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Chapter 1 Economy of Kashmir Since 1947
1
CHAPTER - 1
ECONOMY OF KASHMIR SINCE 1947: AN OVERVIEW
In 1947, at the time of the birth of India and Pakistan, the state of
Jammu and Kashmir with a population of four million people, most of it
concentrated in the fertile valley of the Jhelum River of the Indus River system,1
was one of the least developed regions in the Indian sub-continent2. The
economy of the state was overwhelmingly rural and agricultural in character.
Nearly 90% of people lived in villages and derived their livelihood from
agricultural and related pursuits using traditional and low productivity
techniques. The extreme backwardness of the state was reflected by the
abysmal mass poverty, deprivation, hunger, disease and ignorance3. The
electricity generation capacity was less than 5MW, communications were
poorly developed in most parts of the state and the average life expectancy was
only about 27 years.4
Having gone through a period of extreme exploitation at the hands of
the Dogra rulers5, who were theoretically autonomous but in practice the
stooges of the British imperialism, the population of the state in general and
that of the valley in particular was living in the most abject conditions.6
1 Shahid Javed Burki, Kashmir: A Problem in Search of a Solution (Washington, DC: United
States Institute of Peace, 2007), p. 15. 2 R. C. Bhargava “Economic Background” in Baghwan Sahay (ed.), Jammu and Kashmir, 1969
Guide(Srinagar: Universal publications, 1969), p. 119. 3 M.L Misri and Bhat M. S, Poverty, Planning and Economic Change in Jammu and Kashmir
(New Delhi: Vikas Publishing House Pvt. Ltd, 1994), p. 28. 4 Bhagrava, op. cit., p. 119.
5 The Dogra’s had established themselves as rulers of Jammu in the declining years of
Mughal Empire, but as feudatories of the Sikh kingdom. In 1932 Gulab Singh conquered Ladakh. Meanwhile the East India Company coveted prosperous Punjab. When hostilities broke out, Gulab Singh, true to form, betrayed his Sikh masters and allied himself secretly with the British. The Treaty of Lahore [March 9, 1846] made the Sikh state a British tributary and imposed indemnity on it. Since it could not pay the indemnity, it ceded the territories between Beas and Indus rivers including Kashmir and Hazara. The company, in turn, transferred these areas to Gulab Singh for rupees I crore. It was reduced to 75 lakhs a week later by the treaty of Amritsar, with the British occupying Kalu and Manali. Thus was formed the state of Jammu and Kashmir. For an authoritative description see, Robert A. Huttenback, Kashmir and the British Raj, 1847-1947 (Karachi: Oxford University press)
6 The Dogra rule had been characterized as despotic, tyrannical and sectarian. For more
details on the nature of the D0gra State see, Mohammad Yusuf Ganai, Kashmir’s Struggle for Independence, 1931-1939 (Srinagar: Mohsin Publications, 2003).
Chapter 1 Economy of Kashmir Since 1947
2
Furthermore, unlike India, which along with impoverished economy also
inherited some useful assets in the form of national transport system7 and a
good capitalistic base and entrepreneurial class8 from the British, the state of
Jammu and Kashmir inherited nothing but an impoverished economy from the
Dogras.9 During the Dogra rule, an overwhelming majority of the population of
the state was dependent on agriculture. But in view of the archaic agrarian
structure, the agriculturalists and the agricultural workers in Kashmir were not
having a fair deal as they had to carry on their shoulders the burden of absentee
landlordism10. In 1921, the Census Report noted11:
It would be observed that out of every 10,000 persons 8,173, i, e about 82
per cent, are dependent on the exploitation of animals and vegetation. Or
more properly speaking on pasture or agriculture.... Of the agricultural
population more than 98 per cent are ordinary cultivators, 1.4 per cent are
supported by the raising of farm stock, while the aggregate share of
growers of special products and forestry does not exceed .4 per cent. 1,160
persons out of every 10,000, or 11 per cent of the population, were
employed in industries of different kinds, the more notable among them
being the industries of dress and toilet (30.4 per cent), textiles (23.1 per
cent), wood (12.2 per cent), food industries (8 per cent), metals(6.4 per
cent) and ceramic (6.1 per cent). For every 10,000 persons only 86 derive
their livelihood from transport, which does not come up to 1 percent of
the total population … Only 3.3 per cent of the total population follow the
calling of trade… Public force absorbs. 7 per cent of the population (Army
59 per cent, police 41 percent), while the corresponding share of public
Administration works out at 1.08 per cent.
