Wednesday, October 4, 2023

Pakistan economic crisis: Collapsing neighbour, India’s opportunity or headache?


Pakistan is drowning in a debt spiral, and there is a serious risk of rising influence of Islamic extremism and terrorism in that country, which could pose an even more significant threat to India than before. How could Pakistan’s crisis become India’s headache? Should India try manoeuvering this situation to gain long-term benefits?

India and Pakistan both achieved their independence in 1947. While India has much advanced on all indicators of economic sustenance, resource endowment, potential output and growth, its neighbour, on the other hand, has spiralled down into a multipronged mess. The recent and ongoing economic fallout in the country is the latest outcome of that, which has driven the country to the verge of being a failed state.

But is this situation erupted suddenly? Absolutely not. In 2019, Pakistan found itself facing a dire macroeconomic crisis due to spending more on imports than on exports, with its then-current account deficit rising from $2.7 billion in 2015 to $18.2 billion in 2018. Deepening the crisis, World Bank stated that its total external debt stocks soared to $130.433 billion by the end of 2021, up from $115.695 billion by the end of 2020. According to CEIC data, the country’s external debt reached $126.9 billion in September 2022.

Reuters reported that the country’s debt-to-GDP ratio is approaching 70%, and a large chunk of 40-50% of government revenue is set aside for interest payments this year. Chinese loans alone account for roughly $23 billion of Pakistan’s $27 billion in bilateral debt. The country has been clearly drowning fast in the debt spiral.

Inflation in Pakistan was at a 48-year high in January 2023. So far, it was the highest inflation reading in the country since May 1975. This resulted in thousands of containers of food, raw materials, and equipment being stuck in ports after the cash-strapped government curtailed imports. Pakistan’s inflation rate accelerated to 27.6% in January 2023 from 24.5% in December 2022 before recently dropping to 27.55%, mostly due to the Pakistani rupee depreciation and rising energy prices. In addition to that, increased defence spending, fundamental religious extremism, and low foreign exchange reserves due to low foreign investment in the country owing to its security and political challenges have also played havoc.

Many areas in Khyber Pakhtunkhwa, Sindh, and Balochistan provinces have witnessed grain and flour stampedes. Analysts believe the crisis will soon engulf petroleum products and other necessities, which may lead the country to petrol and diesel rationing in the next two-three months, which would affect trade, industry and even the agricultural sector, which requires diesel during the harvesting season.

With so much happening at India’s western border, we have a two-pronged situation, where on the one hand, we should be worried, while on the other, we have the opportunity to play a more prominent role. How’s that?

Why India should be worried?

Besides being in a beleaguered status with Pakistan, the former’s economic crisis could pose another threat to India. Analysts believe that there would likely be an influx of refugees from Pakistan into India. In fact, an activist recently stated that the residents of POK (Pakistan Occupied Kashmir) are ready to join India, as ANI reported. Such situations would result in massive law and order issues in India. While the bilateral trade between India and Pakistan has been stopped since the Pulwama attack, this crisis would further block India’s exports to Pakistan, which would impact India’s revenue coffer, even though the impact would be minimal.

A very critical issue for India could be the increased Chinese influence in Pakistan. The country is already known for its close ties with China, which has been another troublemaker for India for a long time. Further tightening the bond between Pakistan and China means there will be a high chance that the latter will influence and use India’s western neighbour against us. This could have an immediate or indirect impact on India, which has been at odds with China along the Line of Actual Control (LAC) in recent times.

What’s more worrisome is the strengthening of terrorism. Pakistan has been accused by India several times, and which is rightly so, of funding extremism and terrorism. If the country turns into a failed state, terrorist groups will increase their influence further within Pakistan, which would have a high potential to harm India’s interests directly.

Is there an opportunity for India?

It may sound absurd, but India has an opportunity to gain from Pakistan’s crisis. India has reached out to other South Asian countries to bail Pakistan out of its economic crises. New Delhi could offer help to its neighbour as part of its larger strategy to settle the Kashmir dispute and establish peace on the western front, especially at a time when China’s continuous provocations are heightening the tension in the northern border.

Pakistan’s Prime Minister Shehbaz Sharif has expressed interest in “serious and sincere talks with India” amid the ongoing crises. Pressurised by multiple fronts, Sharif is likely seeing the wisdom in making peace with India. Despite India being irked by Sharif’s addition that Delhi would have to reverse its revocation of Article 370 in Jammu and Kashmir for talks to begin, India could manoeuver this situation wisely in order to get a long-term gain in future.

Indian Prime Minister Narendra Modi signalled his capacity to take risks and think out of the box back in 2018 when he made an unscheduled stopover in Lahore to greet the then-Pakistani Prime Minister Nawaz Sharif on his birthday as a goodwill gesture. Modi could again think out of the box and do something similar to get the best out of this situation, but only if Pakistan shows sincere intent.

It is genuinely loathsome to deal with a Pakistani establishment that has for long hosted and supported anti-India terrorist groups and is known as the hotbed of Islamist extremism and global terrorism, but letting the nuclear-armed country go under and possibly into the hands of radicals and terrorists is a worse prospect.

Also Read: Scrutinizing China’s maritime ambitions in the region: Geography-led-geopolitical realities

Team AFT
Team AFT
The jack of all trades behind the


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