What are the Similarities between India & Pakistan’s Economies?

The comparison of India and Pakistan’s economies involves investigating the historical context, growth rates, trade and investment, challenges and future outlook.

India and Pakistan share common historical and cultural backgrounds.

This is primarily due to the countries being part of the same British colony until Partition in 1947.

It is arguable that India and Pakistan have explored different economic paths, but one thing that remains with both is the continued innovation to boost their economies.

India’s economy is focused primarily on its technology, whereas Pakistan is driven more by agricultural and textile industries.

India’s economy is larger and more diversified, with a strong global presence in various sectors.

Pakistan, however, while smaller and facing more significant challenges, has opportunities for growth through strategic reforms and investments.

Synonymously both countries struggle with reducing poverty and addressing the climate change impacts.

Historical Context

The historical context of both economies is deeply intertwined with their shared colonial past.

But after reaching independents, their economies began to differ in their economies.

Moreover, their economic histories centre around domestic and internal needs with the global picture of the economy.

There are indeed opportunities but also constraints.

India

Initially, India adopted a socialist-inspired approach with a significant emphasis on central planning.

The government took control of key industries, and the economy was characterised by protectionism.

According to Investopedia: “Protectionism refers to government policies that restrict international trade to help domestic industries.”

Alongside this, high tariffs and import policies were implemented to promote domestic industries.

An example is the establishment of public sector enterprises in sectors like steel, mining, and machinery.

This was under the Industrial Policy Resolution of 1956.

The aim was to make India self-reliant and reduce foreign dependence.

Facing a severe economic crisis, the government initiated a series of economic reforms in 1991.

These reforms included opening up the economy to foreign investment, deregulation and privatisation of state-owned enterprises.

The IT and software services industry flourished post-liberalisation, transforming India into a global IT hub.

Companies like Infosys and Tata Consultancy Services became international giants, showcasing India’s prowess in the sector.

Pakistan

Pakistan initially focused on developing its agricultural sector but soon shifted towards industrialisation in the 1950s and 1960s.

The government played a key role in the economy, with significant investments in infrastructure and industry.

The establishment of the Pakistan Industrial Development Corporation (PIDC) in the 1950s stimulated industrial growth.

Thus, leading to the development of sectors like textiles, cement and fertilisers.

Throughout its history, Pakistan has faced various economic challenges, including political instability, conflicts, and natural disasters.

It has relied heavily on foreign aid and loans, particularly from the United States during the Cold War and the post-9/11 era, including from international financial institutions.

The Indus Basin Treaty with India in 1960, facilitated by the World Bank, led to significant investment in Pakistan’s water infrastructure, showcasing the role of international aid in its economic development.

Pakistan has also undertaken economic liberalisation, though its impact has been mixed.

The economy has seen periods of growth, particularly in the textile and agriculture sectors, but has also faced challenges such as inflation, debt, and political instability.

The China-Pakistan Economic Corridor (CPEC), is part of China’s Belt and Road Initiative.

It represents a significant investment in Pakistan’s infrastructure and energy sectors, aiming to stimulate economic growth.

GDP and Growth Rates

The GDP (Gross Domestic Product) and growth rates of India and Pakistan are key indicators of their economic health and trajectories.

These figures reflect the size and health of each country’s economy, influenced by various factors including policy decisions, global economic conditions and domestic challenges.

India

India is one of the world’s largest economies, with a diverse economic base that includes significant contributions from the services sector, manufacturing, and agriculture.

As of 2024, India’s GDP is over $4 trillion, making it the fifth-largest economy globally.

The IT and software services sector is a major contributor to India’s GDP, with companies like Infosys and Tata Consultancy Services leading in global software and services exports.

India has experienced high growth rates since the economic liberalisation policies were introduced in the early 1990s.

Pre-pandemic, India’s economy was growing at an annual rate of approximately 6-7%.

However, the Covid-19 pandemic caused a significant contraction.

It was followed by a strong recovery phase with growth rates projected to be around 8-10% in the immediate recovery period, showcasing the economy’s resilience.

India’s digital economy has rapidly grown. This includes e-commerce, digital payments and startup ecosystem.

