The Economic Pressures Behind the Latest India-Pakistan Clash

Pakistan may have been eclipsed by India’s rise, but it remains critical in areas of war, peace, and prosperity.

(Bloomberg Businessweek) -- On a dark Friday evening, Indian Wing Commander Abhinandan Varthaman looked calm in a blue suit jacket and white-collar shirt as he was escorted by Pakistani servicemen in front of TV cameras across the floodlit frontier point of Wagah. With his extravagantly flared mustache, the pilot had become the face of the latest conflict between India and Pakistan.

Wagah—the only land border open between the two countries—is well known to tourists: Its daily militarized and comically exaggerated closing ceremony is a symbol of the enduring animosity between the two nations, which has endured since Muslim-majority Pakistan was partitioned from Hindu-dominated India in 1947 at the end of British rule. Right after Varthaman was handed over, the heavy, barred border gates were once again shut. Many hoped it marked the end of the most dramatic military escalation over Kashmir—a divided territory that each of the nuclear-armed nations claims is theirs—since a Himalayan conflict in Kargil two decades earlier.

The flare-up started after a Pakistani-based militant group, Jaish-e-Mohammed (Army of Mohammed), claimed responsibility for a Feb. 14 suicide bombing that killed 40 troops in an Indian-administered portion of Kashmir. Twelve days later, Indian Prime Minister Narendra Modi ordered the first airstrike on Pakistani soil since 1971, when the two countries fought their last major war, over mutinous East Pakistan, which became independent Bangladesh. While Pakistan and India were born almost simultaneously when the British withdrew, their recent paths have diverged dramatically. India’s economy has roared ahead, while Pakistan’s continues to move in fits and bursts. Its government in Islamabad is a regular client of the International Monetary Fund, with which it is currently negotiating what might be its 13th bailout since the late 1980s.

India appears to have gotten the upper hand in terms of global sympathy after this latest encounter. Three senior Western diplomats said international reaction leaned toward India, which has long been seen as a victim of Pakistani-sponsored militancy. There was a lack of condemnation over the strikes into Pakistan. India is seen as an increasingly crucial ally to the U.S. and the West because of its economic growth and as a strategic hedge against an assertive China.

However, Pakistan still matters. Its geopolitical importance has frustrated efforts to isolate the country for its alleged use of proxy jihadi fighters in India and Afghanistan—just as it’s hindered attempts to contain the growth of its nuclear arsenal, which Pakistan’s armed forces see as a vital deterrent against an Indian military almost three times their size. With a population of more than 200 million, the fifth-largest in the world, Pakistan is a relatively untapped consumer market that’s beginning to attract more foreign investment. The government in Islamabad has also been recalibrating its political alliances, turning away from the West and leaning toward countries such as China, Saudi Arabia, and Russia.

In February, Pakistan spared no expense on a visit by Saudi Crown Prince Mohammed bin Salman. Prime Minister Imran Khan personally drove him to his hilltop residence on Islamabad’s outskirts. Deals promising $20 billion of Saudi investments were signed. The Pakistani premier was one of the few world leaders to attend last year’s Future Investment Initiative in Riyadh after the murder of Washington Post columnist Jamal Khashoggi, allegedly by Saudi security agents in Istanbul.

China and the U.S. have substantial interests in keeping Pakistan on side. The air skirmishes over Kashmir were particularly ill-timed for Washington. Donald Trump is desperate to withdraw from the Afghan conflict, and Pakistan played a key role in bringing the Taliban’s senior leadership to the negotiating table with the U.S. in Doha at the end of February. It was the highest level of talks since the U.S.-led invasion of Afghanistan almost 18 years ago. U.S. influence over Pakistan, however, is waning after Trump cut $2 billion of security aid last year and hectored Pakistan to end its covert support for insurgents.

Pakistan is one of the largest beneficiaries of China’s “Belt and Road” initiative. President Xi Jinping’s flagship foreign policy endeavor has bestowed about $60 billion for roads and power plants across the country, giving Beijing access to the Arabian Sea. India has been angered that some of those projects are being built in Pakistani-administered Kashmir. China has also blocked New Delhi’s attempts to get the leader of Jaish-e-Mohammed placed on a United Nations terrorist watchlist. “You’ve got the world’s two superpowers, China and the United States, that both actually have dogs in this fight,” Richard Fenning, chief executive officer of security consulting firm Control Risks, said on Bloomberg Television on Feb. 28.

Multiple U.S. administrations have told Pakistan to “do more” to combat extremism within its borders. Islamabad’s constant promises to crack down are largely met with skepticism abroad. Many see it as either incompetence or collusion that allowed Osama bin Laden to live undetected in a walled compound near Pakistan’s premier military academy until he was killed by U.S. Navy SEALs in 2011.

But Pakistan’s relationship with Islamic radicals has changed in many ways. Domestic security has improved hugely since the Pakistani Taliban massacred more than 100 children at a military school in Peshawar in 2014. Groups that launched the attacks were crushed by renewed security operations. While not eliminated entirely, political violence and crime have been greatly reduced in cities such as Karachi. The army’s paramilitary force took responsibility for policing the turbulent metropolis in a way that’s gained few admirers among human-rights organizations but has brought relative calm and safety to its residents.