There were very little changes in the economy of the state in 1941 as the
Census Report stated12:
7 A. Vaidyanthan, “Indian Economy Since Independence 1947-70” in Dharma Kumar (ed.),
Cambridge Economic History of India, Vol. ii (New Delhi: Orient Longman Pvt. Ltd. 2005), p. 348.
8 Bipan Chandra, India Since Independence (New Delhi: Penguin Books Pvt. Ltd., 2007)
9 The rulers of this princely state of Kashmir preferred isolation and therefore no railroad
was constructed in the state, Joseph Korbel, Danger in Kashmir (Jammu: Vinod Publishers and Distributors, 1992), P. 8.
10 Sisir Gupta, Kashmir: A study in India-Pakistan Relationships (Bombay: Asia Publishing
House, 1967), p. 29. 11 Census of India 1921, Jammu and Kashmir, Part I, Vol. XXII, Lahore, 1923, pp. 161-2.
12 Census of India 1941, Jammu and Kashmir, Parts I and II, Vol. XXII, Jammu, 1943, p. 7.
Chapter 1 Economy of Kashmir Since 1947
3
The Jammu and Kashmir state cannot compare with Great Britain,
Bengal, and Bihar; it has a few industries but the more important of
these– forest exploitation, sericulture, and fruit growing– are closely
allied with agriculture and the state must be described as almost entirely
agricultural.
The economic policies of the state were concerned more with
protecting and promoting the interests of the Raj (Dogras) and its
collaborators (mostly Hindus) than with advancing the welfare of the
general masses.13The administration’s primary preoccupation was to
maintain law and order, streamline tax collection and ensure defence. The
Dogra state, therefore, can be said to have represented a framework for
economic stagnation/exploitation, archaic technology, and social
backwardness.
It was against these polices of the state that a popular movement was
launched under the leadership of Sheikh Mohammad Abdullah to establish a
nation-state14 to put an end to the century old religious discrimination and
economic exploitation. Later on, under the influence of Socialism, Sheikh
Mohammad Abdullah advocated the abolition of landlordism and the
distribution of land to the tiller.15
The legacy of such a kind of regressive policy– based on over-taxation,
discrimination and apathy towards the development of social and economic
overheads16– was that in 1947 when the Dogra rule virtually came to an end17
13
The Dogras had always regarded Jammu as their home and Kashmir as the conquered country. They established a sort of Dogra oligarchy in the state in which all non-Dogra communities and classes were given the humble places of inferiors, P. N. Bazaz, The History of Struggle for Freedom in Kashmir (Srinagar: Gulshan Publishers and Exporters, 2003), pp. 91-2.
14 According to Gunnar Myrdal, The only force powerful enough to overcome the force of
stagnation, social stability and equilibrium that perpetuates poverty and inequality is the Nation State, for details see Gunnar Myrdal, Asian Drama: An Inquiry into the Poverty of Nation, Harmondsworth, 1968, Vol. ii, p. 895.
15 The programme of restructuring of the state economy was put forth by the national
conference in the form of a document entitled Naya Kashmir in 1944. 16
The trend for exorbitant tax collection had been set by Gulab Singh, determined to cover the 75 lakh he had paid to the British for Kashmir, and continued by his successors. Not only were tax levels very high, but virtually nothing was exempt from taxation: crops, fruit, grazing animals, handicrafts (shawls, carpets, etc), marriage ceremonials, and labour
Chapter 1 Economy of Kashmir Since 1947
4
the economy of the state was caught up in a vicious circle of poverty
characterised by one of the lowest per capita income and consumption levels
among the states of the sub-continent. Low income levels resulted in low levels
of savings and capital formation and, therefore, low productivity and low levels
of income and this whole vicious circle perpetuated poverty in the state.
Therefore, the process and pattern of economic development of post-1947
Kashmir had been dependent to a considerable extent upon its inherited
pattern of underdevelopment, and also on the strategies and policies of
economic development, which in turn were influenced by the inherited
structures especially feudal land relations. There is no denying the fact that the
British rule in India was very exploitative, leading to what A. Gunder Frank
describes as the ‘development of underdevelopment’18 but such was the
magnitude of oppression and exploitation in Kashmir under the Dogra rule that
the intervention of the British in the state was considered no less a blessing by
the Kashmiri people and was silently celebrated by them. In fact, Kashmiris
resorted to the submission of representations to the British colonial masters,
whenever and wherever they found a chance, for seeking their intervention in
Kashmir.
