The protracted conflict between India and Pakistan is often perceived through the prisms of territorial disputes, religious tensions, and national security. However, a closer inspection reveals that economic motivations and consequences underlie many pivotal diplomatic decisions and confrontations. From historical resource-sharing treaties to modern strategic investments by global powers, the subcontinent has long been a stage for economic diplomacy disguised as geopolitical maneuvering. Furthermore, this persistent tension creates a fertile ground for third-party economic exploitation, where powerful nations and institutions capitalize on instability for economic and strategic gain. This dynamic allows external actors to profit through arms sales, strategic infrastructure investments, and financial influence, effectively making instability an asset for global powers.
Historical Roots of Economic Diplomacy in the India-Pakistan Conflict
1. The Partition and Economic Disruption (1947)
The 1947 Partition of British India did not merely divide territory—it ruptured integrated economic systems. Punjab, once a cohesive agricultural region, was bifurcated, disrupting supply chains and displacing industries, labor, and capital. Trade routes, railways, and production facilities were severely impacted, causing long-term economic dislocation (Talbot & Singh, 2009).
Moreover, partition led to disagreements over financial settlements, further aggravating relations. The early economic friction set the tone for resource-driven diplomacy, seen in subsequent decades.
Third-Party Benefit: For Britain and other Western powers at the time, a divided subcontinent meant a reduction in the likelihood of a united anti-colonial economic bloc in South Asia. The weakened regional integration allowed Western financial and development institutions, such as the IMF and World Bank, to step in with economic aid and policy influence, shaping South Asian economies in line with Western capitalist interests.
2. The Indus Waters Treaty (1960)
One of the earliest and most significant examples of economic diplomacy was the Indus Waters Treaty (IWT), brokered by the World Bank. The treaty granted control of the three eastern rivers (Ravi, Beas, Sutlej) to India, and the three western rivers (Indus, Jhelum, Chenab) to Pakistan. This agreement was critical because both nations depended heavily on these rivers for agriculture, industry, and drinking water.
The IWT reflected mutual recognition of water as an economic lifeline and a willingness to avoid war over a shared resource (Wolf & Newton, 2007). While heralded as a diplomatic success, it also entrenched economic dependencies that continue to influence regional diplomacy.
Third-Party Benefit: The World Bank enhanced its legitimacy and regional influence by mediating the IWT. This opened the door for further loan-based infrastructure projects tied to water resource management, allowing Western engineers, consultants, and construction firms to profit from hydropower, canal-building, and irrigation systems, particularly in Pakistan.
Contemporary Economic Underpinnings of the Conflict
1. Kashmir – Strategic and Economic Importance
Although often reduced to an ethno-political dispute, Kashmir has immense economic value, particularly due to:
- Hydropower potential from its fast-flowing rivers.
- Water control, as it houses the headwaters of key rivers.
- Strategic location, offering access to Central Asia and potential trade corridors.
Control over Kashmir thus implies control over water security, energy independence, and strategic trade routes. Both India and Pakistan use this region for infrastructure diplomacy—India through dam and highway projects; Pakistan through enabling Chinese investment via CPEC (Verghese, 2020).
Third-Party Benefit: Global engineering firms, especially from China and Europe, benefit from constructing hydropower and transportation infrastructure in contested zones. For instance, Chinese state-owned enterprises gain enormous contracts through CPEC projects in Pakistan-administered Kashmir, while Western environmental monitoring agencies and think tanks receive funding to evaluate the “ecological impact” of such ventures, expanding their influence.
2. The China-Pakistan Economic Corridor (CPEC)
China’s CPEC, a flagship of the Belt and Road Initiative (BRI), passes through Pakistan-administered Gilgit-Baltistan—an area India claims. This project includes highways, railways, and the Gwadar port, providing China direct access to the Arabian Sea, bypassing the vulnerable Strait of Malacca.
China’s involvement is economically strategic, ensuring:
- Energy security via pipelines.
- Reduced transport costs for exports.
- Geopolitical leverage in South Asia.
India opposes the project not only for sovereignty reasons but also because it threatens regional economic balance, positioning China as a dominant player.
Third-Party Benefit: Chinese construction giants, telecom firms, and oil companies benefit immensely from CPEC projects, gaining economic returns and soft power leverage. Simultaneously, international financial institutions monitor CPEC’s debt structure, paving the way for IMF-style structural reforms that benefit foreign creditors if Pakistan defaults or requires bailouts.
