Water, Wealth & War: The Untold Economics Of The Indus Water Treaty 1960

After the recent terrorist attacks on civilians in Pahalgam, India, on 22nd April 2025, the Indian government launched Operation Sindoor and suspended the Indus Water Treaty 1960, blaming Pakistan for state-sponsored terrorism. In this blog, we will understand in detail the Indus Water Treaty of 1960.

Introduction To The Indus Water Treaty 1960

The Indus Water Treaty 1960, is a treaty between Pakistan and India to share the water of the Indus River system.

1. Historical Context Of The Indus Water Treaty

After the British Raj ended in 1947, the Indus River system, which consisted of six rivers, was distributed between India and the newly created Pakistan. These six rivers are the Indus, Jhelum, Chenab, Beas, Sutlej and Ravi. 

The water usage of these rivers was a major point of contention between India and Pakistan. Thus, with the World Bank as a mediator, both countries signed the Indus Water Treaty in 1960 to share the water of the rivers that flow from India to Pakistan.

The treaty was signed in September 1960 in Karachi by Indian Prime Minister Jawaharlal Nehru and Pakistani President Ayub Khan¹.  

2. Overview Of The Treaty

Let us take a look at what the regulations of the Indus Water Treaty of 1960 are:

Source: India Today² 

According to the treaty, Pakistan was allotted three western rivers: Chenab, Indus and Jhelum. The three rivers on the east Ravi, Baes and Sutlej, were assigned to India for exclusive use. 

According to the treaty, India could only use the water from western rivers for purposes like agriculture, hydroelectricity and transportation. Any activity that does not hinder the flow of water. 

Despite major tensions (and even wars) between India and Pakistan over different issues, the treaty has stood intact since 1960. Until the Indian government suspended the treaty in April 2025. 

Economic Significance Of The Indus Water Treaty For India

Let us understand the Indus Water Treaty's economic impact on India. 

1. Agricultural Benefits Of The Indus Water Treaty

A consistent water supply has significantly contributed to the livelihoods of millions in the region and improved agricultural productivity, leading to income generation.

The three rivers whose water flows into India provide significant support to irrigation infrastructure, ensuring food security. 

For example, the Indira Gandhi Canal, which is sourced from Sutlej and Baes rivers, provides water in eight districts of western Rajasthan. Water from this canal serves both drinking needs and irrigation³.

A consistent water supply has significantly contributed to the livelihoods of millions in the region and improved agricultural productivity, leading to income generation.

2. Energy Generation 

The Indus Water Treaty allows India to use the water from three rivers to generate electricity. India has made significant hydropower investments on the Indus River system. 

For example, Baglihar Dam, built on Chenab River, has an annual electricity generation capacity of 900 megawatts⁴. 

Similarly, Bakhra Dam is built on the border between Punjab and Himachal Pradesh and uses water from the Sutlej River. Bakhra Dam has an annual capacity of over 1000 MW.

These projects highlight the growing interest in hydropower investment in the Indus River system and underscore the strong link between the Indus Water Treaty and investors.

3. Strategic Importance Of The Indus Water Treaty

The Indus Water Treaty and the stock market are related indirectly because of investment in sectors such as energy and agriculture. The rivers flow through India to Pakistan, which gives India significant leverage. 

For example, when India suspended the Indus water treaty on 23rd April 2025, the stock market in Pakistan crashed. The Karachi stock exchange 100 index fell 1.02% to close at 117,226, the next day the index slipped further 1.88%.

Source: Tradingview, KSE 100 index, Daily chart. 

The index fell starting from the day the Indus water treaty was suspended (23rd April 2025), until a ceasefire was announced (10th May 2025). 

Therefore, understanding the Indus Water Treaty investment implications is crucial for Indian investors for strategic decision-making. 

Also Read: Effect Of War On The Economy: A Guide For Indian Investors

Economic Significance Indus Water Treaty For Pakistan 

For Pakistan, the Indus Water Treaty 1960 is more than a water-sharing agreement. For them, it is an economic lifeline. Pakistan receives water from the three rivers on the west - Indus, Chenab and Jhelum. These three rivers make up 80% of the water from the whole Indus River system⁵. Let us look at Pakistan’s water disputes and economic growth:

1. Irrigation And Agricultural Dependency

Pakistan's agriculture is significantly dependent on the Indus River system. Around 80% of its irrigation depends on the Indus River system water supply⁶. 

For a country like Pakistan, whose 25% of GDP comes from the agriculture sector, a regular water supply from the Indus River system is an issue of national food security. 

2. Industrial Growth And Development

Various industries in Pakistan depend on the Indus Water Treaty. This includes sectors like energy generation and textiles. 

For example, cotton exports contribute nearly 60% of Pakistan’s total exports⁷. Cotton farming depends heavily on the water from the Indus River system. 

33% of Pakistan’s electricity needs are fulfilled from renewable energy, a major contribution of which comes from hydro power⁸. Pakistan depends significantly on the Jhelum and Indus rivers for hydroelectricity generation. 

So, a disruption in the water flow can significantly impact various sectors in Pakistan. 

3. Existing Challenges And Constraints In Pakistan

Despite the Indus Water Treaty of 1960, Pakistan faces significant challenges and constraints, such as: 

• Wastage: The inefficient canal system in Pakistan leads to water wastage of 36 million acre-feet⁹. 
• Water Distribution: Water distribution between Punjab (Pakistan) and the Sindh region has been a long-standing political issue in Pakistan. 
• Dependence on India: The water in Pakistan flows from India. If India disrupts the flow in any way, it can lead to a potential water crisis in Pakistan. 

