ISLAMABAD -- India's move to sever one of its few economic ties with Pakistan raises the odds of military action, as tensions soar after a bomb in Indian-administrated Kashmir last week killed 44 paramilitary policemen.
The attack prompted New Delhi to unilaterally withdraw the most favored nation, or MFN, status it granted to Islamabad in 1996. Economic links between the two nuclear powers are modest -- two-way trade was only about $2 billion last year -- and now look set to fray further.
Indian Finance Minister Arun Jaitley wrote on Twitter on Saturday that the withdrawal of MFN status means basic customs duty on all goods exported from Pakistan to India has been immediately raised to 200%.
Pakistan is seeking economic support from other countries such as China and Saudi Arabia, with which it signed investment agreements worth $20 billion at the weekend. Such deals will further reduce Islamabad's economic reliance on New Delhi.
Indian Prime Minister Narendra Modi on Friday vowed to avenge the killings, in an unusual show of anger that analysts see as being prompted by a general election due by May. Indian police said militants killed four Indian soldiers and a civilian in a gunbattle on Monday in the Kashmir area, and on Tuesday Indian's top military commander in the region said Islamabad's spy agency was involved in the bombing.
Pakistani Prime Minister Imran Khan said Tuesday that India had leveled allegations against his country without evidence and vowed to retaliate should New Delhi launch any attacks.
"By ending even those few economic ties, India and Pakistan are only left with military options if they choose to retaliate against each other in future," a senior Western diplomat in Islamabad told the Nikkei Asian Review. "It's important to have a variety of relations, including economic ones, between these two countries, which are both armed with nuclear weapons."
A senior Pakistani official, who asked not to be identified, told Nikkei that "steps like trade always help to make countries think about options to expand ties rather than breaking ties."
News outlets in both countries have reported that Modi's government has examined options such as the use of aircraft with missiles that can target suspected militant sites on the Pakistan side of the disputed border without crossing into Pakistan's airspace. This option could be used without provoking a military response that runs the risk of an all-out war.
"The prime minister cannot afford to look weak" ahead of the election, a Pakistani Foreign Ministry official said. "Many Indians are waiting to see how he flexes his muscles."
Abdul Basit, a former Pakistani ambassador to New Delhi, told Nikkei that any military retaliation by India would be fraught with difficulties, especially with Pakistan being the world's only majority-Muslim country that possesses nuclear weapons.
"India will not want an all-out war with Pakistan," Basit said. "The difficulty [for India] is to calibrate its military response without allowing the overall situation to get out of control."
Isolating Islamabad diplomatically will also be difficult for New Delhi, according to Talat Masood, a former Pakistan military commander who now comments on defense and security issues.
"India may have its own position, but Pakistan also has a place in the world," Masood told Nikkei. "I think the view internationally will be for our countries to resolve our disputes through dialogue."
On Monday, Saudi Arabian Crown Prince Mohammed bin Salman concluded a two-day trip to Islamabad after overseeing Saudi investment deals worth $20 billion in Pakistan. The list includes a promised Saudi investment of $8 billion in a major new refinery and a petrochemical complex.
The Saudi commitment is a boost to Pakistan at a time when the country is seeking to overcome a balance of payments crisis.
While the economy is the country's most pressing issue, Kashmir has long been a source of tension.
The bad blood goes back to the 1947 partition of India by the U.K. to form two independent countries. At the outset, Pakistan accused India of unfairly claiming Kashmir in defiance of an agreed formula under which Muslim-majority regions would be part of Pakistan. New Delhi has repeatedly accused Islamabad of sponsoring hard-line Islamic militant groups to destabilize the region, two-thirds of which lie under Indian rule.
In 2016, the Indian Army said it launched "surgical strikes" using ground troops on the Pakistan side of the disputed Kashmir border to destroy "terror launchpads." Those strikes came after a militant attack on an Indian Army base was linked by India to a group that it said was backed by Pakistan. Islamabad denied the incursions had taken place.