economic policy, and strategic communication. Failures in one domain, such as narrative shaping, can undermine successes in another, such as military operations. The fact that Pakistan gained "diplomatic and perceptual ground" despite "suffering heavier casualties" highlights that military strength alone is not enough. A truly effective response to such incidents necessitates a coordinated approach where economic resilience, military capability, and a strong international narrative work in concert to achieve strategic objectives and mitigate long-term damage. This calls for a holistic approach to national security that transcends traditional military definitions and embraces the full spectrum of state power. The battle for narrative supremacy will continue to be a critical dimension, requiring India to proactively manage its international image to ensure its strategic objectives are not undermined by adverse perceptions.