With the decolonization of Indian sub-continent accompanied by
partition and conflict between the two succeeding states of ‘India’ and
services- including grave-digging and even prostitution, Iffat Malik, Kashmir: Ethnic Conflict, International Dispute (Karachi: Oxford University Press, 2005), p. 26.
17 The princely state of Jammu and Kashmir acceded to the union of Indian through the
instrument of accession on 26th
October 1947 which virtually put an end to the dynastic rule of the Dogras.
18 Bipan Chandra, India since Independence (New Delhi: Penguin Books India, 2008), p. 11. ;
The differences in the basic economic indicators or characteristics or other initial conditions from which the underdeveloped countries like India had to start their developmental programmes after independence and the initial conditions preceding the industrial development of the presently developed countries has been expounded in its very recent form by Simon Kuznets . The approach undertakes to clarify the basically dissimilar aspects of the two initial conditions with a view to demonstrate that the methods and policies of development followed in the past by the developed countries are not fully applicable to the underdeveloped countries which should evolve their own variants of developmental strategy; Bipan Chandra, Nationalism and Colonialism in Modern India (New Delhi: Orient Longman, 1979), p. 17.
Chapter 1 Economy of Kashmir Since 1947
5
‘Pakistan’, the problems of the state of Jammu and Kashmir which had close
and intimate contacts with both of them increased manifold, needless to say
that the status of the state of Jammu and Kashmir was the bone of contention
in that conflict.19 At the time of independence of the Indian sub-continent,
there were three highways linking the state with the outside world. They were
Jhelum Valley Road from Srinagar to Kohala via Baramulla and Domel; Banihal
Road from Srinagar to Sialkot via Banihal and Jammu and Abbotabad Road
from Domel to Abbotabad via Ramkot. There was also a rail link from Jammu
to Sialkot forming part of the pre-partition N.W. Railway system. Like the big
rivers viz. Jhelum, Chenab, and Indus, which flow from or through Kashmir to
Pakistan, all these highways connected the state of Jammu and Kashmir with
that part of Punjab which had become the part of Pakistan.20 While as the
rivers provided the cheapest mode of transportation for the timber of kashmiri
forests, the roads running along the banks of these rivers provided cheap and
fast transportation of fruits, vegetables, wine, woollen and silk materials,
carpets, and pretty products of skilled Kashmiri artists and artisans to
Pakistan.21
With the controversial accession of Jammu and Kashmir with the Indian
union and the subsequent declaration of Pakistan as an enemy country by the
Nationalists (National conference leaders) who were in power in the state, all
these highways and waterways became entirely useless for the people of the
state.22The age-old economic ties of the people living in the state, particularly
on its borders, with those living on the other side of the frontiers had been cut-
off, thereby shattering the entire economic structure which was so laboriously
and diligently built through centuries.23 Also with the closure of the highways
and the waterways of the state after 1947, not only was the trade of agricultural
19
Sisir Gupta, op. cit., p. 30. 20
Economic Chaos in Kashmir (Delhi: Kashmir Democratic Union, 1952), p. 2. 21
Joseph Korbel, Danger in Kashmir, (Jammu: Vinod Publishers and Distributors, 1992), p. 7. 22
Ibid. p. 3. 23
Techno-Economic Survey of Jammu and Kashmir (New Delhi: National Council of Applied Economic Research, 1969), p. 14.
Chapter 1 Economy of Kashmir Since 1947
6
commodities like fruits and vegetables, which being perishable commodities
and sold mostly in the nearby markets, affected but the cost of living in the
valley also increased. Pertinent to mention here that prior to 1947 almost all
export and import business of the state was carried on with or through west
Punjab which later on became the part of Pakistan24. Moreover, the conflict
between India and Pakistan besides blocking the historical routes of the state
and splitting its territory, also led to the imposition of restrictions, through the
Indus water Treaty25, for the tapping of its water potential, hence, besides
cutting off the centuries old cultural and trade connections with the
neighbouring countries the conflict also checked and retarded the economic
development of the state in general and some of the hilly areas in particular26.
It goes without saying that the conflict besides splitting the territory also
divided the families-there are hundreds of families living on both sides of the
state having relations across the borders27.
24
According to Joseph Korbel about 36% of the trade was going on with west Punjab and 64% with those areas which later on constituted what is now known as India. For details see Joseph Korbel, op. cit.
