Neighbours India and Pakistan share so much in common: religious and ethnic diversity, cultural and culinary characteristics, huge and youthful populations, and, of course, perhaps the most enduring aspect of their shared experience of British colonial rule, the mass opium of cricket.
However, as they both mark their 75th anniversary of independence, their differences and geopolitical friction define them more than their similarities. Sadly, this is very likely to continue, although the prospects of a widespread, hot military conflict are low, given the deterrent of mutually assured destruction.
They are similarities in the top-down investment cases of India and Pakistan but, particularly for equity investors, they are worlds apart, in growth prospects, external account risks, size and liquidity, and valuation.
The first part of this report argues why the key respective domestic and external vested interests have more to gain from conflict and mutual suspicion than cooperation.
The second part of this report presents ten charts and tables on some of the key macroeconomic, social, military and equity market comparisons between India and Pakistan — for completeness, Bangladesh, formerly East Pakistan, which marked its own 50th independence anniversary in March 2022, is also included.
Domestic and external vested interests with more to gain from conflict than cooperation
India and Pakistan should have the sort of cross-border trade, investment, and migration enjoyed by the US and Canada, Brazil and Argentina, Australia and New Zealand, or South Africa and Zimbabwe. Instead, their relationship, since independence in 1947, has looked even worse than that between Turkey and Greece, Russia and Ukraine, or China and Taiwan. South Korea and North Korea might be the closest comparable.
This is unlikely to change, given that the message of mutual fear and distrust underpins the two respective dominant internal political powers, the Bharatiya Janata Party (BJP) in India and the Military-Intelligence deep state in Pakistan.
In India, the BJP already has a 56% outright majority in the lower house of parliament and its performance in the March 2022 state elections suggests there is no prospect of a nationally unified and competitive opposition in the 2024 general election.
In Pakistan, an army chief seeking another extension of his term was the trigger for de-throning the Imran Khan-led government in April 2022, again demonstrating the junior role occupied by civilian politicians in Pakistan — although the subsequent mass political awakening sparked by Khan may yet prove a moment of profound change.
The dominant external, geopolitical influences also continue to pull India and Pakistan apart. India is now clearly aligned with the US in the Asian theatre, in overlapping opposition to China, which, in turn, is closely aligned to Pakistan. Although Pakistan tends to enjoy better US relations under Republican presidents, the strategic alignment of the US in the region is unlikely to change.
Some top-down similarities but investment cases are worlds apart
As top-down investment cases, India and Pakistan do share a number of common features, eg:
Very large populations (1.4bn for India, over 220mn for Pakistan, albeit with a more youthful demographic bias in Pakistan, with a third under the age of 15, compared to a quarter in India).
Relatively poor populations (GDP capita of under US$2,500 in both).
Large share of the informal economy (India 52%, Pakistan 36%, according to World Economics) and low tax collection (c10% of GDP in both, according to national sources).
Increasing urbanisation (currently 33% in both) but still a high share of agriculture in the economy (c40% of total employment in both).
Adoption of new leap-frogging technology in communication, media, and financial services (although mobile internet connectivity is more advanced in India, at 57%, compared to Pakistan, at 41%, according to GSMA in 2019).
High total government debt (close to 90% in India, 70% in Pakistan, with a much higher external component in the latter) and consequent private sector crowding out.
Reliance on imported fuel (net imports of about 7-8% of GDP at US$100 Brent oil price).
Twin fiscal and current account deficits (around the double-digit level, as a percentage of GDP, in both, according to 2022 IMF forecasts).
Stop-start structural reform efforts (with the electoral cycle disrupting PM Modi in India, and the army chief Bajwa's tenure renewal derailing former PM Khan in Pakistan).
However, for investors, India and Pakistan are currently worlds apart.
India has suffered currency depreciation of 7% year to date, similar to China; not unreasonable in a year of high oil prices and US Dollar strength. Pakistan, however, is in the midst of an external account crisis and tortuous negotiations with the IMF, with 18% ytd currency depreciation and import cover of under 2 months (compared to over 9 months for India).
India is growing faster, with lower inflation: according to 2023 IMF forecasts, India will grow real GDP 6% compared to 3.5% for Pakistan, and inflation in India will end the year below 5% whereas it will be above 8% in Pakistan.
India is front and centre for mainstream global emerging market equity funds, occupying a 14% weight in the MSCI EM index. Pakistan, on the other hand, is not even that important for the small surviving band of dedicated frontier investors, with merely a 3% weight MSCI FM.
India equities trade US$4bn a day (excluding a hyperactive futures market) compared to merely US$25mn in Pakistan.
Comparable valuation is also at two extremes: on trailing price/book versus 5-year median, India is at a 15% premium, whereas Pakistan is at a 30% discount.
In our Country Index India scores well above Pakistan
The Tellimer Country Index weighs about 30 factors on growth, policy, politics, sanctions, ESG, equity valuation, liquidity — all of these weights can be customised.