Why did we squander our advantage? Very simple. Post the liberation & independence of East Pakistan, the action was to shift to West Pakistan. Kissinger & Nixon who was frothing st his mouth from being unable to prevent the vivisection of Pakistan nor influence China to open up a new front threatened the USSR with a N war if India did anything to West Pakistan. Since the USSR was our Godfather then, IG couldn't ignore the power politics at play then.
That she let Bhutto get away lightly without formalising thr border was more due to her Kashmiri group of leftist advisors like Kaul, Haksar etc. Something Haksar later justified as not imposing a Treaty of Versailles so as to lay the seeds of a future conflict.In some ways this was a blessing in disguise. For the border would've been formalised at exactly where the LoC stands now give or take a few features or exchange of territory.
Where she ought to be faulted is by not prosecuting a war in 1975 when she was besieged internally. By the time she regained power in the early 80's , the Punjab problem intensified. Though there have been persistent rumours of her considering a final solution to Pakistan . The Russians too were goading her to take on Pakistan due to overt Pakistani support to the Mujahideen in Afghanistan which the Russians couldn't confront due to explicit US threats of initiating a war on the USSR should it attack Pakistan. In the interim operation Blue Star occured followed by the assassination of IG. In come RaGa Sr & a wasted 2/3rd mandate as well as 5 years.