Impact Logic: India-Pakistan War - Impact on Supply of Energy and Food - Push Up Inflation - Affect the Pace of US Interest Rate Cuts - Bearish for Digital Currency and Other Risk Assets
Background: India and Pakistan have had a long-standing tense relationship due to the Kashmir dispute. In April 2025, the conflict in the Kashmir region escalated, leading India to suspend trade and water resource agreements with Pakistan, sharply deteriorating relations and increasing the likelihood of war. Notably, both countries are nuclear powers.
1. The Role of India and Pakistan in the Global Supply Chain
India is the fifth largest economy in the world, with a GDP of approximately $3.4 trillion in 2023, mainly exporting information technology services, generic drugs, textiles, petroleum products, and agricultural products, especially being a significant supplier of global rice and generic drugs. The country is highly dependent on energy imports.
Pakistan's economy is smaller (GDP approximately $375 billion), primarily exporting textiles and agricultural products.
2. Implications of the Russia-Ukraine War on Global Inflation
The Russia-Ukraine war has driven up global energy and food prices, causing supply chain disruptions and a global CPI increase of about 1-2 percentage points. The impact of war on global inflation depends on the importance of the conflict countries in resource and supply chains. On the day of the outbreak, it even caused a nearly 10% drop in the price of flour, but it was quickly recovered by buying in the same day.
In contrast, the exports of India and Pakistan are concentrated in rice, sugar, textiles, and generic drugs, with overall dependence on the global supply chain and the importance of resource exports lower than that of Russia and Ukraine.
3. Potential Impact of the India-Pakistan War on Global Inflation
Assuming a limited scale conventional war occurs (lasting weeks to months):
(1) Energy Market: Indirect Disruption
The war may affect shipping in the Indian Ocean, raising transportation costs and leading to a short-term increase in global oil prices by 5-10%.
The effect is far lower than the energy price surge triggered by the Russia-Ukraine war.
(2) Grain Market: Localized Significant Impact
India is a major global rice exporter (accounting for 25%). War could lead to a 10-20% increase in rice prices, significantly impacting importers in Asia and Africa.
Sugar and wheat price fluctuations are limited, and other countries can partially fill the supply gap.
(3) Supply Chain and Industrial Products: Regional Pressure
India's generic drug and textile exports may be disrupted, driving up prices for medicines and clothing. The global supply chain impact is limited due to alternative supplying countries (like China and Vietnam).
4. Quantitative Estimates and Comparisons
Limited War Scenario: Projected global CPI increase of 0.5-1.5 percentage points, lasting 3-6 months.
Nuclear War Scenario: Global CPI could soar by 10-20%, accompanied by global economic and humanitarian disasters, but the probability is extremely low.
In contrast, inflation due to the Russia-Ukraine war increased by about 1-2 percentage points, lasting about a year.
5. Differences in Inflation Drivers Compared to the Russia-Ukraine War
6. Conclusion
The limited conventional war between India and Pakistan is expected to have a relatively limited impact on global inflation, with a projected increase in global CPI of 0.5 to 1.5 percentage points, mainly reflected in food, energy transportation, and some industrial products. Compared to the Russia-Ukraine war, the overall impact is smaller. However, if the conflict escalates to nuclear war, the world would face catastrophic consequences. For digital currencies, the short-term effect is bearish (especially on the day of outbreak, the volatility will be quite strong), while the subsequent impact depends on the duration and intensity of the war.
