In today’s Finshots, we tell you how keeping the Indus Waters Treaty in abeyance affects the economies of both India and Pakistan.

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The Story

Back in 1960, India and Pakistan did something quite remarkable. They signed an agreement called the Indus Waters Treaty. It was meant to settle a long-standing fight over who got to use the waters of the Indus River, a crucial lifeline for both countries that had recently gone their separate, and rather hostile, ways.

To give you some context and a quick geography lesson — when India and Pakistan split, the new border didn’t just divide land and people, but also the rivers that fed Pakistan’s fields. All the main tributaries of the Indus River originated in India before flowing into Pakistan. And if India controlled the flow, Pakistan’s water supply could be in serious trouble.

So after nearly nine years of negotiation, and with the World Bank stepping in as an arbitrator in case things went wrong, both countries finally signed the Indus Waters Treaty. India got exclusive rights over the eastern rivers — Ravi, Beas and Sutlej, while Pakistan got the western ones — Indus, Jhelum and Chenab, with a few exceptions for India’s limited use upstream.

And for years, the Treaty held strong through wars and endless tensions between the two countries. In a way, it became a rare symbol of cooperation between two bitterly divorced partners who could barely agree on anything else.

But after a brutal terrorist attack on Indian tourists in Kashmir’s Pahalgam, India took a historic step. It decided to suspend the Treaty until Pakistan clearly ends its support for cross-border terrorism.

And that got us thinking. How would nearly breaking a Treaty that lasted for over six decades affect the economies of both countries?

Well, for starters, it doesn’t mean India can suddenly turn off the taps and stop water from flowing to Pakistan. What it actually affects is the sharing of critical information.

You see, the Treaty binds India to share river data like discharge levels and flood forecasts — essential for Pakistan to plan ahead. But if India holds the Treaty in abeyance, it could withhold this data, raising Pakistan’s risk of facing unexpected floods or droughts.

India would also no longer be bound to release a minimum amount of water during the dry season. Which gives it the freedom to store more water upstream, all without checking with Pakistan.

And what could that hurt?

Well, two things.

First up, agriculture. Pakistan gets around 80% of the Indus basin water, making it one of the largest irrigation systems in the world. About 80% of Pakistan’s farmland or nearly 16 million hectares, depends on this water, and 90% of it goes into irrigation.

Now, here’s the catch. Water levels in the Tarbela Dam on the Indus River are already critically low. If India decides to hold back more water in its reservoirs, Pakistan’s farmers might struggle to sow key crops like cotton and paddy on time. Crops need water to germinate, and without it, the cotton yield could drop even further. That’s a big deal because cotton drives over 60% of Pakistan’s exports and makes up 8.5% of its GDP, both of which are already under stress. It could also trigger a ripple effect on Pakistan’s massive textile sector.

Meanwhile, on the paddy front, Pakistan could lose some of its basmati rice market share to India as India already dominates 65% of the global basmati trade, while Pakistan holds the remaining 35%. And if Pakistan’s basmati crop suffers, that gap could widen even more.

Then there’s power. Sure, Pakistan leans heavily on coal, but it’s trying to double its renewable energy share from the current 33%. A big chunk of that comes from hydroelectricity — the country’s largest source of green power. Major hydropower plants like Tarbela, Neelum-Jhelum and Mangla depend on the Indus and Jhelum rivers.

If water flow drops, it could squeeze power generation, hit factory production — especially cotton and sugar industries — and drive electricity prices even higher. And that’s bad news because Pakistan’s power sector is already drowning in $9 trillion of circular debt — a vicious cycle where distribution companies couldn’t recover costs from consumers, piling up unpaid bills across the supply chain and throwing the sector’s finances into chaos.

To keep the lights on, electricity prices in Pakistan have already shot up by 150% since 2021. So another spike could be dangerous as the electricity demand in Pakistan is quite price sensitive. A 1% rise in prices can pull down consumption by 0.3%.

Add to that a fragile power sector hanging by a thread, heavily dependent on external debt from bodies like the IMF. Pakistan’s total external debt has ballooned past $130 billion, while foreign exchange reserves have shrunk to just $8 billion, barely enough to cover 1.5 months of imports. So yeah, any ripple in the power sector could quickly turn into a full-blown economic crisis. And you can see how water trouble could spark a bigger economic mess.

But that’s just one side of the story.

If you flip the lens to India, there are consequences too. See, the Indus Waters Treaty doesn’t actually have a provision for unilateral suspension. And any changes need both countries to agree. So if India steps away unilaterally, it’s pretty much operating outside the framework.

And it could have some economic ripple effects too.

On the bright side, farmers in Jammu & Kashmir and Ladakh could benefit. Right now, India is allowed to irrigate about 13 lakh acres in these regions using water from the western rivers. But it has only tapped into about half of that. If India builds new canals, reservoirs and distribution systems, it could bring more land under cultivation. That’s huge, especially for crops like apples, walnuts and saffron. Farmers have been struggling lately, with cheaper Iranian saffron flooding the market and hurting prices. Even apple yields have taken a hit. Which means more area under cultivation with high irrigation could change the game.

Plus, India could fast-track its hydropower projects on the western rivers. Dams like Kishanganga and Ratle could be redesigned to store more water, boosting India’s renewable energy capacity without worrying about Pakistan’s objections.

But it’s not all a cakewalk. Building additional storage infrastructure takes massive investment and years of work. Plus, India can’t just store water indefinitely to block Pakistan because the volumes in the western rivers are so huge, they could flood India’s own upstream regions too. And ramping up dam construction could harm the fragile Himalayan ecosystems, disrupting natural river flows and potentially causing even more climate issues.

Then there’s another problem. China. If India steps outside the Treaty’s framework, it could set a dangerous precedent — one that might come back to bite. That’s because India itself is a downstream country along the Brahmaputra and other rivers that flow from China. So, by unilaterally suspending the Treaty, it might be sending China the message that it’s okay to act outside agreements too.

China’s multi-billion dollar CPEC (China–Pakistan Economic Corridor) project includes the Indus Cascade — a series of dams planned on the Indus. And if India gets in the way, China could retaliate by limiting Brahmaputra data sharing.

So, that’s how stepping back from the Treaty could throw a curveball not just for Pakistan, but for India too. The ripple effects are still unfolding, and we’ll have to wait and see how this all plays out in the days to come.

Until then...

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