This shows the issues that Pakistan faces in its water management and its reliance on water sources originating in India. 

Can India Cancel The Indus Water Treaty 1960?

India has suspended the Indus Water Treaty. Does it mean that India will stop the flow of water to Pakistan? Legally, the Indus Water Treaty does not have any clause that can lead to termination or permanent withdrawal. 

The suspension of the treaty does not mean the immediate stoppage of all water flow to Pakistan. It means putting other parts on hold, like data sharing, joint oversight and formal cooperation. 

India currently does not possess the necessary infrastructure to stop the flow of water into Pakistan. However, the suspension of the treaty can give India more operational freedom to build new infrastructure and operate the flow of water more freely and efficiently. 

For investors, this introduces new geopolitical risks for investors in India and Pakistan, affecting sectors tied to water usage and energy.

Expected Outcome After Suspension

Let us take a look at the expected outcomes of the suspension of the Indus Water Treaty between India and Pakistan. 

1. Outcomes For Pakistan

The suspension of the Indus Water Treaty 1960 can have some lasting impacts on Pakistan¹⁰. India can now stop sharing flood data with Pakistan. The region sees floods from June to September. 

Furthermore, a lack of data sharing can disrupt any investment plans on the Indus River basin in Pakistan, which already struggles with poor infrastructure and underutilization. 

If India somehow manages to disrupt the flow of the rivers, it can lead to a water crisis in Pakistan. 

2. Outcomes For India

Suspension of the treaty can help India gain more control over water resources in Jammu and Kashmir. This can also allow more freedom in electricity generation projects and water infrastructure development in India. Agriculture and Hydropower generation are among the fastest-growing sectors in India, and any disruptions in the smooth water flow can hamper these growing industries too.

The suspension adds a new dimension to investment implications as investors assess how sustained tensions may affect bilateral trade, security, and infrastructure expansion. 

Conclusion

The Indus Water Treaty 1960 water share agreement suspension can have huge repercussions for Pakistan. India blames cross-border terrorism on Pakistan. The treaty suspension has shown the firm stance of the Indian government against Pakistan-sponsored terrorists. To learn more about the current geopolitical environment and its impact on the economy and investments, sign up for Grip Invest.

Frequently Asked Questions On The Indus Water Treaty 1960

1. What are the main rivers covered under the Indus Water Treaty? 

There are six main rivers covered under the Indus Water Treaty. These rivers are the Indus, Jhelum, Chenab, Beas, Sutlej and Ravi. According to the treaty, India receives the water from three eastern rivers Beas, Sutlej and Ravi. And Pakistan receives water from three western rivers Indus, Jhelum, and Chenab. 

2. Has India stopped the Ravi water from Pakistan? 

Yes, India has exclusive rights to the water usage from the Ravi River. Earlier, due to the incompleteness of the Shahpur Kandi barrage, the majority of Ravi’s water flowed into Pakistan. But the construction of this barrage is completed. Therefore, stopping the flow of water to Pakistan, and this water is now being used by India. 

3. Which dam is on the Indus Water Treaty? 

There are several dams under the Indus Water Treaty on both sides. For example, the Shahpur Kandi Dam on the Ravi River (India) and the Bhakra Nagal Dam on the Sutlej River (India). Some dams in Pakistan are the Tarbela Dam on the Indus River and the Mangla Dam on the Jhelum River. 

4. How does the Indus Water Treaty impact farmers in both countries? 

The Indus Water Treaty plays a vital role in the lives of farmers in both India and Pakistan. For Pakistan, it is a lifeline. Over 80% of its farmland depends on Indus waters, making any disruption a serious threat to food security, crop yields, and rural livelihoods. Indian farmers, especially in Jammu & Kashmir and Ladakh, stand to gain if more water from the western rivers is utilised through better infrastructure.

References

1. Britannica, accessed from: https://www.britannica.com/event/Indus-Waters-Treaty
2. India Today, accessed from: https://www.indiatoday.in/india/story/indus-waters-treaty-suspended-india-pakistan-diplomatic-offensive-pahalgam-attack-2714660-2025-04-24
3. RAJ RAS, accessed from: https://rajras.in/indira-gandhi-canal/
4. The Tribune, accessed from: https://www.tribuneindia.com/news/j-k/india-tightens-water-chokehold-on-pakistan-shuts-baglihar-dam-gates/
5. India Today, accessed from: https://www.indiatoday.in/india/story/india-indus-waters-treaty-pakistan-impact-what-it-means-pahalgam-terror-attack-2713827-2025-04-24
6. TIME, accessed from: https://time.com/7284470/india-pakistan-water-supply-climate-change/
7. ICAC, accessed from: https://tinyurl.com/icac-indus
8. India Today, accessed from: https://www.indiatoday.in/india/story/pakistan-power-supply-crisis-indus-waters-treaty-suspended-2713659-2025-04-24
9. NatStrat, accessed from: https://www.natstrat.org/articledetail/publications/the-indus-waters-treaty-why-pakistan-s-obsession-does-not-mask-its-failure-158.html
10. BBC, accessed from: https://www.bbc.com/news/articles/cd7vjyezypqo

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