This latest Kashmir crisis has shined a spotlight on the outfits that have mostly escaped the crackdown, such as Jaish-e-Mohammed and Lashkar-e-Taiba (Army of the Pure). These groups are the products of the CIA-funded mujahideen, who fought the Soviet invasion of Afghanistan four decades ago and firmed up Pakistan’s use of proxy forces. After Russian troops departed, the jihadis turned their attention toward Kashmir, intensifying the long-standing conflict. New Delhi and Washington say the leaders of both organizations live openly in Pakistan. Despite multiple arrests since 2001, Hafiz Saeed, the alleged planner of the 2008 Mumbai attacks and co-founder of Lashkar-e-Taiba, goes about his business in Lahore. Pakistan’s government says it has no concrete evidence with which to charge him, prompting disbelief in India. The Financial Action Task Force, a global watchdog in Paris, criticized Pakistan in February for making “limited progress” on a plan to combat terrorism financing eight months after the country was placed on a watchlist that could lead to serious consequences for the nation’s banks to do business abroad.

Pakistan’s top brass see the proxy fighters, along with nuclear weapons, as a bulwark against an Indian military that would probably overwhelm Pakistan in a conventional land war. The army has never forgotten that it lost East Pakistan because of Indian intervention. The fear of Indian dominance is the main reason for Pakistan’s alleged support for the Afghan Taliban, a force that opposes what Islamabad sees as an India-friendly administration in Kabul.

Arguably it’s hard for the military, which has directly ruled Pakistan for almost half of its existence and continues to pull strings behind the scenes even in the current democratic government, to be weaned off its proxies and an indoctrinated hatred of India. Yet that’s what the most powerful man in the country is trying to do. Army Chief General Qamar Javed Bajwa is seen as having more moderate views on India than those of his predecessors and has given Khan a green light to extend an olive branch to New Delhi, offering to negotiate over Kashmir as well as open trade talks. Diplomats speculate that Bajwa’s more conciliatory stance stems from his service under an Indian general during a UN peacekeeping mission and because he’s worried about Pakistan’s overdependence on China.

A large factor in the military’s relative shift has been economic. The armed forces have much at stake in seeing the economy improve. The defense budget and debt servicing consumes 60 percent of annual government spending. And the military gets billions of dollars from its ownership of some of the nation’s largest conglomerates. The generals in the garrison city of Rawalpindi have been dismayed by an India that’s leapt ahead while Pakistan continues to rotate in and out of balance-of-payments quandaries. Since last year, multiple serving and recently retired military officers have become fixtures at investment conferences, trying to boost trade with Asia and criticizing Pakistan’s fiscal mismanagement.

It’s a contradictory and confused stance. On one hand, the military “is going to do what it’s always done, they have to maintain a rivalry with India because it justifies their defense spending,” says Shamila Chaudhary, a former director for Afghanistan and Pakistan at the White House National Security Council. “At the same time, Bajwa wants to have some kind of relationship with India which is different from the past. Their whole vision of economic stability and reshaping themselves in the region is dependent on this more mature relationship with India.” Bajwa may not have the luxury of time; his term as chief of the army expires later this year.

India blames much of the unrest in its part of Kashmir on Pakistan, while overlooking decades of heavy-handed security policies that have alienated the territory’s largely Muslim population and fostered homegrown opposition to Indian rule. Ironically, New Delhi’s latest show of military strength may have revealed weaknesses. Eyewitnesses called into question India’s claim to have hit the terror camp in Pakistan’s north. Satellite images suggested a cluster of pine trees were felled instead. Pakistan mockingly said it would lodge a complaint with the UN accusing India of “eco-terrorism.” The next day, Pakistan’s military announced it had shot down at least one Indian fighter jet and captured Varthaman, who was paraded on TV. Many in the international community—as well as India and Pakistan—were relieved when Prime Minister Khan said he would release the pilot.

In India, Modi was trumpeting his government’s actions against Pakistan at political rallies ahead of elections expected in the spring, though one diplomat said he has little to show for his effort. Other diplomats worried about a deadly new normal, in which destabilizing airstrikes become a regular occurrence. “What we’re seeing is the result of Pakistan’s really sad policy of proxy warfare for forever,” says Chaudhary, now a senior adviser at the Johns Hopkins School of Advanced International Studies. “The question we might want to ask is if the jig is finally up, because India is actually retaliating: Are they finally going to have to deal with these bad guys?”

For now, Western diplomats agree the pilot handover has eased tensions. Pakistani airspace has gradually reopened to commercial traffic, and trains between the countries have restarted. Nevertheless, the drumbeat of nationalism continues. In Pakistan, Khan was hailed for releasing the pilot and making a statesmanlike gesture of peace even as the valiant military fought off a warmongering India. Meanwhile, across the heavily fortified border, TV channels proclaimed that Islamabad had cracked under Indian might and pressure. “I am not worthy of the Nobel Peace Prize,” Khan tweeted when his supporters in Parliament submitted a motion nominating him for the award, adding, “The person worthy of this would be the one who solves the Kashmir dispute according to the wishes of the Kashmiri people and paves the way for peace & human development in the subcontinent.” One person isn’t enough. That’s a task that will take two countries to accomplish.

To contact the editor responsible for this story: Howard Chua-Eoan at

©2019 Bloomberg L.P.