25 The Indus Water Treaty was signed in 1960 between India and Pakistan but has remained
controversial as it involves the sharing of water of the Indus River and its tributaries between the two countries. The treaty includes an agreement that Pakistan would receive unrestricted use of the western rivers, which India would allow to flow unimpeded, with minor exceptions. Moreover, the treaty disallows J and K to store the water, which is necessary for power projects and subsequently the state is unable to set up its own electricity projects on the two important rivers. The provisions of the treaty has also a very negative impact on the agricultural sector of the state as irrigation projects could not be set up in view of the fact that construction of storage dams is not being allowed by the treaty. Development Strategies for the State of Jammu and Kashmir (New Delhi: Observer Research Foundation), pp.21-22 & 25
26 Ibid.
27 In the words of the Urdu writer, Ismat Chughtai (1915-1991): The flood of communal
violence came and went with all its evils, but it left a pile of living, dead, and gasping corpses in its wake. It wasn't only that the country was split into two bodies but minds were also divided. Moral beliefs were tossed aside and humanity was in shreds. Government officers and clerks along with their chairs, pens and inkpots, were distributed like the spoils of war... Those whose bodies were whole had hearts that were splintered. Families were torn apart. One brother was allotted to Hindustan, the other to Pakistan; the mother was in Hindustan, her offspring’s were in Pakistan; the husband was in Hindustan, his wife was in Pakistan. The bonds of relationship were in tatters, and in the end many souls remained behind in Hindustan while their bodies started off for Pakistan; Mushirul Hasan, “Partition Narratives,” Social Scientist, Vol. 30, No. 7/8 (Jul. - Aug., 2002), pp. 24-53.
Chapter 1 Economy of Kashmir Since 1947
7
In 1950, the state had a meagre per-capita income of Rs 208 (at 1960-61
prices) and the rate of literacy was just about 5 per cent28 while as the all India
literacy rate was 18.33%. Agriculture the predominant sector of the economy
was stagnant and the productivity of the land/worker was very low. Industrial
development was almost negligible and the lack of infrastructure had crippled
the economy and accentuated the poverty syndrome29.
After the accession of Jammu and Kashmir with the Union of India no
doubt the exploitative and discriminatory rule of the Dogras came to an end
but the newly established interim government had to face a multitude of new
problems30. The territory of the state was divided, natural routes blocked and
more importantly the communal disturbances and the refugee problems
following the partition of the state placed massive burdens on the otherwise
state’s weak financial and administrative resources- there was a big problem of
refugee rehabilitation which sapped the meagre resources of the state.
However, without wasting any time the first state government (1948) under
Sheikh Mohammad Abdullah based its developmental ideology along the same
socialist lines as the rest of India and took steps towards the reconstruction of
the economy to liberate it from the dominance of the exploitative colonial
structures. It is worth mentioning here that the programme of the
reconstruction of the state economy had been articulated by the political
leadership since 1940s and was presented to the masses in the form of a
manifesto called Naya Kashmir31 or New Kashmir in 1944 to emancipate them
28
Misri, op. cit., p. 28. 29
Ibid. 30
The Interim Government came into being on 5 March 1948, replacing the Emergency Government that had been formed the year before in October. The new administration was to govern until a Constituent Assembly could be elected. Sheikh Abdullah took over as Prime Minister from Mehr Chand Mahajan, Bakshi Ghulam Muhammad was appointed Deputy Prime Minister, and other National Conference leaders took over key Ministries, Iffat Malik, Kashmir: Ethnic Conflict, International Dispute (Karachi: Oxford University Press, 2005), p. 90.
31 In September 1944 the National Conference published New Kashmir, its blueprint for the
future of the state: heavily infused with socialist jargon, and reputedly drafted by a communist, P. L. Bedi, the document promised equality of sex, age, class or creed, the abolition of landlordism, nationalization of big business, and an eight hour working day, for more details see, The New Kashmir Manifesto. Also see, Ian Copland, “The Abdullah
Chapter 1 Economy of Kashmir Since 1947
8
from the century’s exploitation, oppression, backwardness, poverty and the
like32. The programmes envisaged institutional and agrarian restructuring to
liberate and unleash the productive forces from the shackles of parasitic
landlordism and also to clear decks for rapid modernization and industrial
growth.33Absentee landlordism was abolished and the actual tillers were made
the owners of land.34 This interventionist role of the state was not for the
welfare of a selected few as had been the tradition under the Dogra rule but was
meant to benefit the whole society. It is therefore, not for nothing that the state
at this point of time was looked upon as a benevolent state.35 (For details on
Agrarian Restructuring see the Chapter on Land Reforms).
