Well, I guess if you take the literal meaning:
Pak·i /ˈpæki, ˈpɑki/ Pronunciation Key - Show Spelled Pronunciation[pak-ee, pah-kee] Pronunciation Key - Show IPA Pronunciation
–noun, plural Pak·is. Chiefly British Slang: Disparaging and Offensive. 1. a Pakistani, esp. one who has emigrated to Britain.
2. any emigrant to Britain from the Indian subcontinent.
Then it's considered an offensive word to use.
That sad, I don't think anyone can deny that the passangers in the taxi over-reacted immensely. Calling the police? The taxi driver is obviously just ignorant. It's something my father would say, yet I know that he's not actually a racist.
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