Thats a really interesting dialogue there.It will be difficult to prove the authenticity though,but then in these cases all you can do is either go by the account of the bystander or deny it.I choose to do neither.
Let us say,even if Zia did say that,I am compelled to ask one question,"Where were the Pakistani nukes?"
From what we have come to know from the accounts of A.Q.Khan,Pakistan was not in a position to make their own nukes even in the later part of the 80s..Considering the fact that the conversation was happening in 1987,we can very well assume Zia's comments to be empty threats..But then,let us not forget the fact that,India already had nukes at that time having conducted the first test some 13 years ago..
So,in the event of an ACTUAL war,if it exceeds the nuclear threshold,there is a far greater possibility that Pakistan would have been annihilated from the face of the Earth.