Indian forces during 1971 had decimated the Pakistani troops in Eastern theater resulting in one of the largest post WWII surrender including 90,000 soldiers.
While Pakistan was in a non-negotiable position, India still pulled out its troops liberating Bangladesh from Pakistan.
But what actually made India pull out troops from Pakistan and give back the captured the territory?
Background
In 1970, the Awami League, the largest East Pakistani political party, led by Sheikh Mujibur Rahman, won a landslide victory in the national elections. The party won 167 of the 169 seats allotted to East Pakistan, and thus a majority of the 313 seats in the National Assembly. This gave the Awami League the constitutional right to form a government.
However, Zulfikar Ali Bhutto (a former Foreign Minister), the leader of the Pakistan Peoples Party, refused to allow Rahman to become the Prime Minister of Pakistan. Instead, he proposed the idea of having two Prime Ministers, one for each wing.
The proposal elicited outrage in the east wing, already chafing under the other constitutional innovation, the "One Unit scheme".
On 3 March 1971, the two leaders of the two wings along with the President General Yahya Khan met in Dacca to decide the fate of the country but their discussions yielded no satisfactory results and Yahya Khan postponed the convening the National Assembly of Pakistan indefinitely.
Sheikh Mujibur Rahman called for a nationwide strike on 1 March 1971, shuttering offices, shops, factories, and halting trains, buses and planes.
Causes
Except for religion, there was nothing common between the two wings.
The Bengalis' language, culture, dress, food habits and their very way of life was different from that of the West Pakistani.
The economies of the two wings had a different basis, and the west Pakistan, having held political sway, exploited the eastern wing's economic resources for the benefit of the western wing. For example, the jute and tea which was grown in East Pakistan earned most of the country's foreign exchange but the major portion of it was used to develop the western wing.
On 13 Nov 1970, a cyclone in east Pakistan claimed 2 million lives. The more populous East Pakistan was denied protection from floods which brought periodic devastation of life and property.
To suppress the voice of dissent, Rehman was tried for conspiracy. In his broadcast to the nation on 26 March 1971, Yahya Khan charged Rehman with treason, and India was blamed for allegedly aiding and abetting the same.
Unable to bear injustice any longer, the Bengalis took to the streets to seek a solution for their continued oppression.
On 7 March 1971, Rehman announced his willingness to participate in the session of the National Assembly provided his four demands-withdrawal of martial law, return of troops to their barracks, inquiry into army killings, and transfer of power to duly elected representatives of the people- were met before the start of the session. He also outlined a weeklong programme of non cooperation to cripple the army regime.
Therefore, long before India intervened and acted as a catalyst to liberate Bangladesh, so overwhelming was the response to Sheikh Mujibur Rehman's call that he had virtually become the rulers of East Pakistan.
Yahya Khan appointed General Tikka Khan as Governor of East Pakistan for the task of bringing Rehman to heel. Tikka Khan started to suppress the rebellion by imprisoning the Awami League leaders, suspending political activities and finally carrying out mass genocide of the Bengali intellectuals resulting in fleeing of Bengalis to neighbouring India.
As the number of refugees grew in number (about 10 million), it became a massive task for the authorities to cater for their food and lodging arrangements, which was already a massive burden on the weak Indian economy( in 1971).
In April 1971, the then PM Mrs Indira Gandhi decided and told the Army Chief Gen Manekshaw to invade into East Pakistan, which was denied by him stating that the international support is not with the country and his army is not ready both equipment/weapon wise and strength wise. So, it was decided to attack in Dec 1971 so as to minimise threat from China as well.
Initially India's plan was to free as much territory in then East Pakistan so that all the refugees could return to their country, but the low morale and confusion and lack of coordination amongst the Pakistani troops lead to capture of Dhaka in just 14 days.
Reasons to call back troops
Undoubtedly, India's national interest laid in having a friendly regime in neighbouring East Pakistan as the economic and cultural affinities of Indian state of West Bengal and East Pakistan were linked indivisibly.
The main aim to weaken Pakistan was achieved and after establishing Sheikh Mujib ur Rehman as the Premier of Bangladesh Indian troops retreated. India wanted peace in the region, had they occupied Bangladesh the freedom movement would still be alive, so it was better to have a friendly state rather than occupying a restless province. Moreover, it provided stability in the south East Asian region from that time onwards.
Source
'India's wars since independence ' by Major General Sukhwant Singh who was in Indian Army during the 1971 Indo Pak war.
India had obtained her main war objective: to weaken Pakistan. This occurred mainly through the independence of Bangladesh, although the humiliation of the Pakistani army certainly didn't hurt.
(West) Pakistan by itself was a relatively modest threat to India. On the other hand, Bangladesh represented more than half the population of the former Pakistan. Together with its "flanking" position to India, that might have been a threat if the Pakistani army had been better trained and equipped.
Bangladesh had many people relative to land and resources, and India did not "need" the extra mouths to feed (and the additional Moslems). It was more concerned with depriving Pakistan of it.
There were three primary objectives of the 1971 war:
Having achieved all these objectives, the Indian army knew that its role was over and withdrew its troops. Had the army pro-longed its stay, it would have faced tremendous international pressure.
There was never any intention for India to capture or rule any territory. If India had those ambitions, it would have done so in Kashmir itself, where it successfully captured two-thirds of the territory and would have captured the remainder also had Nehru not gone to the United Nations.
There are many reasons behind India's move
Indian forces captured around 5,795 square miles (15,010 sq.km) land in the West but returned it in the Simla Agreement as a gesture of goodwill.
- Wikipedia Article on Indo-Pakistan war 1971.
Bangladesh was one of the nations to be quickly recognized by UNO. This would not have happened if India has held Pakistan's territory in it's possession.
When Bangladesh applied for membership to the United Nations in 1972, China vetoed their application because two United Nations resolutions regarding the repatriation of Pakistani prisoners of war and civilians had not yet been implemented. ref
India was an ally with Bangladesh. Recognition of Bangladesh was important for India too. India would have made truce with Pakistan for the sake of Bangladesh.
India wanted peace. After fighting two wars within 10 years, may be Indian leaders were looking for opportunities to decrease tensions with others world powers. Clearly, this treaty conveyed a clear message that India does not want to solve it's issues through war.
