Since the abrogation of Article 370, Jammu and Kashmir have been under lockdown, with normal facilities being restored very gradually, in a trickle one might even say. While the regions of Jammu and Ladakh seem to have moved on peacefully from the events of August 5, the violence-prone Kashmir region is still under surveillance and communications are heavily controlled. Most media reports paint a picture of a very wary and reticent Kashmiri population and indicate we are merely seeing the calm before the storm.
Given the almost unbearable trepidation in the air in Srinagar and the Kashmir valley, it is hard to buy the centre’s pitch that Kashmir will finally be open for proper business after decades of falling behind due to terrorism. However, the Modi govt has claimed, more than once, that Jammu and Kashmir will now be on par in development with the rest of India.
In this episode of digging deeper, we’re going to examine J&K’s economy, the changes that the centre is touting, and what, if any, investment and opportunities have been discussed.
The Jammu & Kashmir economy
After promising sweeping changes during his election campaign, Narendra Modi has not exactly been chary of taking some big decisions, whether it was the recent decision to merge 27 public sector banks into 12 banks, the ban on triple talaq, or the very unpopular hike in traffic fines. But it is likely that Modi 2.0 will be most remembered for the events of August 5, 2019 - when Article 370, which essentially granted special status to Jammu & Kashmir, was abrogated and the state was bifurcated into two union territories - Ladakh and J&K.
In an analytical piece in Hindustan Times earlier this month, Vasant Dhar, professor at New York University’s Stern School of Business and the Center for Data Science, shared his opinion on the abrogation of 370: “...though the method chosen by the Indian government of removing Article 370 has been unfortunate, seven decades of reality suggest that it did not work, and if anything, was regressive from a development standpoint. Democratic methods, including all-party delegations, interlocutors, and negotiations with Pakistan to stem the tide of militancy in Kashmir, have not worked either. India had two choices: ...try something new or let the situation fester indefinitely.”
A consensus seems to be emerging - most countries around the world prefer India restore normalcy to Kashmir as soon as possible, but are refraining from passing judgement on the issue. Within India, the events since August 5 have been reported by all sides according to their respective ideological persuasions, so we’ll step away from the politics of it in this episode and examine the economic angle.
Prof Dhar is uncharitable in his criticism of the leadership in the state of J&K. He wrote, “Kashmir’s special status has created perverse incentives and an impossible climate for business. The protections afforded to Kashmiris under Article 370 have turned out to be regressive, exploited by local politicians for their own ends, and they have inhibited investment and progress. Every Kashmiri has come to know and expect rampant corruption. Courts are inefficient. Officials are often planted in posts by their friends. Local leaders have no creative solutions or initiatives, but play a delicate double game between the terrorists and the central government. What is clear after 70 years is that Kashmir’s instability and social climate do not benefit anyone except those served by the status quo.”
To understand his point of view, which is echoed by many, let’s take a look at the GDP of J&K. The state has a GDP of approx $18 billion. Its immediate neighbour Himachal Pradesh, an agrarian state with half the population, has a GDP of $22 billion. India’s most popular holiday destination, Goa, has half of Kashmir’s GDP with a tenth of the population. One of the largest NGOs in India, Pratham, which promotes education for underprivileged children, claims Kashmir ranks close to the bottom in India on standard reading and math tests conducted across the country.
It’s no shocker, of course, but the state’s economy hasn’t been peachy either. J&K is marked by low productivity in agriculture and allied sectors that have affected employment generation and growth in per capita income. Poor infrastructure has resulted in an undeveloped industrial sector.
According to Financial Express, the lack of a well-defined strategy, good governance, and sound fiscal management have further stymied economic growth in the state. RBI data shows that the growth rate of Jammu and Kashmir careened wildly between -3.2% and 17.7% in a matter of just two years. The volatility is common across all major sectors like industry, banking, construction, manufacturing, and agriculture.
Okay, let’s look at how the people of J&K make their money.
First, literacy and employment numbers. Census data from 2011 indicates that the literacy rate in J&K is 67.16%, well below the national average of 74 percent. The urban unemployment rate is 70%, which is more than double the national average of 34 percent.
According to FE, “the state’s tax revenue rose by 78% to Rs 11,190 crore in the last five years whereas the non-tax revenue surged by 100% to Rs 5,750 crore during the period. Despite the increase in tax collections, the gross fiscal deficit of J&K has been estimated around Rs 7,720 crore for the year 2018-19, which has shot up by 69.6% in the last five years.”
It is estimated that the service sector accounts for 56% of J&K’s economy. Industry, at 27.8%, and agriculture, with 16%, are the two other major sectors. As expected, tourism plays a vital role in the state’s economy. It caters to allied sectors like handicrafts, handlooms, and transport. However, it is also an underperforming sector. Despite the state’s cultural and heritage assets, tourism accounts for only around 6.98% of the state’s GDP. The hard fact is that Jammu & Kashmir does not even figure among the top 10 domestic destinations in India if we go by the number of tourist arrivals.
The state is also well below the national average in per capita income. That number stood at a pretty meagre 65,615 rupees in FY18. The national average is approx Rs 98,000. One positive for the state is that the poverty rate in is 10.35 per cent, only half of the national average of ~21 percent. Where J&K really shines is Human Development Index - it is well above the national average on that count. As per the Economic Survey for 2018-19, the minimum wage in the state for unskilled labour is Rs 225 per day. Expenditure on the social sector in the last five years rose by 148% to Rs 24,350 crore in the previous fiscal.
Opportunities
That brings us to the obvious question - what are the economic opportunities dfor a state riven by terrorism?