. No doubt Abdullah was ideologically oriented towards the socialistic
principles of the Indian State but the measures he took once in power clearly
indicate that he wanted Jammu and Kashmir to be an economically
independent state. To have a balanced budget his government preferred to
broaden the tax base of the state than to be dependent on external financial
assistance. In this regard his government remained adamant to continue with
the custom barriers between Jammu and Kashmir and the rest of India and
levied taxes on education as well.36 Through such measures the government no
doubt could balance its budget and decrease the deficit, the budget deficit in
1952 had been only 7.11 lakh while as it had been 3.7, 2.8, 2.9, 2.5 crore for the
years 1948, 1949, 1950, 1951 respectively, but at the same time the cost of living
in the state increased leading to the disenchantment of the people, a situation
Factor: Kashmiri Muslims and the Crisis of 1947” in D. A. Low (ed.), The Political Inheritance of Pakistan (London: Macmillan, 1991), p. 233.
32 Naya Kashmir Manifesto, Published by All Jammu and Kashmir National Conference.
33 Misri, op. cit., p. 28.
34 Ibid.
35 A Benevolent State, acts solely in the societal interest, and equipped with needed
information, knowledge and policy instruments, intervenes in an optimal way. Instead, predatory state is seen to be subjected to the pushes and pulls of interest groups, whose main interest is in redistribution, rather than growth and development. For details see , Siddhartha Prakash, “Political Economy of Kashmir Since 1947”, in Economic and Political Weekly, June 2000, p. 2054.
36 Bazaz, op. cit., p. 502.
Chapter 1 Economy of Kashmir Since 1947
9
very well exploited by Ghulam Mohammad Bakshi later on37. Apart from that
Abdullah launched a vigorous campaign in favour of making the state self
sufficient. Immediately after coming to power steps were taken to increase the
production of food grains and programmes such as ‘Grow-More-Food Scheme’
was launched under which new lands hitherto uncultivated were brought
under cultivation. To secure the supply of food grains to the city people the
infamous practice of Mujawaza– whereby peasants were called upon to deliver
shali to government granaries in the city, so that it could be distributed to the
city population– was reintroduced. Furthermore, to popularize the self-
sufficiency, Sheikh even told the people to consume potatoes than to be
dependent on imports thus earning him the name of Aaloo Bab.
The development programmes in the state received a fillip with the
introduction of ‘Planning’ in 1951. Though the launching of the First Five Year
plan [1951-56] marked the beginning of the concerted drive for the elimination
of the state’s age-old backwardness but it suffered from certain serious defects.
There was lack of study of resources and proper investigation into technical
feasibility of the projects38. It also did not take into account the local needs of
the people and was, therefore, considerably revised (in December 1954) after
the political change in 1953; as a result, the plan provisions went up from Rs.
700 lakh to Rs. 973.21 lakh in the central sector and from Rs. 300 lakh to
Rs.300.94 lakh in case of the state sector39. The plan had thus an outlay of
Rs.1274.15 lakhs and the expenditure during the plan was 1152 lakhs40. The
distribution of the plan provisions among various heads was as under:
37
Ibid. 38
I. Batnagar, “Planning in Kashmir,” in Kashmir Today, Vol. 4, No. 3, November, 1959 (Srinagar: Department of Information, Government of Jammu and Kashmir), p. 3
39 Sisir Gupta, op. cit., p. 397.
40 Government of Jammu and Kashmir, Jammu and Kashmir: A Review of progress, 1961
(Srinagar: Department of Information), p. 10.
Chapter 1 Economy of Kashmir Since 1947
10
Table 1.1
Allocation of funds under First Five Year Plan
S. No. Head of Work Plan provision (1951-56)
Rs. In Lakhs
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Power
Irrigation
Road development
Rural and urban water supply
Tourism
Cottage and small scale industries
Agriculture
Animal Husbandry
Drug farming
Soil conservation
Forest works
Housing
Health services
Education
Miscellaneous
Total
295.08
268.68
254.97
99.76
50.46
83.12
20.43
24.38
8.48
9.92
6.85
13.32
44.83
66.06
27.50
1,274.15
Source: Government Jammu and Kashmir, First Five Year Plan Document, Department of Planning and Development
However, on the whole ‘the First Five Year Plan of the state was merely a
modest beginning in the state’s planned development as work on its
implementation started only in late 1953-54 with no specific targets having been
laid down in the plan and few supply schemes for increasing agricultural yields
by means of improved inputs and improved agricultural practices being put
into practice41’.
