The starting point: A shared legacy
In 1947, both India and Pakistan began with limited foreign exchange reserves, reflecting their colonial legacy of economic exploitation and lack of industrialization.India’s forex reserves experienced a prolonged stagnation until the 1991 balance of payments crisis. At the time, India had less than $2 billion in reserves, barely enough to cover three weeks of imports. That crisis, however, became a turning point for India’s economy.
India initiated sweeping economic liberalization measures. Trade barriers were lowered, the rupee was devalued and eventually made partially convertible, and the economy was opened up to foreign investment. These reforms catalyzed growth, boosted exports, and encouraged remittances and capital inflows — all of which steadily built up forex reserves.
The IT boom in the 2000s, growing service exports, strong remittance flows from the Indian diaspora, and prudent central bank policy further accelerated the accumulation of reserves. By 2008, India’s reserves crossed $300 billion. Despite global shocks — including the 2008 financial crisis and the COVID-19 pandemic — India has continued to maintain a strong external balance, with reserves touching an all-time high above $640 billion in 2021, and now reaching $688 billion.
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Pakistan: A cycle of mismanagement and crises
Pakistan’s foreign exchange story has been much more turbulent. Despite early industrial success in the 1960s, frequent political instability, military rule, and inconsistent economic policies hampered long-term growth. Unlike India, Pakistan became heavily reliant on external aid — particularly from the United States, China, and international financial institutions like the IMF.While such aid provided temporary relief, it also entrenched a cycle of borrowing without sustainable export or investment growth. Pakistan’s export base remained narrow, centered around low-value textiles, while imports — especially of energy — grew consistently. A persistently high current account deficit and external debt obligations drained reserves.
Periodic IMF bailouts — more than 20 programs since the 1980s — became a hallmark of Pakistan’s economic policy. Each bailout brought temporary stability, but structural reforms were either delayed or diluted. By 2023, the country faced a severe balance of payments crisis, with reserves falling below $4 billion, enough for just a few weeks of imports.
Key drivers of the divergence
Several factors explain the wide gulf between the forex reserves of India and Pakistan. India diversified into services, pharmaceuticals, and IT, creating robust export sectors. Pakistan remained reliant on a few low-value sectors.
After 1991, despite political changes, India broadly maintained its liberal economic framework. Pakistan, in contrast, oscillated between populist policies and austerity, often under IMF duress. India’s central bank maintained relatively sound macroeconomic management, whereas Pakistan’s central bank often operated under political pressure.
India attracted steady foreign direct investment and large remittances from a diverse NRI community which is among top earners in Western countries. Pakistan’s remittance base was smaller and more dependent on Middle Eastern economies.
India leveraged its geopolitical clout to deepen economic ties globally. Pakistan’s focus on security-related alliances often overshadowed economic imperatives.
India and Pakistan began their journeys with similar economic legacies but took very different paths. India, despite many internal challenges, leveraged reforms and global integration to build strong reserves that now act as a shield in turbulent times. Pakistan, constrained by structural weaknesses and recurrent crises, remains vulnerable.
Content Source: economictimes.indiatimes.com