What has happened?
Long-term geopolitical rivals India and Pakistan, continue to struggle to find a compromise surrounding Pakistan’s alleged support for Islamic militant groups. This has led to a recent exacerbation in tensions between the two which came to a head at the end of February 2019. This could potentially impact foreign investment interest in both countries in the short term, as well as the global investment environment. Despite global concern that growing tensions could lead to violent conflict, the leaders of both countries seem determined to keep peace. However, this does not necessarily indicate that underlying disputes will be resolved.
Not for the first time in the last 70 years, India and Pakistan may be on the edge of major confrontation. On 26 February 2019, India launched airstrikes on an alleged Jaish-e-Mohammed (JeM) training base within Pakistan. This was in retaliation to a suicide bombing attack by JeM in Kashmir on 14 February, which killed 40+ Indian paramilitary forces.
The airstrikes were followed by cross-border fire, which killed at least four Pakistani civilians. On 27 February, the Pakistani government claimed that they had shot down two Indian fighter jets. They also stated that they were holding an Indian fighter pilot in custody. The two nuclear-armed South Asian rivals engaged in a battle of conflicting military claims.
The fighter pilot was handed back to the Indian authorities on 1 March by Pakistan’s government. Pakistan’s Prime Minister Imran Khan labelled this action as a “peace gesture”. However, underlying tensions still fundamentally remain. Crucially, India will still demand a firm commitment from the Pakistani government towards removing Islamic militant groups from the country.
JeM were responsible for India’s first experience of a suicide terrorist attack in April 2000. JeM share ideology and indeed, links, with larger terrorist names including al-Qaeda. Their central aims include uniting Pakistan with Kashmir under Sharia Law.
JeM are based in Pakistan which has led to frequent accusations from New Delhi that Pakistan’s government shelters and supports the group. These are accusations which the Pakistani government vehemently denies.
Indian Foreign Affairs Minister Sushma Swaraj stated that the recent airstrikes were launched in response to the “continuing refusal of Pakistan to acknowledge and act against terror groups on its territory”. He also claimed that the airstrikes were preventative of future planned attacks.
Since August 1947, Pakistan and India have been independent of one another. Nonetheless, conflict over ownership of the Princely State of Kashmir, remains unresolved.
However, despite the two countries’ bloody history of two wars over Kashmir, both governments currently state they wish to avoid outright conflict.
This would indicate that forecasts of nuclear war between India and Pakistan are far-fetched. Nevertheless, the unpredictability demonstrated by both countries’ recent and compulsive actions, is arousing global concern.
What are the implications?
Pakistan’s government has been accused since the 1980’s of aiding Islamic extremist groups, including the infamous Afghan Taliban. Although JeM is banned by Pakistan’s government, Pakistan’s intelligence services, Inter-Services Intelligence (ISI), are widely suspected internationally, of providing covert support to members.
Therefore, despite recent pressure from India to stop protecting militant groups, it is unlikely given their history, that the Pakistani government will do so. As such, Pakistan’s high terrorism risk is unlikely to decrease.
India and Pakistan’s security environments may actually become less safe if there is a resurgence of JeM activity, in response to Indian airstrikes. This is relatively likely as the Indian airstrikes were specifically aimed at JeM centres.
In this event, international companies with assets and employees in Pakistan and India are likely to experience increased risks of damage to property, and to the safety of personnel. JeM principally target infrastructure, to increase the impact of their attacks. Another of their central goals includes driving Western occupation from Southern Asia.
As such, foreign companies and particularly US-sponsored projects would be vulnerable to being targeted. This is especially the case, as JeM’s ideological outlook is strongly anti-Western and specifically anti-American. The US, is in fact a nation which they have publically declared war on.
Damage incurred through a terrorist attack would have significant economic implications for the affected company. This would also impact financial investors in such businesses. Global awareness of these risks may decrease investment interest in businesses operating in each country, despite their low labour costs.
Having said this, India’s government will be cautious following recent JeM terrorist attacks. Therefore, government awareness to such activity will be heightened - decreasing the risk of a successful attack.
Tensions between Pakistan and India have existed for almost a century. Neither are strangers to civil war. With military attacks already having incurred losses on both sides in the last weeks, and both nations’ forces lined up at the border, the likelihood of outright conflict looked high. However recent developments - including Pakistan’s return of the Indian fighter pilot - have meant that these risks appear to have receded.
Both countries’ governments maintain that they wish to avoid conflict. Additionally, US government officials, among other influential world voices, including those of China, have urged both sides to find a peaceful alternative to conflict.
The fact that India and Pakistan have spent so long in conflict or on the brink of conflict, may factor in the decision of both to find a compromise. As such, although potential violence increases property damage risk, it is not necessarily any higher than it has been historically, for international investors.
5 Key Takeaways
- Pakistan’s security environment is weak, due to high terrorism risks
- This directly impacts India’s security environment which remains under increasing threat from JeM
- Pakistan and India are unlikely to resolve disputes over JeM in the short term, although tensions are unlikely to escalate into outright conflict
- The ideological standing of JeM, puts Western and particularly US corporations’ infrastructure, assets and personnel, at risk of being targets for terrorist attacks
- The short-term effects of the recent re-escalation of tensions between India and Pakistan may include declining foreign investment interest in both countries.
For further information please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837