India and Pakistan gained independence in 1947 and inherited an almost similar economic legacy of underinvestment and neglect, and ranked among the world’s poorest nations. Pakistan was not given its full share of wealth and resources, therefore, had relatively more problems. Out of 921 industrial units in undivided India, Pakistan received only 34. Soon after independence, Pakistan was struggling with economic challenges. On January 5, 1948, LIFE magazine reported that Pakistan’s economy was on the verge of collapse. Contrary to the above assessments, during the first four decades of its independence; Pakistan’s economy witnessed an average growth rate of 6 percent, while India lagged behind with only a 4 percent average growth rate.
However, with the end of the Cold War, the situation reversed. India surpassed Pakistan in economic growth rate and became one of the fastest-growing economies in the world in the past three decades. Today, India is the 5th largest economy in the world. In 1970, Pakistan’s GDP per capita was $226 vs. India’s $112, whereas, in 2022, Pakistan stands at $1400 vs. $2490 of India. The foreign reserves of India are $554 billion vs. Pakistan’s at $8 billion. The history of the economic progress of Pakistan and India can be divided into two distinct periods, i.e., from 1947 to 1990 and 1991 to 2023. It will be very interesting to assess the impact of changing global order and strategic realignments vis-à-vis the economic growth of both Pakistan and India in this period.
Soon after independence, Pakistan joined the ‘US Camp’ by becoming a member of CENTO and SEATO. Despite initial economic hardships, Pakistan’s economy saw an upward trajectory that can be contributed to the flow of financial aid, especially from the US, West and Gulf countries, coupled with better governance. 1958 to 1963 saw major economic growth, which led to infrastructure building, dams, canal systems, power stations, industrialization and land/ agricultural reforms. Pakistan achieved an economic growth rate of almost 10 percent during this period. Although, two wars with India, the separation of East Pakistan coupled with the ‘nationalization’ of industries, impacted negatively on the economic growth of Pakistan during the 1970s; Pakistan started recovering from its weak economic performance from the 1980s onwards. This is the time when Pakistan was the front-line state supporting Afghan Jehad with the full support of the Americans.
In economic terms, Pakistan’s recovery could be attributed to the denationalization of industries in 1977 and increased remittances from the Middle East. The completion of the Tarbela Dam gave a boom to the agricultural sector. During the Soviet invasion of Afghanistan, the US and the West provided direct financial assistance to Pakistan as an ally; therefore, till the late 1980s, Pakistan managed to maintain a uniform upward growth.
With the end of the Cold War (the early 1990s), things started to change, resulting in a downward trend in Pakistan’s economy. During the 1990s, under ‘democratic rule’, Pakistan became the ‘most sanctioned ally’ of the United States and the economic situation was further aggravated post the nuclear explosions of 1998. However, geopolitics took another turn after the incident of 9/11. Pakistan was termed a non-NATO ally by the US in its Global War on Terror (GWOT). Interestingly, Pakistan’s economy showed an upward trend for a short period of time between 2003-2006 with an average growth rate of more than 6 percent. As soon as Pakistan’s relevance to the US vis-à-vis Afghanistan diminished, Pakistan witnessed a deteriorating security situation, especially in FATA and Swat, and a rise in militancy which restricted foreign investment, resultantly FDI decrease. This deterioration of the economy became more prominent once the US left Afghanistan which continues even today.
Like Pakistan, India’s economic growth can also be divided into two phases, 1947-1990 and 1990 to date. During the period of the Cold War, India was proclaimed to be one of the leading countries of the Non-Aligned Movement but realistically, India remained in the ‘Soviet Camp’. In this period, the Indian government adopted an economic model whereby it implemented a protectionist trading strategy and licence regime, which constrained economic growth. During this time, India’s average economic growth rate was around 3-4 percent. High levels of regulation and protection for the industrial sector, inefficient agriculture, and low trade ratios all contributed to a slow-performing Indian economy. Before 1990, the main sources of capital inflows to India mostly consisted of foreign aid from the US and Russia, commercial borrowings and remittances. India faced a serious balance of payment crisis in the 1990s and approached IMF for a bailout.
Interestingly, as soon as the Cold War ended, India abandoned the centralized economic policy in favour of opening up to the US and West at large for greater political and economic gains. Indian economic reforms included Liberalization, Privatization and Globalization (LPG). Indian export/ import diversified its outreach to almost all parts of the world. India liberalized trade, lowered tariffs, deregulated industries, abridged controls on foreign trade and investment, and privatized state-owned enterprises, thus, making it convenient for local companies to grow, which led to more foreign investment. Reforms were successful because they opened new markets for Indian businesses, increased their competitiveness, and ultimately resulted in a higher rate of economic growth for India as a whole. The result of India’s outward-oriented policy and integration into the global economy proved fruitful and aided the country’s accelerated economic growth which continues to date. It is important to note that the same India which performed below par vis-à-vis its economic potential in the first 40 years, started performing better as soon as it got a favourable geopolitical wind.
India enjoyed uninterrupted democracy for 75 years, whereas Pakistan witnessed a turbulent political period where military and civilian rule changed hands many times. However, Pakistan’s economic growth always remained encouraging during the periods (irrespective of the type of regime) when it was geopolitically relevant to the US/ West during the Cold War and later as well. In other words, the economic growth of Pakistan was always less dependent upon indigenous reforms, measures, policies, capacities, etc., and relied primarily upon external monetary support, which was available during periods of SEATO, CENTO, Afghan Jehad, US GWOT, etc. These were the times when Pakistan was positively relevant to the US/ West in the global order. India, at the same time, despite its ‘democratic’ credentials kept struggling in economic terms. The situation did not change until the early 1990s.
However, as soon as the Cold War ended and the US changed its strategic priorities ‘suddenly’ finding a new ‘democratic’ ally in South Asia, the Indian economy started showing signs of recovery and openness. Indian nuclear explosions of 1998 and later entry into the Nuclear Suppliers Group, etc were not meant for Pakistan but primarily to announce India’s arrival against China in the evolving global order as the ‘net security provider’ on behalf of the US. Is it a coincidence that as soon as India became positively relevant to the US, its economy started showing trends of upward growth? It also implies that Indian economic trajectories, like Pakistan’s or any other developing country, remain largely dependent upon its strategic alignment or relevance to the world’s leading superpower.
Notwithstanding the above, India was able to develop relatively robust domestic state institutions due to its continued democratic dispensation for 75 years. As a result, the Indian economy showed a very quick recovery as soon as it received a favourable geopolitical environment. Contrarily, Pakistan could not develop strong state institutions due to the turbulent political dispensation. As a result, Pakistan could not fully convert the relatively favourable geopolitical environment of the Cold War into a more robust and sustainable economic model. In fact, the contemporary unfavourable geopolitical environment has really exposed domestic institutional inadequacies resulting in weak governance, socio-economic fragility, unbridled media, weak civil-military relations, etc.
Therefore, Pakistan must focus on building institutions if it wants to sustain itself through this difficult time of history where the leading superpower (US) has different strategic priorities in South Asia. Pakistan must recognize its immense geopolitical and economic potential while safeguarding its key national interests to wade through these tough times without inflicting major self-harm. Learning lessons from the past, state institutions like the military, bureaucracy and judiciary, etc apart from other important institutions need to be working in their respective spheres and in harmony for achieving the socioeconomic well-being of a common Pakistani. Moreover, Pakistan’s politico-military leadership must continue to discover and explore geopolitical and geo-economic avenues to remain positively relevant to contemporary world powers in an era of changing global order.
The writer is a freelance contributor. She can be reached at firstname.lastname@example.org