Three months of eyeball-to-eyeball confrontation at the border should have left Indian and Pakistani troops cross-eyed. Perhaps it should have signalled the time to end the scary military stand-off between the two nuclear powers and send the forces back to the barracks. But any hope of a detente faded away last week as leaders of both countries hardened their positions, ruling out a de-escalation in the near future.

NEIGHBOURS

THE PROS INDIA: Army troops on the LoC PAKISTAN: Soldiers guarding the border at Wagah   » The Indian military build-up forces Musharraf to crack down on terrorist groups. » Gets Pakistan to ban the Jaish-e-Mohammed and the Lashkar-e-Toiba terror groups. » Bleeds Pakistan's economy by bringing about an increase in its defence spending. » Gets the US to pressurise Pakistan to rein in terrorists. » Will help to check violence in the coming J&K elections. THE CONS » Pakistan frustrates the Indian effort by releasing key terrorist leaders after three months. » Musharraf continues to support "indigenous" groups operating in Kashmir. » India also ends up spending Rs 1,500 crore, affecting its own economic growth. » Increases the US leverage on the Kashmir issue. » Brings world attention on Kashmir like never before.

Prime Minister Atal Bihari Vajpayee is categorical that Pakistan has not fulfilled the Indian conditions for a dialogue and says India has no intention of withdrawing troops from the border. Delhi accuses Islamabad of remaining unyielding on its demand to hand over 20 terrorists wanted for committing heinous crimes in India. Nor has there been a significant reduction in cross-border terrorism-especially in Kashmir-that India says is the most important condition for talks to resume.

Pakistan, which had so far been making all the conciliatory noises, has said it is not going to push for a dialogue any more. General Pervez Musharraf has accused India of looking for a "face-saving formula" to end the stand-off and indicated he was in no mood to grant any further concessions. In an interview to The Hindu last week, Musharraf left it to India to open the "shut door" on bilateral diplomatic ties. Earlier he had talked of "teaching India an unforgettable lesson" if it ever decides to declare war against Pakistan.

In India's calculus, Musharraf's decision last week to go in for a national referendum to legitimise his presidency was a sign of his growing insecurity. Musharraf had promised to hold general elections by October and restore parliamentary democracy. The credible course would have been to get the new parliament to endorse his presidency. But by opting for a referendum-much like the late General Zia-ul-Haq did-Musharraf is fashioning his own brand of democracy that will allow him to enjoy unfettered powers. So long as he is busy manipulating the levers of power to ensure he remains president, India expects Musharraf to stay adamant.

In order to win over certain sections, Musharraf is seen to be leaning towards right-wing parties now. Islamabad's decision to allow Qazi Hussain Ahmed of the Jamait-e-Islami to hold a political rally, the move to shift JeM chief Maulana Masood Azhar from prison to house arrest with an allowance of Rs 10,000 per month to his family and the release of LeT supremo Hafiz Saeed from incarceration are cases in point. Musharraf's assertion that the Kashmir movement is an "indigenous struggle" is a signal that he means to do nothing to clamp down on militant groups operating in Pakistan-controlled Kashmir.

IN REFERENDUM MODE: Musharraf

There were other reasons why Vajpayee indicated that India would not withdraw its troops from the border. With the snow melting on the passes, India will be able to judge in the coming months just how serious Pakistan is about checking the infiltration of terrorists into India. "There is little reason to keep the troops on the border if Musharraf takes steps to stop cross-border terrorism," says Lt-General Vijay Oberoi, former vice-chief of army staff. "After all, the two countries cannot go to war only over the list of 20." Also, with assembly elections in Jammu and Kashmir due in September, India wants to prevent militant groups from disrupting the process by escalating violence. A successful, free and fair election in Jammu and Kashmir is vital to India's negotiating position.

Nevertheless, keeping a million troops on high alert on the border is a costly operation. It may have paid off in terms of forcing Pakistan to act on terrorist groups such as the LeT and the JeM, and in convincing other countries, especially the US, to goad Pakistan to stop state-sponsored terrorism but it has already cost India Rs 1,500 crore in defence expenditure-2.5 per cent of the defence budget of Rs 65,000 crore.

The troop build-up has seen Pakistan bleed financially much more than India, especially since its economy is far more fragile. But to hear Pakistan's Citibank-imported Finance Minister Shaukat Aziz tell it, the current military state of high alert on the border with India has had "minimum fiscal impact" on the country's economy. Aziz reckons the additional resource mobilisation to deploy, feed and supply an estimated 3,00,000 Pakistani troops and provide them hardware on the country's eastern borders at "only" Rs (Pakistani) 10 billion. That is around a piffling 6 per cent of Pakistan's annual defence expenditure which, in normal circumstances, stands at over Rs 155 billion.

Cursorily speaking, Aziz may well be right. The heightened state of tension with India certainly appears not to have hit Pakistan's economy too badly. The stock market is at an 18-month high, foreign exchange reserves have never been better and property prices are coming out of a long slump. But there are many issues regarding the impact of war preparation which are glossed over by the smooth Aziz. Defence budgets in Pakistan are the ultimate sacred cows, not open to scrutiny by the public even in periods of democracy. "There is no way one can question government figures on defence," says Asad Sayeed, an economist who works with the independent Social Policy and Development Centre in Karachi.

At a time when the economy is badly in need of a boost, the two elements that could provide that thrust-trade and infrastructure investment-are the ones suffering the most. "Before the current crisis, trade between India and Pakistan was estimated at around $1 billion," explains Akbar Zaidi, an independent economist who has done some of the most insightful work on the Pakistani economy. "Of this, one-third was legal trade, one-third third-country trade-that is, goods routed through other countries-and the rest was from smuggling," says Zaidi. "Legal trade and smuggling have almost come to a complete halt since the channels for these-bus, train and direct air routes-are now closed. Third-country trade is still going on via Dubai and Singapore but it too has suffered substantially."

Yet both countries have pushed aside such economic worries and continue to adopt hostile postures. Even if the nuclear powers do not blow themselves up, they could still bleed each other weak.