41
Government of Jammu and Kashmir, Achievements of First Three Plans (Srinagar: Directorate of Economics and Statistics, Planning Department, Oct. 1968), p. 1.
Chapter 1 Economy of Kashmir Since 1947
11
By 1953 the government of Kashmir was divided within itself, its
members (as Nehru observed), liable ‘to pull in different directions and
proclaim entirely different policies’42. There is a bit of controversy regarding the
cause of the split within the national conference’s leadership. To some it arose
over the autonomy versus integration issue, with Sheikh Abdullah and Mirza
Afzal Beg wanting the state government to have at least the powers granted in
the Instrument of Accession, while as other National Conference ministers Viz.
Bakshi Ghulam Mohammad, G.M Sadiq, D.P. Dhar, S.L. Sharif favouring greater
integration with India,43 yet many others argued that Bakshi Ghulam
Mohammad was as staunch a supporter of autonomy as Abdullah used to be
and the main cause of the dispute was the nature of accession itself- S M
Abdullah considered the instrument of accession temporary where as others
wanted to settle the issue permanently and finalise the Accession44. Whatever
be the actual cause of the dispute there is no denying the fact that this was in
good part the work of the government of India’s intelligence Bureau. Officers of
the Bureau had been working within the National Conference, dividing the
leadership and confusing the ranks.45 Consequently Abdullah was overthrown
and Bakshi was invited to form the government.
After Abdullah’s government was sacked, Bakshi Ghulam Mohammed
became the prime minister of the state with the support of the Indian
government. In order to quell discontent, the government of India proposed to
step up the economic development in the region. The government of India
realized that the only way the people of Kashmir could be kept under control
and convinced of the merits of closer ties with India, was to provide the region
42
Ramachandra Guha, India after Gandhi (New Delhi: Picador India, 2008), p. 255. 43
Malik Iffat, op. cit., p. 104. 44
Puri Balraj, Triumph and Tragedy of Indian Federation, (Delhi; Sterling, 1981), p. 128. 45
See B.N. Mullick, My Years with Nehru: Kashmir (Bombay: Allied Publishers, 1971), Chapter 3.
Chapter 1 Economy of Kashmir Since 1947
12
with economic prosperity. Thus in December 1953, the India’s Planning
Commission advanced a loan of $14.9 million to the state government46.
As prime minister, Bakshi adopted a populist style, holding a Darbar
(court) every Friday, where he used to hear the grievances of the public47.
Mujawaza, a compulsory procurement of food grains, which had caused great
hardship to the people, was abolished. Ration was subsidized to the consumers
to the extent of 75 per cent of its cost and monopoly of cooperatives, which had
become “a symbol of tyranny”, over the distribution system, was broken48. The
accession of the state with the union of India was ratified (Feb, 1954) and in
April, 1954, the custom barriers between the State and rest of India were
abolished. Notwithstanding that the abolition of custom duties decreased the
cost of living in the state– the imported commodities from India were cheap
and durable-, enhanced the choice of the Kashmiri consumers, and greatly
helped in reducing the burden of indirect taxation on masses and led to greater
investments from India for the improvement of roads and communication to
facilitate the exchange of goods, however, it flooded the Kashmiri markets with
finished goods, exposed its indigenous industries, which after the abolition of
the custom duties had been rendered unprotected, to greater competition from
the Indian industries and devoid the state of some of its revenues. This had a
long term impact on the development of indigenous industries in the state as
the two key stimuli Viz. import-substitution and growth of home market which
led to the development of industries in post-1947 India were not available to the
industries of the state. Furthermore, the abolition of custom barriers led to the
emergence of a peculiar type of trade relation between New Delhi and the state
where in Kashmir become the supplier of raw materials and market for the
finished goods of India.
46
Wajahat Habibullah, The Political Economy of Kashmir conflict: Opportunities for Economic Peace building and for U.S. Policy (Washington: United States Institute of peace, 2004), p. 7.