Defense Spending and Military-Industrial Interests
1. Escalation of Defense Budgets
India and Pakistan’s frequent border skirmishes and terrorism-related tensions ensure steady growth in defense budgets. India is one of the world’s largest arms importers, while Pakistan relies heavily on Chinese and previously U.S. support.
This arms race benefits global powers:
- U.S., Russia, France, and Israel profit from defense exports to India.
- China earns influence and revenues by equipping Pakistan’s military.
The conflict sustains global defense economies, with South Asia as a lucrative market.
Third-Party Benefit: Defense contractors like Lockheed Martin, Thales, and Rosoboronexport thrive on prolonged tensions. Their lobbyists influence foreign policy to prevent reconciliation, ensuring continuous demand for arms. Defense expos and joint exercises funded by these sales also serve as soft diplomacy platforms for exporting countries.
2. Third-Party Benefits from Instability
Repeated confrontations and unresolved tensions allow foreign powers and institutions to:
- Justify arms sales and military alliances.
- Strengthen financial control through sanctions and oversight.
- Gain contracts for reconstruction, infrastructure, or surveillance in conflict-prone areas.
Institutions like the Financial Action Task Force (FATF) have increased scrutiny of Pakistan, citing terrorism financing, which also facilitates global financial oversight of South Asia (Jones, 2020).
Third-Party Benefit: Beyond arms, multinational intelligence and cybersecurity firms sell surveillance technology to monitor “terrorism,” while global ratings agencies control financial reputations and investment flows into Pakistan and India. This enhances the financial power of Western economies and the dependency of South Asian nations on external credit assessments and governance metrics.
Blocked Regional Economic Integration
1. The Failure of SAARC
The South Asian Association for Regional Cooperation (SAARC) has failed to deliver on economic integration due to persistent India-Pakistan rivalry. As a result:
- Intra-regional trade in South Asia is less than 5% of total trade, compared to over 25% in ASEAN.
- Opportunities for collective growth, infrastructure pooling, and labor mobility remain unrealized (Kathuria, 2018).
Third-Party Benefit: The underperformance of SAARC allows powers like China, the U.S., and Gulf countries to deal with South Asian states bilaterally, creating economic asymmetries. The Gulf states, for instance, benefit from cheap South Asian labor migration without having to engage in broader labor market harmonization. Western donor agencies also increase leverage by replacing collective regional funds with bilateral aid.
2. China’s Strategic Entry
The void left by SAARC’s dysfunction has allowed China to offer alternative integration via BRI, especially with nations like Pakistan, Sri Lanka, Nepal, and Bangladesh. China is increasingly replacing regional cooperation with bilateral economic domination.
This weakens India’s regional leadership and allows China to:
- Redefine trade routes.
- Control supply chains.
- Expand geopolitical influence under the guise of development finance.
Third-Party Benefit: Through BRI, Chinese banks and state-owned enterprises become creditors and developers, locking recipient countries into long-term repayment obligations and resource-export agreements. Western rivals, meanwhile, step in with counter-offers and geopolitical deals (e.g., QUAD initiatives), generating a competitive bidding market for influence in the region.
Conclusion
The India-Pakistan conflict, while rooted in history and ideology, is inseparably linked to economic diplomacy. Water, energy, trade routes, and defense spending are core to the dispute. Global powers like China, the U.S., and Russia, along with institutions like the World Bank and FATF, benefit directly or indirectly from the sustained instability. Their economic interests in arms sales, financial oversight, or strategic corridors subtly incentivize the continuation of conflict rather than its resolution.
Viewing the India-Pakistan tensions through an economic lens not only clarifies the motivations of regional actors but also exposes the economic greed and geopolitical strategies of third-party stakeholders. A peaceful South Asia, while economically beneficial for its people, may not align with the strategic calculations of global powers entrenched in the region’s fault lines.
References
- Talbot, I., & Singh, G. (2009). The Partition of India. Cambridge University Press.
- Wolf, A. T., & Newton, J. T. (2007). Case Study of Transboundary Dispute Resolution: The Indus Water Treaty. Oregon State University.
- Verghese, B. G. (2020). Waters of Hope: From Vision to Reality in Himalaya–Ganga Development Cooperation. Oxford University Press.
- Kathuria, S. (Ed.). (2018). A Glass Half Full: The Promise of Regional Trade in South Asia. World Bank Group.
- Jones, S. G. (2020). Pakistan and the FATF: Compliance and Strategic Calculations. Center for Strategic and International Studies (CSIS).
Explained nicely