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Pakistan should be in a state of siege. Especially with half a million Indian troops amassed on its borders. Yet last week in Islamabad, the tension wasn't showing. It was Interior Minister Lt-General (retired) Moin-ud-Din Haider who was cheering the loudest at a qawwali performance that went on well into the night. Haider pointed out that he wasn't the only one having fun. At a nearby stadium, thousands of Pakistani teenagers had gathered to listen to the British pop group Stereo Nation.

BALANCE OF POWER: Musharraf has kept his counsel

Two months after President General Pervez Musharraf's watershed speech of January 12, in which he spelled out his vision of Pakistan as a moderate Islamic state, the contradictions are evident. With the Government moving in on five key extremist organisations by arresting their leaders and shutting their offices, there are clear indications that militants, who till recently ran a parallel state, are on the run. One pointer: there was hardly any donation of skins of animals sacrificed during Id celebrations to militant organisations, a practice which contributed to the groups' coffers. Another: fundamentalists usually disrupt Basant (spring) celebrations at Lahore but last fortnight, the Government not only permitted it, but also sponsored many of the dance and music programmes.

"Maulvis are on the retreat as they know we mean business," says Lt-General (retired) Javed Ashraf Qazi, minister for railways and communications and a Musharraf confidant. Yet to presume that all is well with Pakistan and Musharraf's benign dictatorial rule will be a grave mistake. Sectarian violence between the majority Sunni population and the Shias continues. There is no let up in killings of professionals belonging to the minority community. A fortnight ago in Rawalpindi, not far from the army headquarters, militants stormed a Shia mosque and gunned down 11 people who had come to offer prayers.

STUDY IN CONTRAST: In Lahore spring was celebrated with gaiety and kites uninterrupted by extremist threats, but in Karachi (below) sectarian violence refused to die down

Deteriorating law and order is not the only issue troubling Musharraf's Government. Pakistanis, as Mushahid Hussain, former information minister puts it, "think a lot through their pockets". Now people are beginning to feel the pinch. Though inflation is at a low 3.5 per cent, a steep rise in the price of domestic energy has hurt the middle and lower classes. Haneef Khan, a worker on an oil rig in Karachi, says he now spends twice as much on gas for heating and cooking as he did a year ago.

Much of the price rise had to do with Musharraf's sensible, though unpopular, decisions to deregulate oil prices and cut down on subsidies. With the GDP growing at less than 3 per cent, the economy continues to falter and unemployment figures have ballooned. News on the trade front is no better. Exports that were expected to grow by 12 per cent will cross only half that figure. Hit by a severe drought that has affected half of 106 districts, agricultural production too is expected to fall.

Musharraf isn't to blame for all the woes. When the General grabbed power through a coup in October 1999, the economy was on the brink of collapse and Pakistan was about to default on its international loan commitments. But 9/11 changed all that. With Pakistan becoming a frontline state for the US in its Afghanistan battle, international organisations like the Paris Club have rescheduled its foreign debt, saving Pakistan as much as $2 billion on commitments and bailing it out of the immediate financial crisis. All this has buoyed up business sentiments and the Karachi stock exchange index has doubled since last year.

Musharraf's real test, however, is only beginning. For by October 2002, as the Supreme Court has ordered, he has to hold general elections and deal with the chaos that politics and a return to democracy will throw up. Until now, there is hardly any way to verify Presidential Press Adviser Major-General Rashid Qureshi's claim that there "is a great swell of love and appreciation for the President and his Government". Musharraf has the option of holding a referendum to ratify his presidency as General Zia-ul-Haq did in the mid-1980s. But with only one candidate-Musharraf-everyone knows it would be a sham of an election. Also, as General (retired) Mirza Aslam Baig, former chief of army staff, says, "With just a few months to go (for general elections), there is no time for a referendum."

THE NEW THREAT VOICES "Musharraf should worry about his personal safety. Many people are unhappy with his decisions." Ejaz-ul-Haq, Zia's son and senior PML leader "He has clearly established his credibility. He is riding high and only among extremists is he a bad word." Javed Ashraf Qazi, Railways and Communications Minister "Pakistanis think a lot through their wallets. They look at prices and the economy and it is pinching them." Mushahid Hussain, Former Information Minister "Earlier the state patronised the fundamentalists. Now the mullahs and khakis are adversaries. It is a big shift." Imtiaz Alam, Columnist and political analyst "If America goes on a rampage in Iraq and Iran then Musharraf will have to distance himself from Bush." Khalid Mahmud, Institute of Regional Studies "Neither India nor Pakistan can afford confrontation. It is a dangerous situation and we must start talking." Nisar Memon, Federal Minister for Information

The other option is riskier: getting Parliament to endorse his presidency. Musharraf has so far manipulated the levers of power to keep out the two tall Pakistani leaders, Nawaz Sharif and Benazir Bhutto. While Sharif has been banished to Saudi Arabia as part of a clemency deal, Benazir has been warned that the day she enters the country, she faces arrest for the various criminal charges pending against her.

In the past few months, Musharraf has been trying to build a king's party by splitting Sharif's Pakistan Muslim League (PML) into various factions that would be favourable to him. To ensure compliance, he has banned all rallies by political parties who are only allowed to hold "compound wall meetings" at private residences. Recently he declared that only graduates would be allowed to contest elections. It has raised a storm among parties as it would mean that half the members of the previous National Assembly won't be eligible to contest. Opposition leader Nawabsada Nasurullah Khan was quick to retort, "Then the President should have a PhD."

Musharraf's best bet is a hung parliament that would force political parties to form a coalition government. Effectively it would enable him to remain unchallenged at the helm. The trickiest part, though, would be to undo the Sharif regime's constitutional amendment that made the President a toothless ceremonial head. Under the guise of checks and balances, Musharraf is likely to issue an ordinance giving the President the right to dismiss the prime minister and the National Assembly, in addition to powers of appointing service chiefs and provincial governors. He is also expected to try to institutionalise the army's role in top decision making by installing a national security council that would act as a supra-cabinet.

Other than the political machinations, Musharraf has to deal with the resentment brewing over the US presence in the country. If George W. Bush launches a military offensive against countries such as Iraq and Iran regarded as the "axis of evil" then the fears of a Christian West out to destroy Islam may heighten. The support for fundamentalist groups could revive.

But the General's greatest threat continues to be from an assassin's bullet because he has offended most power groups in Pakistan-the fundamentalists, the political parties, the feudal lords, whom he booked for corruption, and the bureaucracy by imposing army monitors in each department. As Ejaz-ul-Haq, Zia's son and a senior PML leader, says, "He should be worried about his personal safety because there are plenty of people out there who are not happy with his decisions."

Meanwhile, the military build up by India on the border has meant mounting defence expenditure eating into Pakistan's meagre resources. It pressured Musharraf into making his January 12 speech to break the back of terrorism. But for Musharraf to make any concession to India by handing over any of the criminals on the wanted list would be politically suicidal. Although Pakistan wants the dialogue process to be resumed, India has so far been reluctant. "We are waiting to ensure that Musharraf does not turn back on his commitments and to see if he puts enough daylight between him and the militants," says an Indian foreign policy expert. It could be a long wait for India.