India and Pakistan inherited the same economic legacy of underinvestment and neglect from Britain when they became independent states after partition on August 15, 1947. Their colonial economies were among the poorest in the world.
For both nations, independence almost immediately led to strong growth and significant gains in education, health care, and other areas of development. But it was Pakistan that saw faster growth rates for the first four decades or so, while India lagged behind.
Something began to change in the 1990s when their roles reversed and India overtook Pakistan to finally become the world’s third largest economy by purchasing power and the “I” in BRICS – an acronym referring to a bloc of five major emerging economies .
What explains India’s growth spurt?
As an expert in international political economy, I believe India’s greater turn towards democracy – at the same time as Pakistan experienced frequent military dictatorships and regime changes – has a lot to do with it.
A colonial legacy
From 1857 to 1947, Britain directly ruled most of the territory that became the independent states of India and Pakistan.
Economic growth under British rule was minimal, averaging just 0.9% a year from 1900 to 1947. This happened mainly because the colonial Indian economy was mainly agricultural and yet the British invested little in improving agricultural productivity.
In addition, Britain made limited investments in the well-being of the people of India, particularly by underfunding their education and health care. As a result, colonial India had one of the lowest literacy rates in the world at around 17%, and life expectancy was in their mid-30s.
Britain’s neglect of the plight of Indians is perhaps best illustrated by the 1943 famine in Bengal, East India, which left over 1.5 million dead as a result of political failure.
Post-independence growth led by Pakistan
Britain decided to abandon its “jewel in the crown” and split the region into Hindu-dominated India and Muslim Pakistan after facing growing pressure from local people and a growing nationalist movement.
This resulted in one of the largest forced migrations of the 20th century: nearly 9 million Hindus and Sikhs moved to India over the next two decades, and about 5 million Muslims to geographically separated East and West Pakistan. An estimated 1 million people died from mass violence.
However, economic growth picked up, with both new countries growing by 3% to 4% in the first decade of independence as respective governments invested more in their economies. But differences soon became apparent.
While both economies were largely state-controlled, the Indian government restricted exports and introduced protectionist trade policies in the 1960s that limited growth.
Pakistan, on the other hand, benefited from significant trade from its East Pakistan region. The newly created Pakistan was geographically separated from India – on one side was West Pakistan and on the other East Pakistan. Each was carved out by the British due to their Muslim majority. Pakistan lost its growth engine in 1971 when East Pakistan became Bangladesh after a war of independence.
Pakistan also received billions of dollars in military aid from the US. Other oil-rich Muslim countries in the Middle East have also lent aid to Pakistan. As a result, Pakistan’s growth accelerated to about 6% a year from 1961 to 1980, compared to 4% for India.
India leaps ahead
The growth script reversed in the 1990s as India grew at a 6% growth rate over the next 30 years, surpassing Pakistan’s 4%.
What explains the role reversal? Economics and politics played a role.
Pakistan has long relied more on external sources of finance than India, receiving $73 billion in foreign aid from 1960-2002. And even today, it often relies on institutions like the International Monetary Fund for crisis lending and foreign governments like China for development aid and infrastructure.
The aid has allowed Pakistan to delay much-needed but painful reforms like expanding the tax base and resolving energy and infrastructure problems, while the loans have left the country saddled with heavy debt. Such reforms, I believe, would have put Pakistan on a more sustainable growth path and encouraged more foreign investment.
While earlier in its existence India also received a lot of support from international aid agencies and some countries like the US, it has never relied on it – and has relied less on it in recent decades.
In addition, India liberalized trade in 1991, reduced tariffs, made it easier for domestic companies to operate and grow, and opened the door to more foreign investment.
These reforms have paid off: By integrating the Indian economy with the rest of the world, the reforms have created market opportunities for Indian companies, making them more competitive, which in turn has resulted in higher growth rates for the overall economy.
Another way to measure the different pathways is gross domestic product per person. In 1990, India and Pakistan had almost identical GDP per capita, just under US$370 per person. But by 2021, India’s had risen to $2,277, about 50% higher than Pakistan’s.
The reasons for their different decisions have a lot to do with politics.
Pakistan suffers from almost constant political instability. From 1988 to 1998 alone, it had seven different governments, as it alternated between civilian and military governments following coups.
This deterred foreign investment and made reforms much more difficult to implement and enforce. Despite all these changes, Pakistan’s military spending as a percentage of GDP remained higher than India’s throughout the post-independence period.
India, on the other hand, has managed to maintain a stable democracy. While far from perfect, it has made leaders more accountable to the people, leading to more inclusive growth and less dependence on foreign institutions or governments. In just one decade India has lifted over 270 million people out of poverty.
At a time when democracy is under threat in so many parts of the world, I think this story reminds us of the value of democratic institutions.
Surupa Gupta is Professor of Political Science and International Affairs at the University of Mary Washington
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