47 Ramachandra Guha, op. cit., p. 255.
48 Balraj Puri, op. cit., p. 129.
Chapter 1 Economy of Kashmir Since 1947
13
Moreover, Bakshi used his closeness to Delhi to get a steady flow of
Central funds into the State. During this phase, driven by access to central
resources, the state got its first dose of ‘autonomous public investment’49. This
was used primarily for creation of social, economic and administrative
infrastructure. The phase, thus, was one of basic infrastructure building in the
state (dams, roads, hospitals, tunnels and hotels were constructed) and was not
very different from the national program except that there were no major
industrial investments50. No doubt there was corruption and nepotism in the
government of Bakshi51- in the development projects undertaken by Bakshi’s
government there was always ‘a percentage for family and friends’ and permits,
contracts, licences, quotas and loans were sanctioned by arbitrary discretion
and mood of the state Prime Minister52, thereby, earning his regime the name
BBC, or the Bakshi Brothers Corporation53- and some of the money was
creamed off by the Prime Minister and members of his family but even
Abdullah acknowledged that the Bakshi government did take ‘some positive
steps’ in Jammu and Kashmir:
For the first time a medical college and a regional engineering college was
set up. From Primary to university level, education was made free. Bakshi
oversaw the construction of a new secretariat, a tourist reception centre, a
stadium, Tagore Hall and some other buildings in Srinagar. The city of
Jammu was extended, its lanes and by lanes were widened and new roads
constructed. In Jammu as well a new secretariat and assembly were
constructed. In rural areas new roads and bridges were made. Preliminary
work was started with the intention of converting Kashmir University into a
residential institution54
.
49
Haseeb A. Drabu, Jammu and Kashmir Economy: Reform and Reconstruction ( Srinagar: Asian Development Bank, 2004), p. 4
50 Ibid. p. 4.
51 The chairman of the commission of inquiry set up to enquire into the charges of
misconduct and abuse of official position against Bakshi remarked: “Political offices have been turned into sources for making private fortunes for those in office and their friends and relatives”; Government of Jammu and Kashmir Commission of Inquiry, 1965 (Ayyangar Commission Report), p. 719.
52 Balraj Puri, op. cit., p. 129.
53 Ramachandra Guha, op. cit., p. 259.
54 Ajit Bhattacharya, Kashmir: The wounded Valley (New Delhi: UBSPD, 1994), p. 129.
Chapter 1 Economy of Kashmir Since 1947
14
Although, the concept of planned development was introduced in
Jammu and Kashmir, along with other states of India right from the First Plan
in 1951 but planned development in the state in true sense started with the
Second Five Year Plan (1956-61). This was so because of the fact that real
emphasis towards the attainment of declared goals of development policy like
rapid increase in living standards, full employment at adequate wages,
reduction inequalities arising from the uneven distribution of income and
wealth, was given by the introduction of the Second Five Year Plan. In the
initial period (pre-1954), under the Article 370 of the Indian constitution, taxes,
which in other cases were collected by the Union or on behalf of the Union by
the state, remained exclusively under the state control in Jammu & Kashmir
and the Income Tax Department of the state remained free from the control of
India55. Also the financial arrangements between India and Kashmir including
the difficult question of custom duties had not been worked out under the
Delhi Agreement between Abdullah’s government and New Delhi. But with the
change of government in the state, its (state’s) political and financial relations
with the union of India drastically changed. The custom duties between the
state and the centre were abolished and some of the important provisions of
the Indian constitution were applied to the state of Jammu and Kashmir,
56legislative power of the Indian parliament over the state of Jammu and
Kashmir increased. Economically the more important change was the financial
integration of the state with the rest of India. Through different Acts since 1957,
the state entered into financial arrangements with the centre / union
government which brought it at par with other state with respect to financial
matters including proportionate allocation of funds from the centre.57 The
55
Government of Jammu and Kashmir, Report of the Committee on Economic Reforms for Jammu and Kashmir, 1998, p. 12
56 For example, application of fundamental rights; Jurisdiction of the Supreme Court, the
authority of the Auditor General, transfer to the services of services to Union List, Approval of the Union Planning Commission of the States development programmes, See, P. N. Bazaz, Kashmir in Crucible (New Delhi: Pamposh, 1967), p. 71.
57 A. S. Anand, The Constitution of Jammu and Kashmir, its Development and comments (New
Delhi: Universal Law Publishing Co. Pvt. Ltd, 2006), p. 223.
