Conflict In Kashmir: How High Are The Stakes?

The battle is costly for India, but Pakistan stands to lose most

It's hardly a peace settlement, but it may be the first step toward keeping the conflict in the snowy passes of Kashmir from escalating out of control. Pakistani Prime Minister Nawaz Sharif has pledged that his military will ask mujahideen forces to withdraw from positions they seized on India's side of the Kashmiri line of control. But while the pledge has the support of Pakistan's army chief of staff, mujahideen leaders indicate they are unlikely to obey. And even if they do, the decades-old dispute between India and Pakistan over Kashmir remains unresolved.

Nationalistic pride remains high on both sides. But neither country can really afford a full-scale war. Already, Pakistan is up to its ears in debt, while heavy defense outlays could push India's budget deficit, which is already rising, on a perilous upward spiral. The ongoing costs of Kashmiri tensions are high: India and Pakistan will now boost spending to an estimated $1 billion a year each to patrol and defend the disputed border, even if there is peace.

"MORE PRECARIOUS." For Pakistan, a country dependent on international handouts, the repercussions of Kashmir are especially severe. The International Monetary Fund threatened to withhold $100 million in loans unless Sharif acquiesced. Their status is now unclear. And next month, analysts expect Islamabad to default on $40 billion in foreign debt, including $750 million worth of Eurobonds. Reserves are nearly depleted: The current stash of $1.7 billion is just 10 weeks of exports. Says Marshall E. Bouton, India scholar and executive vice-president of the Asia Society in New York: "Pakistan's whole fiscal situation is much more precarious."

With a $350 billion economy and $31 billion in reserves, India could sustain the financial drain of a restricted conflict. But there are limits. Air Commodore Jasjit Singh of India's Institute of Defense Studies & Analyses says India's defense spending, currently 2.3% of gross domestic product, needs to rise to 3% to maintain India's defense. The defense budget had already jumped 11% this year, to an estimated $10 billion. The risk is that ballooning defense outlays could throw overall budgets out of kilter. Already, official statistics show that the deficit for the 1998-99 fiscal year has exceeded 7%, compared with a government forecast of 5.6%, and is still rising.

Earlier wars have left India's economy on its back. A deep and lengthy recession followed India's three-week conflict with China in 1965. The 1971 liberation of Bangladesh pushed inflation up to 30% and set the economy back for a decade. Analysts don't expect that to happen this time. That's partly because of a so-far rosy picture: The economy is growing at nearly 6% this year, slightly more than last year, due to projections for a bumper harvest. Bombay's Sensex Index is up 10% since the conflict began.

Nor is India likely to suffer politically. The government of Prime Minister Atal Behari Vajpayee won praise for its restrained handling of the latest Kashmir problem. Political analysts say the conflict is unlikely to influence the showing of Vajpayee's Bharatiya Janata Party (BJP) in upcoming national elections in September. But Indians have been rallying around an external threat--nearly $100 million has poured in from civilians to support the war effort.

SELLOUT. For Pakistan, however, the political fallout could be more severe. Sharif, who is beholden to his military for support, faces severe criticism at home for what Islamic groups say is a sellout. In the worst case, U.S. diplomats fear Islamabad could fall into the hands of conservative Islamic militants similar to the Taliban regime in neighboring Afghanistan. "The whole incident has cast further doubt in the minds of international observers and investors on Pakistan's stability," says Bouton.

In the end, one of the biggest costs of the conflict will be the nascent detente between India and Pakistan, which had received a boost with Vajpayee's visit to India in February. Sharif cannot afford to risk his position on closer ties with India. Nor will the BJP government, readying for October elections, talk of friendship with Pakistan. Tensions may ultimately subside. But hope of a lasting peace between the world's newest nuclear powers is vastly diminished.

— With assistance by Sheridan Prasso

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