Meaning of Guns and ghee

It's the Economist's humorous attempt to "India-ize" the American expression guns and butter. It refers to the political tensions that occur when a nation builds up its military, presumably to the detriment of its civilian social needs. See the the relevant Wikipedia artice, particularly the section called Origin of the term.

Specifically, "guns versus butter" describes the tension between the government's need to spend money on the military ("guns") to defend its national interests and the domestic need for ordinary things like food ("butter"). Since this is the "guns versus butter" conflict in India, the trade-off could be described as "guns and ghee".

I think you might be on the right track with one of the meanings being about the domestic economy, that makes sense for how the article reads.

I don't think it is referring to "bread and butter", except perhaps incidentally - it's a bit too far of a reach to rely on that pun, when both parts are being replaced. I think perhaps it is instead leaning on something like "to butter [someone] up", and perhaps something like "good manners are oil to our social wheels" - the idea of India being polite, not making as much of a fuss as they could, and having to be polite, to try to prevent rising tension with Pakistan. Ghee is likely being used as a metaphor in the sense that politeness is a social lubricant (which is a more common variant of the phrase), and ghee is a used as a grease, another type of lubricant.

At least, that's how I understood the title after reading the article - since the main focus was literally on the diplomacy and reasons for it(the metaphorical grease) versus the military hardware (the literal guns).