How India’s Suspension of the Indus Waters Treaty Will Affect Pakistan’s Economy

By Vinayaka Mission’s School of Economics and Public Policy (VSEP)

On 23rd April 2025, India announced its decision to suspend the Indus Waters Treaty (IWT) with Pakistan in a historic move that would change the hydrological landscape of South Asia. It was made in the wake of a deadly terrorist attack in Pahalgam, Jammu and Kashmir that killed 26 Indian civilians. India’s response to this tragedy was both strategic and diplomatic in nature, indicating a more hard-hitting policy towards cross-border terrorism. Given Pakistan’s reliance on the Indus River system for irrigation, hydroelectricity, and national economic viability, the IWT’s suspension creates far-reaching ramifications for the country. Here is what you need to know about the economic ramifications Pakistan could face as a result of suspension.

This post is part of Vinayaka Mission’s School of Economics and Public Policy (VSEP) analytical commentary series on key geopolitical and economic issues facing the South Asian region. Our B.Sc. Economics (Honours with Research) program provides students with the tools to assess such developments critically and to inform evidence-based policymaking in a multi-faceted world.

The Indus Waters Treaty: A Historical Overview

The Indus Waters Treaty is one of the world’s most important water-sharing pacts, signed in 1960 with the mediation of the World Bank. It distributes control over six rivers in the Indus system; India has rights to the eastern rivers — Ravi, Beas and Sutlej — and Pakistan control the western rivers — Indus, Jhelum and Chenab. These rivers are vital for Pakistan, providing some 80 percent of its water, which is a necessity for agriculture, industry and hydroelectric power.

The treaty, despite political tensions, has historically stopped large-scale fighting over water. But India’s recent suspension marks a departure from decades of diplomacy and comes with serious economic repercussions for Pakistan.

India’s Diplomatic Measures Following the Suspension

India’s decision to suspend the treaty included a series of strategic actions:

1. Diplomatic Actions: India downgraded its diplomatic relations with Pakistan, expelled Pakistani military advisers, and reduced staffing at its Islamabad mission.
2. Suspension of Water Flow: India halted water flow from the eastern rivers, disrupting the water supply to Pakistan.
3. Border Closure: India closed the Attari-Wagah border, halting trade and movement of goods, intensifying Pakistan’s economic strain.

These moves were intended to pressure Pakistan diplomatically while highlighting India’s intolerance of cross-border terrorism.

Economic Impact on Pakistan: A Sector-wise Breakdown

1. Agricultural Sector Crisis

• Water Shortages: Reduced water from the Ravi, Beas, and Sutlej rivers impacts irrigation, especially in Punjab and Sindh, threatening crop yields.
• Food Security: Diminished agricultural production may cause food shortages and price inflation.
• Long-Term Decline: Prolonged disruption could force reliance on unsustainable groundwater extraction and impact exports.

2. Energy Sector Challenges

• Hydropower Disruption: The Indus, Jhelum, and Chenab rivers support major dams like Tarbela and Mangla. Reduced water flow will limit power generation.
• Increased Power Outages: Pakistan, already facing energy shortages, could experience more frequent and prolonged outages.
• Higher Costs: Shift to expensive thermal power sources will increase operational costs for businesses and consumers.

3. GDP and Employment Impact

• Economic Contraction: Analysts predict a potential GDP decline of 1.5% to 2% due to reduced water and power availability.
• Unemployment: Agricultural and industrial sectors may shed jobs, increasing joblessness.
• Rising Inflation: Food and energy costs will spike, reducing purchasing power and deepening economic distress.

4. Diplomatic and Trade Consequences

• Trade Disruption: The border closure cuts off $2.6 billion in bilateral trade.
• International Scrutiny: The suspension could draw attention from the UN and World Bank, potentially prompting intervention or mediation.

Impact Analysis of Indus Waters Treaty Suspension on Pakistan’s Key Sectors

Economic Factor	Impact Summary	Data/Statistics
Agricultural Sector	Reduced crop yields, food insecurity	Agriculture = 24% of GDP; 40% workforce
Water Dependency	Severe reliance on the Indus River system	80% of water supply from the Indus system
Energy Sector	Lower hydropower generation, higher energy costs	30% of electricity from hydro
GDP Growth	Projected decline in economic output	1.5% to 2% drop in GDP
Employment	Job losses in agriculture and industry	40% of workforce in agriculture
Inflation	Rising food and energy prices	12% food inflation (2024)
Water Stress	Increased competition for scarce water resources	Pakistan ranks 14th in water stress (WRI)
Trade Disruption	Halted trade at border, supply chain issues	$2.6 billion bilateral trade (2022)
Hydropower Dependency	Critical reliance on Indus-based hydropower	60% of hydropower from Indus system

Long-Term Implications and the Path Forward

If unresolved, the suspension could strain Pakistan’s economy for years. The government must:

• Explore alternative water sources
• Invest in sustainable water management
• Modernize irrigation infrastructure
• Seek diplomatic dialogue and international mediation

Efforts from global organizations like the UN and World Bank may be vital to restoring stability and ensuring equitable water sharing.

Final Words

The immediate and long-term economic impact of the suspension of the Indus Waters Treaty on Pakistan. From agriculture and energy to GDP. and employment, almost every sector of Pakistan’s economy is vulnerable to disruption. Combating these issues will need to be done through domestic changes, shrewd international diplomacy, and potentially foreign intervention. The crisis also underscores geopolitical aspects of transboundary water resources and the urgency of cooperative management of these resources throughout South Asia.

At VSEP, we challenge the students to tackle complicated international issues from a policy perspective. This case stands out on the importance of understanding how geopolitics plays into economics, and demonstrates why an interdisciplinary approach to learning, like the one offered within our B.Sc., makes sense. With Research) (Economics (Honours with Research)