The roller-coaster of India-Pakistan relations took its latest dip Monday with India's decision to cancel scheduled talks next week between the countries' top Foreign Ministry bureaucrats. India's decision followed the move by Pakistan's ambassador in New Delhi to consult with Kashmiri separatists ahead of the bilateral talks. As an Indian foreign ministry spokesman put it, Islamabad had a choice to make—"talk to the separatists or talk to us."
All this offers important clues about how the newly elected government of Narendra Modi will approach its neighbors. Its motto appears to be, "We're open for business, but national security comes first."
Critics of New Delhi's decision see it as a flip-flop on an important foreign policy issue. In May, Mr. Modi belied his reputation for hawkishness by inviting Pakistani Prime Minister Nawaz Sharif to his swearing-in ceremony in New Delhi. This was followed with an exchange of gifts that suggested personal warmth: A shawl for Mr. Sharif's mother from Mr. Modi, and a white sari for Mr. Modi's mother from Mr. Sharif.
But while scrapping the talks may hurt the mood in New Delhi and Islamabad, Mr. Modi's critics are wrong. Anyone who thought he turned into a dove this year hasn't been paying close attention. His decision to cancel suggests a refinement, not a reversal, of his government's approach to its neighbors.
In reaching out to Mr. Sharif, Mr. Modi signaled a desire for friendly relations in line with his goal of reviving India's flagging economy, which includes fostering a peaceful neighborhood. In pulling the plug on talks, Mr. Modi has suggested what India expects in return: A modicum of respect from Pakistan for Indian sensibilities.
Both elements of this outlook—economic pragmatism and diplomatic toughness—have been visible over Mr. Modi's three months in power. Apart from his overture to Mr. Sharif, the Indian leader has visited neighboring Bhutan and Nepal, where he unfurled a vision of shared economic prosperity. He echoed that theme again in Delhi on Friday, during his first Independence Day address to the nation. "Why not get together with all the SAARC nations to plan out the fight against poverty?" he asked, referring to the eight-member South Asian Association for Regional Cooperation.
On the campaign trail, candidate Modi made much of restoring India's national pride. This, as he laid out repeatedly on the stump, was not merely a matter of boosting economic growth but equally of ensuring that India's territorial boundaries are respected by Pakistan and China. En route last week to Kargil, the site in Kashmir of a bloody border confrontation between India and Pakistan 15 years ago, Mr. Modi accused Pakistan of backing terrorism against India. In July, India boosted defense spending by 15%.
For Pakistan, the current standoff could mark a turning point. Previous Indian governments have not liked but have tolerated the Pakistani practice of meeting publicly with assorted Kashmiri separatists, from relative moderates to hardline Islamists, before talks with India. Now Islamabad will need to ask itself: Is it worth jeopardizing talks with an important neighbor on a range of issues, including the disputed territory of Kashmir, just to preserve an empty ritual?
Militancy is at a low ebb in Kashmir and Pakistan is lurching from one crisis to the next. Meeting with a ragtag bunch of Kashmiri separatists serves no purpose for Islamabad beyond poking India in the eye and signaling to Pakistanis that their government hasn't quite given up on the increasingly farfetched cause of claiming Indian-controlled Kashmir. That Pakistan went ahead with the meetings despite Indian warnings shows Islamabad's continued reliance on stale diplomatic set pieces.
India is right to expect basic decorum from Pakistan if the countries are to improve ties. But New Delhi ought to guard against a policy of toughness for its own sake. If Pakistan plays ball—eschewing grandstanding with separatists and checking terrorism emanating from within its borders—India should respond with a concrete plan for deepening trade and cultural links.
Indians like to scoff that a flailing Pakistan needs India more than vice a versa. While this may be true, it doesn't mean that India won't also benefit from better ties with its recalcitrant neighbor. If both sides can adjust to new rules of the game, there's no reason why they can't find a way for both to win.
Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for WSJ.com. He tweets @dhume