Swaminathan Aiyar cautions on short-term impact on markets if tensions persist

“Pakistan will be tempted to strike deep into Indian territory. We do not know the targets. We do not know the damage. There is a definite danger of upward escalation and all this will depend again on India‘s own response to what Pakistan does,” says Swaminathan Aiyar, Consulting Editor, ET Now.

When I got up really early in the morning, I saw the headlines and I would say, okay, we all knew this had to happen sooner than later. India has hit the spine of Pakistan terrorist camps.
Swaminathan Aiyar: Yes. Well, we had retaliated in 2016 with surgical strikes. We had retaliated in 2019 with the Balakot bombings. It would have been difficult for Mr Modi to somehow avoid such strong action. So, he has gone ahead and done it. So, this was not unexpected. Equally expected is that Pakistan will retaliate.

So, the big question is, will the two sides be able to prevent further escalation? That is the big thing. As I said without doubt Pakistan will retaliate. Let us be very clear about that. On both sides they will want to claim victory. So, in this particular case, India has gone so deep into Pakistan. The attack in Bahawalpur 150 kilometres in.

Pakistan will be tempted to strike deep into Indian territory. We do not know the targets. We do not know the damage. There is a definite danger of upward escalation and all this will depend again on India’s own response to what Pakistan does.

So, I would say that at this point there are many hazards, there are many unknowns. This is a point at which to cross your fingers. Obviously, the United States and others will put pressure on both sides, do not carry this too far.

But Pakistan will not say that I can be seen being hit and not hitting them. So, we will have to get to a situation where both sides can claim victory without escalating further.

We have shown the skill to do this in the past. I hope we will show the skill to do this in the current situation also, that would be my expectation. I do not expect a runaway escalation. But could there be more than one step of escalation is possible and yet I would say I do not think we are going to go for any kind of all-out war.
So, this is definitely deeper than where India had gone last time, the surgical strike, and fingers crossed nobody wants a repeat of Kargil. So, can I say that it is going to be somewhere in between slightly higher than last time surgical strike, but much lower than what happened during Kargil?
Swaminathan Aiyar: No, in case of Kargil they actually moved their troops and they had captured the heights. I do not expect that. India on this occasion has chosen to use drones and loitering munitions. These have both been very successful in Ukraine.

It is a way of precision bombing without endangering your own pilots, your own staff, and it is very precise and you know what you can hit. So, just as we have used these drones, I would expect Pakistan to also use these drones.

I do not think like in Kargil they will move their troops in to take anything. They too will use drones. Let us see where and one thing is notable while Pakistan was on alert there is no sign that they were able to launch anti-drone operations.
The question is does India have anti-drone operations available to try and shoot down the drones that Pakistan is going to send over. So, this in military terms is going to be a major question. Let us see what happens. I hope that this can finish off fairly soon. But let us not think it be over in one or two days. This may be with us for a week or two even if all ends well.

Geopolitical tensions mean uncertainty. Uncertainty means delay in decision making, nervousness for the market. Do you think we should keep that independent because irrespective of how things would move the overall health of the economy will not be changed.
Swaminathan Aiyar: I would say that it is too early to be 100% certain. I think that is likely, but while that is likely that assumes that we are both able to control the escalation. I do hope that is the case. If things go a little out, I am afraid things can get worse, but even if for two weeks there will be some impact, I mean ships will say do we want to go into a war zone, business will say do we want to travel, all these uncertainties are going to be there, so there can be some impact on business decisions and on growth. But as long as, it is over within two weeks, I would say, the overall impact on the annual rate will not be significant. Let us hope that is the outcome.

Nobody wants a war. India does not want a war and Pakistan cannot afford a war. I just go back to the basic purpose of why in the first place do something which will have huge implications and it will have zero result.
Swaminathan Aiyar: I mean it is very easy to agree on that, but both sides wish to be able to claim victory. Let me also say, when you say Pakistan cannot afford a war, let us be very clear that Pakistan is not alone. If this escalates and it looks as though India is going to win, please be quite certain that China various Arab countries, maybe Turkey will immediately come to the assistance of Pakistan, not necessarily in the form of forces but certainly in the form of equipment, in the form of munitions that kind of aid will come.

Pakistan is not alone. From China’s point of view, Pakistan is a very important ally. It keep holds India in check on one entire side. It prevents India from connecting up with Central Asia and the other countries on the other side.
Right now China will not want an all-out war like anybody else, but China will make sure that Pakistan’s honour is satisfied and it is not put in a situation where it looks as though India has won a great victory.

So, the important thing is India should not attempt a great victory. The language should not attempt a great victory. Right now, we have talked about this was non-escalatory attack. Fine. You said that no military place was targeted. Fine. So, we are using relatively moderate, relatively even sweet language to tell Pakistan do not escalate.

And yet look we know for sure that Pakistan is going to hit back. Pakistan will be tempted to hit back just as deeply as we penetrated it. Let us be prepared for this and at least we have the chance to say let us get our anti-drone operations systems working. Let us see what happens. There are dangers ahead.