India-Pakistan Trade Disrupted Following Pahalgam Attack: Impact on Economy and Diplomacy

India-Pakistan Trade Comes to a Standstill After Pahalgam Attack: Economic and Diplomatic Fallout

April 22, 2025 — A devastating terror attack in Pahalgam, Jammu and Kashmir, which claimed the lives of 26 individuals—most of them tourists—has triggered a wave of diplomatic and economic consequences, bringing India-Pakistan trade to an abrupt halt. The attack, attributed to The Resistance Front (TRF), a proxy of the Pakistan-based Lashkar-e-Taiba, prompted India to shut down the Integrated Check Post (ICP) at Attari—the only active land trade route between the two countries.

In retaliation, Pakistan suspended all trade with India, including indirect commerce routed through third countries such as the UAE, escalating tensions to a new high. This mutual suspension, centered around the Attari-Wagah corridor, threatens serious economic repercussions for both sides, particularly for small traders and border economies.

Attari-Wagah: A Vital Economic Artery

Since its operational launch in 2005 and the inauguration of modern facilities in 2012, the Attari-Wagah border has been a key facilitator of cross-border trade. In FY 2023–24, trade through this route totaled ₹3,886.53 crore (approximately $465 million), encompassing 6,871 cargo movements and over 71,000 passenger crossings, according to the Land Ports Authority of India.

India’s exports to Pakistan via Attari included soybean, poultry feed, vegetables, red chillies, plastic granules, and yarn. Imports from Pakistan largely consisted of dry fruits, dates, gypsum, cement, glass, rock salt, and herbs. Additionally, the route enabled Afghan goods to reach India via Pakistan, underscoring its regional strategic value.

Despite its importance, bilateral trade has steadily declined, particularly after India imposed a 200% duty on Pakistani imports following the 2019 Pulwama attack. Trade volumes fell from ₹4,370 crore in 2018–19 to ₹2,257 crore in 2022–23. Even so, the World Bank estimates the trade potential between the two countries at $37 billion annually—making the existing $2 billion exchange just a fraction of what could be achieved under normal diplomatic conditions.

India’s Response: Security-First Approach

India formally announced the closure of the Attari ICP on April 23, 2025, following a high-level Cabinet Committee on Security (CCS) meeting chaired by Prime Minister Narendra Modi. The decision was conveyed by Foreign Secretary Vikram Misri and came into effect immediately, with exceptions only for travelers holding valid return endorsements until May 1, 2025.

The closure is part of a broader five-point diplomatic and security initiative targeting Pakistan. This includes suspension of the Indus Waters Treaty, revocation of SAARC visa exemptions for Pakistani nationals, and expulsion of Pakistani defense advisors. The CCS cited “cross-border linkages” to the Pahalgam attack, with early investigations pointing to the involvement of three Pakistani nationals among the five terrorists.

The move is expected to impact Punjab’s economy significantly, affecting small-scale traders and manufacturers dependent on cross-border commerce. It also poses logistical challenges to Afghan-India trade via Pakistan. Notably, Pakistan’s stock market responded with a 2,000-point decline, reflecting broader economic unease.

Pakistan’s Countermeasures: Trade Halt and Diplomatic Retrenchment

On April 24, 2025, Pakistan’s National Security Committee (NSC), chaired by Prime Minister Shehbaz Sharif, announced a full suspension of trade with India, including indirect routes via third countries. Islamabad also closed its side of the Wagah border, scaled back diplomatic representation, and hinted at withdrawing from key bilateral agreements, including the 1972 Simla Accord.

Pakistan has labeled India’s suspension of the Indus Waters Treaty an “act of war” and has warned of potential military retaliation. The response comes amid a period of economic fragility for Pakistan, which remains reliant on IMF support and faces mounting fiscal pressures. The sudden halt of even a modest $2 billion trade flow could further marginalize Pakistan in the global economic landscape.

According to Splash247, Pakistan’s actions are viewed as a desperate attempt to counter India’s diplomatic offensive, albeit with limited economic leverage.

Broader Implications: A Shrinking Diplomatic Space

The abrupt suspension of trade marks a severe deterioration in already fragile India-Pakistan relations. The closure of the Attari-Wagah border—once a symbol of cautious engagement—has now shut down both commerce and limited people-to-people interaction. Even the daily retreat ceremony has been scaled back, underscoring the gravity of the situation.

India’s firm stance aims to pressure Pakistan on cross-border terrorism, but also risks collateral economic fallout in regions like Punjab and disruptions to Afghan trade corridors. For Pakistan, the trade halt exacerbates economic vulnerabilities, with forecasts by the IMF already predicting slowed growth.

The diplomatic fallout has spread beyond economic measures. With both nations expelling diplomats, tightening visa rules, and withdrawing from long-standing treaties, the potential for constructive dialogue has further diminished. Although several countries—including France and Canada—have condemned the Pahalgam attack, Pakistan’s outright denial and accusations of a “false flag operation” by India have muddied international opinion.

Looking Ahead: A Fragile Future

The India-Pakistan trade suspension underscores the precarious nature of bilateral ties, where progress can be easily derailed by violence and mistrust. While India’s actions are rooted in national security imperatives, and Pakistan’s responses aimed at maintaining diplomatic parity, the real cost is borne by small businesses, border communities, and regional stability.

As the situation in Jammu and Kashmir remains tense and diplomatic avenues narrow, the road to de-escalation appears uncertain. The Pahalgam tragedy has not only cost innocent lives but has also fractured a fragile economic bridge—one that may take years to rebuild.