This has been a significant contributor to the country’s GDP growth rate in recent years.

Pakistan

Pakistan’s economy is smaller compared to India’s, with a GDP that is around $300 billion.

The economy relies heavily on agriculture, textiles, manufacturing and remittances from overseas Pakistanis.

The textile industry is a major part of Pakistan’s economy, accounting for a significant portion of its exports and employing a large number of people.

Pakistan’s economic growth has been more modest and variable, with rates typically ranging from 3-5% in the years before the pandemic.

The economy has faced challenges such as political instability, security issues, and fiscal deficits, which have impacted its growth rates.

Like many countries, Pakistan’s economy was also affected by the Covid-19 pandemic, experiencing a contraction before recovering.

The China-Pakistan Economic Corridor (CPEC) is expected to boost Pakistan’s economy by improving infrastructure, energy resources, and trade routes, potentially enhancing growth rates in the long term.

Trade and Investment

Trade and investment are crucial components of the economies of both India and Pakistan.

These shape their interactions with the global economy and influence their domestic economic landscapes.

India

India has a broad and diversified export portfolio that includes information technology services, pharmaceuticals, textiles, chemicals, automotive components and agricultural products.

This diversification helps India mitigate risks associated with global market fluctuations.

India’s IT and software services industry is a global leader, with major companies like Infosys and Tata Consultancy Services providing services to clients worldwide.

The pharmaceutical sector is another significant contributor, with India being one of the largest suppliers of generic drugs globally.

India’s major import partners include China, the United States and the United Arab Emirates.

Imports primarily consist of crude oil, precious stones, electronics, heavy machinery, and organic chemicals, reflecting India’s industrial and consumer demands.

India has been a significant recipient of Foreign Direct Investment thanks to its large market, economic reforms, and liberal investment policies.

The government has implemented various measures to attract foreign investment.

Including easing FDI norms in several sectors and launching initiatives like “Make in India” to boost manufacturing.

The retail, telecommunications, and technology sectors have seen substantial FDI inflows, with global giants like Amazon, Walmart and Google making significant investments in India.

Pakistan

Pakistan’s export portfolio is more concentrated compared to India’s, with textiles, clothing, rice, leather goods and sports equipment making up a significant portion of its exports.

This concentration reflects Pakistan’s comparative advantage in these sectors but also exposes the economy to sector-specific risks.

The textile sector is Pakistan’s largest industry and export earner, with products ranging from cotton yarn to ready-made garments being shipped to the United States, the European Union, and other markets.

Pakistan’s major import partners include China, the United Arab Emirates, and Saudi Arabia.

Key imports include petroleum products, machinery, plastics, transportation equipment, edible oils, and tea, highlighting the country’s energy and industrial needs.

A significant part of Pakistan’s investment landscape is shaped by the CPEC, a collection of infrastructure and development projects valued at billions of dollars, funded by China.

According to CPEC.org, the aim is:

“To improve the lives of people of Pakistan and China by building an economic corridor promoting bilateral connectivity, construction, explore potential bilateral investment, economic and trade, logistics and people-to-people contact for regional connectivity.”

CPEC aims to enhance Pakistan’s infrastructure, energy resources, and trade connectivity, which is expected to stimulate economic growth and attract further investment.

Projects under CPEC include the development of Gwadar Port, road and railway infrastructure upgrades, and energy projects designed to alleviate Pakistan’s power shortages.

Challenges

The economies of India and Pakistan face several challenges, each unique to its socio-political and economic context.

These challenges impact their growth prospects, investment climate, and overall economic stability.

India

Despite significant economic growth, India faces high levels of income inequality and poverty. A substantial portion of the population still lives below the international poverty line.

According to the World Bank, a significant percentage of India’s population earns less than $3.20 a day, the standard poverty threshold for lower-middle-income countries.

India’s infrastructure, though improving, still lags behind that of other emerging economies, affecting its industrial competitiveness and quality of life.

Logistics challenges, including inadequate roads, ports, and power supply, can increase the cost of doing business and impede economic growth.

The Indian economy struggles with high unemployment rates, especially among the youth and graduates.

Despite a growing economy, India’s unemployment rate has been a concern, especially with job creation.

