Afghan may be focus of future Indo-Pak rivalry: US

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"Inequality, lack of infrastructure, and educational deficiencies are key weaknesses in India. India also faces an intransigent rural insurgency - the Naxalites - which constitutes an internal security challenge.

"Rapid urbanisation in India and Pakistan almost certainly will transform their political landscapes from more traditional control by rural elites to one shaped by a growing pool of urban poor and middle class," it said.

NIC said in a 'Turn-the-Corner scenario', sustained economic growth in Pakistan based on the gradual normalisation of trade with a rising India would be a critical factor.

An improved economic environment would produce more opportunities for youth entering the workforce, lessening the attractiveness of militancy and containing the violence.

"Intra-regional trade would also be important in building trust between India and Pakistan, slowly changing threat perceptions and anchoring sectors with vested interests in continuing economic cooperation," it said.

"Just as China's economic engine transformed its relations with neighbours from the early 1990s, so a strong economic engine in India could lay down new foundations for prosperity and regional cooperation in South Asia," the report said.

However, if influence of radical Islamists in Pakistan and Taliban in Afghanistan grows, a symbiotic relationship would deepen between the military and the Islamists, and the Army would be more willing to engage in negotiations with the extremists, the NIC said.

In case of social unrest in Pakistan and Afghanistan, "India would be left trying to defend against the spillover of militancy, increased tensions in Kashmir, and potential radicalisation of its Muslim populations. Rather than uplifting its neighbors as in the Turn-the-Corner scenario, India would be dragged down by them, challenging its ability to play a more global role," it said.

It said countries like Pakistan and Iran - who feel threatened by what they perceive as stronger regional or global powers - may continue to use terrorist groups as proxies for the next few years.

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