Sunday, August 12, 2018

Sinking Economy of Pakistan and its likely impact on India

   Pakistan has many internal and external problem. Its citizens are getting killed by terrorists of all hues. Baluchistan is fighting for its freedom for many years. Pak Occupied Kashmir and Sindh are fed up with oppression by the federal government. Fundamentalists dream of Sharia Rule in Pakistan and Final Battle for India, so-called “Gajwa e Hind”. However, that is not being discussed in this article. This article discusses a very vital aspect of a nation that can destroy it without a single shot being fired, that aspect is Economy. The Sinking Economy of Pakistan and its likely impact on India is the main thrust of this article.

   There are some parameters and their present values which are important for every economy. The current figures of these parameters indicate the state of that economy. It is important to understand these values and its implications to understand where is that economy heading. These important parameters are Gross Domestic Product (GDP), Balance of Payment and Current Account Deficit.  Let us examine these parameters of Pakistan Economy.

   It is interesting to note that post-independence, Pakistani Economy was better than the Indian Economy as they had opted for the free market economy while India followed the path of Socialist-Communist kind of state-controlled economy. Things have changed over the years. India has become an important and powerful economy while Pakistan Economy has weakened owing to lack of large Industries, Wrong policies and unnecessary military competition (and 4 wars) with India. The weakening economy should have made Pakistan worried but the non-stop American aid on one or the other pretext (without any need of accounting for it) continued to help Pakistani economy and that resulted into a false sense of economic well being.

   Every nation runs itself (and its government) on the income it earns from the exports, investments abroad and its internal direct and indirect tax collection (just 1 % of Pak citizens pay Income Tax). It is true for most of the nations but not for Pakistan. The collection of Direct and Indirect taxes is meagre in Pakistan and their imports outstrip export by a huge ratio. Due to the inflow of American aid, Pakistan never felt any need to increase internal accruals despite such a dismal collection of taxes.

   With this primer on Pakistan Economy, let me analyse its present position. The growth rate of GDP of Pakistan is 5.7% which is the best in the last five years (it was f5.3 % last year and is forecasted to drop the next year). A good growth rate of GDP indicates that this economy is a  good economy but only and only if other vital indicators (as mentioned above) also corroborate the trends. Analysis of other parameters does indicate that all is not well with Pakistani Economy. It will be further elaborated in the next paragraphs.

   The internal and external income of Pakistan is low. Few efforts have been made in the last few years to improve internal income without much success. The only other source they had of income was American unrestricted aid. That has also stopped due to direct and indirect support that Pakistan gives to the terrorist.

   Another major aspect of any economy apart from the GDP growth figure is Balance of Payment. BOP is the annual account of a country’s trade with other countries. It also indicates the availability of World (trading ) currencies with a nation or lack of it. If a nation is doing more export than import they have surplus Forex and if the imports are more than exports, there is a dearth of Forex with that country. The Balance of Payment, as the name suggests, is supposed to be balanced but it generally does not happen automatically.

  To balance BOP, if a nation has surplus earnings from exports, those earnings are retained as Forex Reserves and if there is a shortage of Forex due to higher imports, that country needs to obtain Forex by other means like Loans, etc. The question is, is the BOP of Pakistan satisfactory? Not really. Their imports outstrip their Exports by a huge margin and thus there BOP is not healthy. They have been surviving using external loans and they are neck deep in the loans. There  Forex Reserve is playing a game of See-Saw. When Asian Development Bank or China gives a loan, Forex Reserves of Pakistan go up and then they use it for Import and the Forex Reserve drops.

   Pakistan’s Balance of Payment is in negative, Forex Reserves are in the doldrums. They must be recalling olden days when” Uncle Sam” used to give unlimited aid with no strings attached and must be thinking, “those were the days”.

   If the world had faith in Pakistan they would have invested into Story of Pakistan and Pakistan’s Forex Reserves would have swollen with inflow from Foreign Direct Investment but that is Pakistan and not India in whom investors have confidence. No one wants to invest there. The remittances by Pakistani Diaspora are also nothing to write home about. In simple words, Pakistan is neither earning Forex by commerce nor by remittances and they have no other way except for taking loans to get any Forex.

   Pakistan’s Current Account Deficit (CAD) is unbelievably high. It has gone up from $ 12 Billion in 2017 to $ 17 Billion in the current year. The dichotomy is, they don’t have money for imports worth 3 weeks of necessities but the import of luxury cars continues unchecked.
Pakistan had recently received a loan of $ 2 billion from China but that amount is inadequate for them. Their only hope is an IMF bailout but America has warned IMF from advancing to Pakistan as America feels that Pakistan would use the IMF advance to pay back China. There are no signs of improvement in Pakistani economy in foreseeable future. This is the biggest challenge facing the new government of Pakistan. The question that begs answer is, what are the implications of worsening economic situation of Pakistan for India?

   Raison d’etre of Pakistan’s existence is opposing and hating India. It is a very difficult task to check the economic slide whereas it is easy to give a dose of Anti India sentiments to their population and fool them. After all the Pak governments and the Pak Army has been doing this for decades. Despite economic difficulties and a shortage of Forex, the anti-India activities by Pakistan are likely to go up and so are the terrorist activities at the border and in the countryside of India. In these trying times that is the only and time-tested method  Pakistan government has to keep their folks together.

   In light of the above, India needs to be extra alert because what will this unpredictable nation do is difficult to predict. As such it is easy to distract its own citizens from worsening economic situation by fanning the Anti- India sentiments rather than taking and implementing tough decisions to improve their sinking economy.


  1. A very lucid description of the situation at hand there. Warm regards Cdr Himanshu Joshi.

  2. Present state of economy of Pakistan and its effect on India has been explained well and without any ambiguity. More power to your pen Harshad. Regards, Col(Dr.) Guru saday Batabyal

    1. Thank you Colonel for your kind words. Yes, I tried to explain the economic terms in such a way that a non economy background people should be able to get the meaning.