This has proven difficult as India cannot keep up with the number of entrants to the job market.

Environmental degradation and climate change pose significant risks to India’s agriculture, water resources, and overall sustainability.

India is highly vulnerable to climate change, with increasing instances of extreme weather events like cyclones, floods, and droughts affecting millions.

Pakistan

Political instability and security issues have historically deterred foreign investment and affected economic growth in Pakistan.

Periodic political unrest and security challenges in regions bordering Afghanistan have impacted Pakistan’s investment climate and economic stability.

High fiscal deficits and growing debt levels pose a significant challenge to Pakistan’s economy, limiting its government’s spending on essential services and development projects.

According to the Economic Times, the fiscal deficit is defined as:

“The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts.”

Pakistan has entered into multiple arrangements with the International Monetary Fund (IMF) for a bailout package.

This is implemented to address its balance of payments crises and fiscal deficits.

The International Monetary Fund (IMF) is essentially:

“An ongoing policy and reform efforts are required to address Pakistan’s deep-seated economic vulnerabilities amidst the ongoing challenges posed by elevated external and domestic financing needs and an unsettled external environment.”

Pakistan faces an ongoing energy crisis, with frequent power outages affecting both businesses and households, thereby hampering economic activities.

The energy sector’s inefficiencies and reliance on imported fuels have led to frequent electricity shortages, affecting industries and contributing to economic losses.

Water scarcity is a growing concern in Pakistan, affecting agriculture, which is a significant part of its economy.

This leads to disputes within the country and with neighbouring countries.

Pakistan’s agriculture sector, which employs a large portion of the population, is heavily dependent on the Indus water system.

It is now under stress due to overuse and climate change impacts.

Future Outlook

The future outlook of these economies is shaped by their current economic landscapes, challenges, and the strategies they are implementing to navigate their futures.

Both countries have distinct economic dynamics, opportunities, and challenges that will influence their growth trajectories in the coming years.

India

India is projected to remain one of the fastest-growing major economies in the world.

Its large, young population and growing middle class are expected to drive domestic consumption and increase demand for services and goods.

The digital economy in India, including fintech, e-commerce and IT services, is expected to continue its rapid growth.

It is fueled by widespread internet adoption and a booming startup ecosystem.

The Indian government has strongly emphasised improving infrastructure, including roads, railways, ports, and digital networks.

There is a strategy in place to enhance industrial competitiveness and attract foreign investment.

The Smart Cities Mission, aiming to develop 100 smart cities across the country, is an ambitious project that seeks to modernise urban infrastructure.

It will improve city governance, and provide better quality of life.

India is making significant strides in renewable energy, aiming to reduce its carbon footprint and ensure energy security.

The country has set ambitious targets for renewable energy installations.

India’s commitment to installing 450 GW of renewable energy by 2030 showcases its dedication to sustainable development and combating climate change.

Pakistan

Pakistan aims to stabilise its economy through structural reforms, fiscal consolidation, and efforts to diversify its export base.

The government is working to improve the business environment and attract foreign investment.

The China-Pakistan Economic Corridor (CPEC) is a key initiative expected to boost Pakistan’s economy by enhancing its infrastructure, energy sector, and connectivity with China.

This may pave the way for opportunities within trade and investment.

Given the importance of agriculture to Pakistan’s economy and the challenge of water scarcity.

In addition, there are efforts to improve water management and agricultural productivity are critical for sustainable growth.

Projects like the Diamer-Bhasha Dam aim to enhance water storage capacity and irrigation, supporting agricultural productivity and providing clean energy.

Pakistan is focusing on developing its IT and services sector as a means of boosting exports and creating jobs.

The government is implementing policies to support IT startups and attract investment in technology.

The establishment of technology parks and the provision of incentives for IT exports are part of Pakistan’s strategy.

This is to develop its digital economy and enhance its global competitiveness in the sector.

India and Pakistan’s economies are thriving, with many plans in place to not only stabilise their economies but to put them as a serious contender on the global map.

India’s economy is larger and more convoluted, whereas Pakistan’s economy is somewhat smaller.

Both face challenges such as issues with global warming and internal affairs yet their future outlooks seem exciting and a force to be reckoned with.