Every war has its economical impact and history proves it. Whether it is from the strongest economy or developing economies. World War-I, German Inflation during Hitler's era, Russian Revolution, World War-II, Vietnam War, Indo-Pak War, Iran or Iraq War, all prove beyond doubt that funding in all these wars is from concerned countries' tax-payers. No country's economy is immune enough to consequences of war, whether it may be attacker or the attacked. You may label the war with any any name (fight against terror) the affects cannot be nullified.
The Reserve Bank or any Federal Agency controlling the economy of the country, they are non profit organizations, created with an intention to stabilize economy by following various methods. They are answerable to none and with a free hand. They regulate the money supply to the government for funding various schemes & projects. They also provide the leverage to the country by providing funds for waging war in the name of defense. Now just for the common understanding the cost of war, or the country's capabilities to wage war are financed by Reserve Bank or Federal Bank, who in turn collect it through various improvised methods form the public.
Whom the government may approach for financing the WAR ?
If you are asked to give Rs.10,000 for waging a war, would you part with the amount. The answer can be well imagined, so what else can the government do ? they have found a way out - to recover the expenses of the WAR by picking the pockets of unwary public, by imposing direct or indirect taxes.
Now just imagine for a moment that, if your pay-cheque is Rs.25,000 and Rs.10,000 are taken away how you will cope for various requirements. Obviously you will cut down all the expenses which can be postponed or you will adjust rather will be forced to adjust your expenditure. The result your buying capacity will be reduced. This will effect the retail demand and will adversily effect the production of the goods.
If the producing company is unable to meet its targeted profit what are the options left before the company or organization to remain afloat ? The company would reduce production, workers will become idle leading to lay-offs. After first round of these corrective measures the company if still finds itself in non-profitable position, how long will it bear. The company decides the enevitable the SHUTDOWN. This will further lead to addition of unemployment problem.
All the above factors lead to further lowering of demand and further CLOSURES.
The inflation spreads its tentacles, further affecting the common man who has a fixed income or pensioners. People with variable income remain a little less effected. Export/import of the country is adversely impacted.
Lower production leads to shortages. People start holding or piling up reserves in fear of non-availability or price-escalation further compounding the inflation.
The resultant effect is less money so to increase the money supply lending rates or repo rate is cut, to make more money available to the companies. All sorts of measures are taken by Reserve or Federal Bank to contain inflation.
The above impact of WAR will continue till Fedral or Reserve Bank fills the coffers again, which is imperative.