Diverging Paths: Comparing India & Pakistan's Economies

While both countries started with similar colonial legacies of Parliamentary democracy and agrarian-based economies, today India stands as the world’s largest functional democracy and one of the fastest-growing major economies. In contrast, Pakistan remains a land where the military’s writ runs, and the nation itself continues to struggle with recurring crises. 

Nevertheless, both nations possess a mix of strengths and weaknesses that have defined their political and economic destinies.

India: The Giant Awakens

From a situation where India accounted for a paltry 3 per cent of the world economy, with small, uneconomic farms unable to produce enough food to feed its population, and few textile, jute and light engineering mills in Calcutta and Bombay, India has grown into a colossal industrial and services sector powerhouse, with the fifth largest GDP in the world, which is expected to cross US$ 4 trillion in 2025.

Early in the 1950s and 1960s, the Indian government built key heavy industry complexes — steel mills at Durgapur, Bhilai, Bokaro, and Rourkella, power sector giants such as NTPC, massive hydel dams, and modern heavy machinery manufacturing complexes. They were complemented by scientific and management educational and research institutes like the AIIMS, IITs, and IIMs.

A key strength lay in building India’s diversified economy, which strove to manufacture everything from aircraft and rockets to medicines and toys. However, in the process, India also built a 'statist system' of controls and checks on the economy, through what came to be known as the “License Raj”.

In the 1980s, India started dismantling controls over foreign trade and ushered in a telecom and computer revolution that created the bedrock for India’s transition into becoming the software and computing back office of the world.

At the beginning of the next decade, in 1991 to be precise, the Indian leadership embarked on its own version of “Perestroika” — breaking down the license-permit-quota system that gave the bureaucracy immense power. This unleashed a period of fast-paced economic growth, with the GDP growing at an average of 7-8 per cent annually.

Among other things, the automobile industry flourished, with car manufacturers setting up factories across India, ushering in an automobile revolution that made personal cars accessible to even lower-income groups. Foreign investment and technology poured in. New millionaires mushroomed, and new forms of businesses sprang up.

The country today boasts a robust services sector, particularly in information technology and business process outsourcing. Indian firms like TCS, Infosys, and Wipro have become global brands. The digital economy has boomed, with home-grown platforms and startups drawing billions of dollars in investment. From fintech to e-commerce, India is now a land of digital opportunity.

Demographics have been another advantage. With a median age of just under 30 and a population exceeding 1.4 billion, India enjoys a vast domestic market and a potential demographic dividend that could extend for another quarter of a century.

Yet, India’s growth is not without flaws. Income inequality is rising, and the benefits of economic growth are unevenly distributed. Rural distress, agrarian stagnation, and underemployment continue to haunt the economy. India’s labour force is largely informal, and job creation has lagged behind economic expansion.

Moreover, bureaucratic inefficiencies and regulatory unpredictability can still deter investment. The banking sector, while stabilising, still carries the burden of non-performing assets (NPAs), particularly in public sector banks. Besides, India’s dependence on energy imports makes it vulnerable to global oil price shocks.

Pakistan: Caught In A Cycle

Early in its journey, Pakistan got enmeshed in a cycle of military coups, the rise of religious intolerance, and repeated revolts by Baluchs and East Pakistanis, challenging the very existence of the state.

Pakistan’s economy, valued at around US$ 350 billion, remains significantly smaller than India’s, with a narrow industrial base, in which textiles, food, beverages, tobacco, and pharmaceuticals account for a major chunk of the nation’s output. From cars to bathing soaps, Pakistan is a major importer of industrial goods.

Its agriculture is increasingly finding it difficult to feed its growing population, and has had to resort to food imports from all over the world, including India.

Repeated balance of payments crises, heavy reliance on IMF bailouts, and low foreign reserves paint a picture of fragility. Inflation remains high, often in the double digits, and the Pakistani rupee has depreciated sharply in recent years (currently at US$ 1 = Pak Rs 281), eroding purchasing power and investor confidence.

Only a small percentage of Pakistan’s citizens pay income tax, limiting government capacity for public investment and debt repayment. The energy sector suffers from inefficiency and debt. Political instability, military dominance in governance, and inconsistent economic policies have further stunted long-term planning.

Foreign direct investment remains abysmal due to security concerns, legal uncertainties, and a lack of investor-friendly reforms.

Pakistan, however, has a strategic geographic advantage, acting as a bridge between South Asia, Central Asia, and the Middle East. The China-Pakistan Economic Corridor (CPEC), part of China’s Belt and Road Initiative (BRI), has improved infrastructure, energy supply, and connectivity in the otherwise strife-torn country.

Remittances from a large diaspora, particularly in the Gulf region, besides short-term loans from “friendly” countries, provide vital foreign exchange, and has kept the country from going bankrupt.

The Road Ahead

India is poised to become the third-largest economy in the world by the next decade, according to analysts.

On the other hand, the IMF believes Pakistan will barely grow by 2.6 per cent this year.

Analysts opine that unless Pakistan is able to shed its militaristic jingoism, support for terror outfits for proxy wars against neighbours like India and Afghanistan, free up its economy, and integrate with regional forums to propel its growth, it will continue to slide down a slippery slope towards an abyss of low growth, high unemployment, social unrest and constant turmoil.