When Pakistan economy fared better than India, and how India beat it, surged ahead

Dark war clouds loom large over India and Pakistan in wake of the Pahalgam attack of April 22. On Monday (May 5), Islamabad continued to raise the spectre of a military escalation when it test-fired long-range missiles in the direction of India.

However, global rating agency Moody’s has a warning for Pakistan; it stated that “sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability.”

In comparison, Moody’s said that the macroeconomic conditions in India would remain stable, propelled by “moderating but still high levels of growth amid strong public investment and healthy private consumption”.

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As tensions keep rising between the two nuclear-armed rival countries, we examine both the nations’ economies and how they compare to one another. We also analyse how a full-blown conflict could hurt both countries.

History of India and Pakistan and its economies

In August 1947, after ruling for around 150 years, the British left India. However, before leaving, the British divided the subcontinent into two — India and Pakistan. The two countries inherited similar economies, marked by neglect and under-investment from their past colonisers. Data shows that the economies were among the poorest in the world.

For both nations, independence almost immediately led to strong growth and fuelled significant gains in education, health care and other areas of development. But interestingly, it was Pakistan that saw faster growth rates during the first four decades or so, while India lagged behind.

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Between 1961 to 1980, Pakistan’s growth rate accelerated to about six per cent per year, compared to four per cent for India. This could be attributed to the fact that Pakistan benefited from substantial trade from its East Pakistan region. Additionally, Islamabad’s growth was further aided by the billions of dollars of military aid it received from the United States, as well as donations from other oil-rich Muslim countries in West Asia.

However, as the 1990s rolled in, something began to change with India and Pakistan reversing roles. New Delhi vaulted ahead, eventually becoming the world’s fifth largest economy with predictions of it overtaking Germany to be the third-largest by 2028.

Meanwhile, Pakistan is struggling to stay afloat; it is saddled with crippling debt and a faltering economy. The neighbouring country is heavily dependent on the foreign aid and loans — it has been the recipient of repeated bailout packages from the International Monetary Fund (IMF). In fact, the 2024 IMF programme in which it approved a $7 billion loan was the country’s 24th.

India vs Pakistan — the economy battle

Today, the difference between both countries’ economies are starkly different. In 2024, India’s GDP stood at a $4.2 trillion, compared to Pakistan’s $374 billion. According to the World Bank, India’s GDP stood at $3.39 trillion in 2022, more than 800 per cent greater than the $376.53 billion GDP of Pakistan.

When it comes to GDP per capita, India is leaps and bounds ahead of Pakistan. From $1,560 in 2014, India’s GDP per capita rose to $2,711 by 2024. In comparison, Pakistan’s performance has been comparatively stagnant. Starting from $1,424 in 2014, it increased to only $1,581 in 2024, a modest 11 per cent growth in this duration.

Data on inflation also reveals that India has maintained a relatively stable inflation environment, with a rate of 4.9 per cent in 2015 and 4.7 per cent in 2024. On the other hand, Pakistan experienced a severe surge in inflation. From a modest 4.5 per cent in 2015, it skyrocketed to a whopping 23.4 per cent in 2024. Reports suggest that the prices of basic food items like rice, flour, vegetables, fruits, and chicken have surged sharply in the neighbouring country. As per media reports, the price of rice has jumped to Rs 340 per kg, while chicken price has surged to Rs 800 per kg.

Another clear divergent economic factor between India and Pakistan is foreign reserves. Currently, India’s forex reserves exceed $688 billion, while Pakistan’s have barely crossed $15 billion.

When it comes to trade too, India surges ahead of its neighbour. Data reveals that in 2023, India’s overall exports were worth $779.45 billion whereas Pakistan was only $35.41 billion. A Moneycontrol analysis shows that India’s overall trade, exports, and imports, was 17 times that of Pakistan’s in 2023.

Similarly, unemployment data also shows a contrasting picture between India and Pakistan. India’s unemployment rate is projected to be 4.9 per cent in 2025, down from 8.9 per cent in 2018. Meanwhile, Pakistan’s unemployment rate, which stood at 5.8 per cent in 2018, has worsened, rising to eight per cent by 2025.

India, Pakistan and the heavy cost of military escalation

In the wake of the Pahalgam terror attack, there are rising fears of a military escalation between the two nations. But can either country afford it?

Analysts at Moody’s have stated that Pakistan’s economy will be hugely affected if it chose to escalate the conflict with India. In its report titled ‘Escalating Pakistan-India tensions would weigh on Pakistan’s growth’, Moody’s said it does not expect major disruptions to India’s economic activity because it has minimal economic relations with Pakistan.

It, however noted that “higher defence spending would potentially weigh on India’s fiscal strength and slow its fiscal consolidation”.

And Moody’s isn’t alone in their assessment. Other experts have also noted that a military escalation could be catastrophic for Pakistan, while also having limited impact on India. “From a market standpoint, Pakistan looks the more vulnerable,” Philip McNicholas, an Asia sovereign strategist at asset manager Robeco, told Bloomberg.

For a country that is surviving on back-to-back loans, a military conflict would be disastrous.

With inputs from agencies