Uri or Balakot style, India-Pakistan clash can’t be ruled out; may impact stocks markets, economies: Swaminathan Aiyar

What should we start with, geopolitical tensions or Trump?
Swaminathan Aiyar: On geopolitical tensions, we have this 90-day pause. So, greed versus fear. For 90 days, you will find that greed will overtake fear. As you are getting towards the 90-day deadline, you will find fear coming back. But as of now, you will largely see people being fairly positive until we come up against that deadline.

The one thing that people are not taking too seriously as geopolitical right now is the attack on Pahalgam. If you look at the track record of Mr Modi, he takes Pakistan very seriously and says I have a 56-inch chest, I am not going to allow them to get away with it. I will strike back. In 2016, he struck back with the surgical strikes.

In 2019, he struck back at Balakot. On the basis of that track record, he might well strike back now itself. So, that would be a very major political event because Pakistan’s track record shows that if India strikes, they will indubitably strike back. It will not be allowed to go uncontested on either side. Then, the question arises will both sides manage to stop escalation as they did in 2019? Both sides with the help of a very supportive local media were able to claim victory and the ability to claim victory is the best way to stop further escalation. Let’s see what happens right now. I am not saying that there is going to be a military clash. I am merely saying that there is a good chance on the basis of the track record that it will happen and then that would become a very large cloud over the stock markets and over the economic scene.

Second, what we have seen is that this exchange on the Indus Waters is not going to immediately have any impact. If India wants to withdraw, it can withdraw from this but for India to seriously withdraw any serious amounts of water from the Jhelum and Chenab, would take many years of planning before it could be done and you would have to take account of local flooding. Where will you put this excess water? One possibility is that instead of getting into a shooting match, you get into shooting words at each other or the Indus Waters Treaty. Can this be a way of settling the current uneasy relationship? Perhaps, but as I said, I would not rule out armed military action, on the basis of the track record. Please factor this in as a definite possibility.

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What are we looking at and I am just going to put two instances here. Are we looking at a situation as large as Kargil or are we looking at something like a surgical strike which is Uri?
Swaminathan Aiyar: You could have a variety of things. You could just have a surgical strike which Pakistan shrugs off. You could have a more serious attack like Balakot which Pakistan will respond to. You can also think of having a certain amount of covert action where India will deny responsibility. There might be something altogether new, which we have not thought of so far. But I would say that while we are very relaxed at this particular point. It is being seen as an Indus Waters thing rather than a shooting thing. But I am worried when I look at the track record. If there is one more single incident of this kind, Mr Modi will find himself impelled to take military action. So, let us hope for the best, but I merely say that we really must keep in mind that Mr Modi does not believe in sitting down and taking it lying down. He does believe in striking out hard and saying this is the big difference between me and our predecessors. And when he does that, Pakistan is also clear that we will not take it sitting down, we will also retaliate. Till now, the two countries have been careful enough to prevent escalation. I do hope it will happen this time too, that is the probability, and you can never rule out some stupid blunders taking place. But let me not emphasise the stupid blunders but merely say that there are a number of geopolitical issues now, right in India and Pakistan, you do not have to go to China versus the USA, India versus Pakistan is the place to look out for.

War is always bad news for the market as that means uncertainty, impact on the economy and it could also impact the global risk perception. In this case, can we ignore all this? The worst case scenario is that even if it is a war like situation or a mini war, it is not going to have an impact on the economy per se and this time, India has a lot of global support which will ensure that uncertainty in the financial market does not get created.
Swaminathan Aiyar: If the events turn out to be carefully controlled escalation where people expect that the two countries are responsible enough to stop at that point, apart from tantrums, at the end of it all, we will see it through and ride out that storm. The only problem will arise if it looks as though there is an escalation that might get out of hand.

The important thing is neither side should really very much hurt the other side. As long as you do not do that, both sides can claim victory. The problem arises if one side has a big victory and the other feels it has to strike back as an even larger victory. So, these are the dangers. Everybody knows about them. The war games have been played out on both sides. People know that we need to take it forward, we need to say I have won this particular battle and you cannot get away from that but hope that we avoid escalation. We have avoided it in the past and hopefully we will avoid it now. But let us see what happens.

It is also possible that instead of exchanging bullets, we will just go to a lot of rhetoric on the Indus Waters Treaty. But that would be a long argument over a very longish period. It will not result in any kind of shooting war. It will not result in any impact on the stock market.

In the global context, the last week full on was related to the news headlines suggesting that the Trump administration is now open for some consideration on China tariffs while China has been denying that the negotiations are on. Do you believe that some time from now, we could see a deal in the making?
Swaminathan Aiyar: Right now, as I said, because so little is happening, people are latching on a lot of attention to a statement here and a statement there. A proper negotiation obviously is not taking place. What is true is that within China, they are saying there are not certain areas where we have to get this thing from the USA and we will achieve nothing by putting a high tariff. There could be a slight exchange on that and then you take some decision out there. This cannot be called a trade negotiation, but there could be some exchanges and some clarifications. We have certainly not got to the point of what you can call a negotiation yet.