Two Key reasons, Foreign Aid and Economic policies of early Pakistani Leaders.
Long Answer: To understand how pakistan managed to grow early and suffer latter on we need to understand the economic and political scenario in two countries over several decades.
Pakistan has been one of the largest receivers of US economic Aid. According to Estimates, during 1960’s the total foreign aid received was close to 10% of GDP. Now Foreign aid is well known to help short term economic growth however, over a longish term its impact can be either positive or negative depending upon how the money is used.
India: The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India. Defense spending 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This, accompanied by the drought of 1965/1966, led to a severe devaluation of the rupee. Personally, the more I read about it, the more it surprises how India managed to win the 1965 war, Hats of the brave soldiers and strategic might of generals. However it was the poor economic condition which forced India to accept ceasefire than anything else.
1970’s weren’t as rosy for Pakistan, US President Carter suspended all aid to Pakistan (except food aid) due to Pakistan’s decision to construct a uranium enrichment facility. This along with 1971 war with India, separation of East Pakistan etc. led to weak financial conditions and the newly elected PPP and Bhutto govt. resorted nationalizing some of the biggest Industries in hope to fill fast depleting govt reserves and fight a spiraling inflation. This was also driven by concern for the amount of power and wealth corporate elite had. In short Pakistan had to go through what India suffered during the 60’s.
Bhutto introduced socialist economics policies ditching the more open capitalist policies of Ayub Khan, However Corruption grew exponentially during this period and access to state corridors became a primary avenue of accumulating a private fortune. Nationalization, increased military spend, nuclear program, oil crisis of 1973, corruption and high inflation led to an era of stagnation.
India was slightly better off due to increased and more vocal USSR support on the back of weakening USSR-China relationship but was still marred by consistent food shortages and weak economy. Effect of foreign aid was not as significant as the impact of US aid on Pakistan due to huge size and population of country. However India gained from more stable economic direction from govt.
Increased focus on agriculture, High foreign remittance from educated Pakistanis working abroad (close to 10pc of gdp) and renewed US aid helped and its use to build local infrastructure helped turn things around. However inconsistent macroeconomic policies and focus on building Military might against India
India’s acceleration of economic growth began earlier, in the early or mid-1980s, long before the exchange crisis of 1991 and the need to generate higher exports and USD income was realized and marked the shift of the government of Narasimha Rao and Manmohan Singh toward neoliberal economic reforms.
This followed by 1991 reform, unparalleled investments in Infra and education of masses by Atal Bihari and NDA govt and strong rise of Indian IT industry meant India rose way more than Pakistan post 1990’s to be the economic power it is now.
At the same time, Inconsistent economic policies, over reliance on foreign aid, Disproportionate military expenses and very little investments in Infra, or to raise the standard of living for people in general, deprived Pakistan of the foundation for a strong economic growth.