Well, we know about tourism and we know Kashmiri apples. But terrorists recently burnt a large pile of apples in an orchard in the district of Shopian to make people refrain from selling their apples to retailers. A report in India Today claimed apples are the lifeblood of Kashmir's economy, involving as many as 3.5 million people, around half the population of the state. Terrorists also burnt down a entire government panchayat building in Kani Gam village in the same district. So the answer to the question, “What comes next?” is anybody’s guess at this point.
Tourism has also tapered. Tourist numbers improved between April and July this year, only to plunge in August. Only 10,130 tourists came to Kashmir last month, compared with nearly 1,50,000 in July and more than 1,60,000 in June.
Journalist and author Niranjan Rajadhyaksha, a member of the academic board of the Meghnad Desai Academy of Economics, observed in his column in Mint, “Economic integration will be a very slow process, as was the case with the rest of India. The government may have to take the lead. The old strategy of putting up public sector industrial units in the quest for balanced regional development is no longer viable, given the financial health of enterprises owned by the government. Infrastructure spending is a more realistic option, especially if it pulls in more tourism.
Private sector investment will be needed, but that is unlikely to happen overnight given the current state of investment activity across India. Massive migration will unleash the same cultural fears that periodically bubble up to the surface in other parts of India, and more so in a former state witnessing a huge political transition.”
What this means is, it will be a huge challenge for the Modi govt to kickstart Jammu & Kashmir’s economy. The contentious decision on abrogating Article 370 may also hold the answer to some of the state’s economic woes. For precisely the reason being bandied by both critics and backers. According to an analysis in Business Standard, one of the primary benefits of the abrogation of Article 370 would be the freedom for non-permanent residents of the state to buy property and invest money in the state. The analysis claims, “Owing to discriminatory policies, many businesses were shying away from investing in manufacturing, services and tourism in the state. One of the key parameters of business interest and development – gross fixed capital formation – has been languishing in Kashmir. In 2016-17, the gross fixed capital formation in Kashmir stood at Rs 645 crore – back to its 2006 levels. The sorry state of business activity in Kashmir can be gauged from the fact that in 2004, gross fixed capital formation in Kashmir was double than that of Bihar – one of India’s poorest states. But now this key development and investment parameter is four times higher in Bihar as compared to Kashmir.”
Since 2011-12, when a new base year was adopted for domestic product calculations, Kashmir’s GDP in the manufacturing sector has grown at just 32% – lower than the national average of roughly 50 percent. Manufacturing GDP growth in Kashmir has been lower than much poorer states like Bihar, Madhya Pradesh and Uttar Pradesh. While the mountainous terrain of Kashmir may not be conducive to setting up factories, save for the Jammu region, a look at the growth of services in the state paints a sorry picture. Kashmir has failed to keep up with the rest of India. The service sector GDP in the Union Territory also grew 32% from 2011-12 to 2016-17, far below the national average of 52 percent. In fact, it was considerably lower than all BIMARU states including Rajasthan.
Towards the end of August, Modi met with Indian businessmen in the UAE and invited investment in Jammu & Kashmir. He said, “Political stability and predictable policies framework are key driving forces for investors and these factors have made India an attractive investment destination in the world.” He then added, “Impetus on development initiatives in Jammu and Kashmir will make it play a role in the growth engine of India and also create job opportunities for the youths there.” Modi also claimed there was no development in the region for a long time and that now is a conducive environment for investment in the region. He said, “J&K and Ladakh have the potential to become the biggest tourist destinations in the world...Several herbal and organic products are scattered across J&K and Ladakh. If they are identified and marketed in the global market, then it will greatly benefit the people and farmers of these regions. I urge the enterprises from all over India to come forward for this...we need to take products of the region to the world,”
The govt’s insistence that Kashmir will soon be open for business was met with scepticism. But that attracting businesses and investment is easier said than done. Case in point being the J&K Investors' Summit. It was originally scheduled to be held between the 14th and 19th of October, and was part of the centre’s attempt to boost investment opportunities, attract new business avenues and allow Jammu and Kashmir to showcase its strength and potential to potential investors. The summit has now been postponed to 2020. According to media reports, the State Administrative Council reviewed the preparedness for holding the summit and decided that it should be rescheduled to next year in consultation with the union government. The rescheduling is intended to ensure the Industries and Commerce Department is given reasonable time for preparations to secure robust participation of investors.
But it isn’t really a surprising development. Katharine Adeney, director of the University of Nottingham Asia Research Institute, told the Economic Times, “Investment is unlikely to be forthcoming as long as the state is consumed with violence, or the threat of violence.”
Laveesh Kumar Bhandari, chief economist at Delhi-based Indicus Foundation, told ET, “Everything hangs on what happens over the next year and how people handle it. There will be a lot of anger...Kashmir can’t have barbed-wire tourism. And private sector investment can’t come in if law and order remains a concern.”
According to economist Haseeb Drabu, who has also served as Jammu & Kashmir’s finance minister, Modi will need to focus on public investments in building connectivity and power supply. Drabu, who is pessimistic about the region’s economic outlook, claimed that lack of private investments in Kashmir are directly related to poor infrastructure.
On the other hand, Prof Dhar believes that typically, 5% of investment can kick-start an economy “if there is a decent “multiplier,” meaning roads and bridges are built properly, actually lead somewhere, and spur other economic activity. That is a $1 billion a year. The government’s plan is to allocate roughly $20 billion per year on infrastructure projects over the next few years. So, 5% of that total on Kashmir would be significant but within the realm of reality. Without public investment and an accompanying reduction of tension, private money is unlikely to follow.”
He recommends public investment be split between infrastructure - like roads, bridges, schools, health facilities and municipal services, and services like courts, banking and government services. He insists, “Without such essential services, there will be no private investment following public spending.”
But all talk of J&K’s economic future will only be meaningful once we get past the big eruption everyone seems to be waiting for. In summary, wait and watch.
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