Chapter 1 Economy of Kashmir Since 1947
15
financial integration of Kashmir with the centre, which Sheikh had resisted and
which was gladly accepted by Bakshi, brought great financial aid to the state.58
The second plan 1956-61 was, therefore, executed in a new political and
economic setup, the political will of the governing elite regarding the relations
of the state with Indian union being more or less the same. Furthermore, it is
important to mention that despite being a distinct political entity the economic
problems of the state were almost identical to those of the other states in the
Indian union. Among such problems were the high fiscal imbalance of the
state, excessive under-utilised growth potential, lower capital productivity, and
a small shrinking productive base of the economy. The problems could be
attributed to geographical location of the state, very real exogenous difficulties,
inherited production structures, the uncertain political situation and the
disturbed law and order conditions.
The Second Five Year Plan aimed at securing a coordinated and balanced
development of the economy of the state with a view to ensure better standard
of living for its people. Unlike the first plan which had a limited character and
gave main emphasis on agriculture, the 2nd plan was of a larger dimension and
had more or less three times the value of the first plan. But the expenditure
during the second plan was only about 26 crore while as the outlay for the plan
was round about 34 crore. The distribution of funds for various heads of
development within the ceiling of the 2nd state plan made it clear that the plan
was designed to satisfy the objectives of opening up of new areas like, large and
medium industries and minor irrigation fisheries. It also provided for the
extension of irrigation facilities on a large scale and the development of
backward areas.59
The Third Plan of the state 1961-62 to 1965-66 envisaged vital economic
policies for the speedy achievement of a socialist pattern of society. The
58
Government of Jammu and Kashmir, Jammu and Kashmir on the Road to Progress, Department of Information, p. 3
59 Government of Jammu and Kashmir, Second Five Year Plan, Department of Planning and
Development.
Chapter 1 Economy of Kashmir Since 1947
16
development schemes incorporated in the new Plan stressed on the following
objectives:60
i) To bring about a substantial increase in the state income
ii) To develop state’s power resources and establish industries based on
the state’s natural wealth
iii) To achieve self–sufficiency in food-grains and increase agricultural
production; and
iv) To increase employment opportunities and spread the benefits of
increase in the state income as evenly as possible.
The outlay of the plan was 7514.44 lakhs and the expenditure during the
plan was 6185.09 lakhs61. Besides the reorganization of rural economy by
enlarging the scope of agriculture the plan gave top most priority to the
development of power, setting up of industries and exploitation of untapped
mineral wealth of the state62.
During the Second and Third plan periods, which also coincide with the
financial integration of the state with the Indian union, the rate of growth in
the State Domestic Product [SDP] was of the order of 8 per cent63. Given the
fact that the state's own resource generation was almost non-existent, the
driving force of the growth was central aid and assistance which was primarily
used for the creation of social, economic and administrative infrastructure. Not
surprisingly therefore, this phase (1956-1966) was one of the basic infrastructure
building phase in the state and was not very different from the national
program except that there were no major industrial investments64. The
quantum of assistance for the three plans was as follows:
60
Government of Jammu and Kashmir, Jammu and Kashmir: A Review of Progress, 1969, Department of Information, pp. 1-2.
61 Government of Jammu and Kashmir, Different Plan Outlays, Department of Planning and
Development. 62
Jammu and Kashmir: A Review of Progress, 1969, 63
Haseeb A. Drabu, op. cit., p. 4. 64
Ibid.
Chapter 1 Economy of Kashmir Since 1947
17
Table 1.2
Central Assistance for the first Three Five Year Plans of the State
Source: Report of the Jammu and Kashmir commission of Inquiry, 1968
From the above table it is clear that the state plans had been largely
financed by the union government. The amount of assistance increased from Rs
10 crore during the First Plan to 62 crore at the end of the third plan. It is worth
noting that the financial assistance received by the state was the highest
percentage of assistance received by any other state of the Indian union. The
per capita financial assistance to Kashmir in the second plan 1956-61 was Rs.50
against the average of Rs 37 for other states. In the Third Plan which began in
1961, the figures were Rs. 117 and Rs. 52 respectively.65 Plan outlay and State wise
Central assistance, given in the table 1.5 below substantiates the fact.
65
Balraj Puri, “Jammu and Kashmir” in Weiner, Myron,(ed.), State Politics in India (Princeton: Princeton University Press), p. 225.
Period Total plan
expenditure (In lakhs of Rupees)
Central Assistance (In lakhs of Rs)
% of Central Assistance to plan expenditure
(In Lakhs of Rs)
First Plan 1,151.71 1,000 86.8
Second
Plan
3,120.20 2,000 64.1
Third Plan 6,409.34 6,200 96.7
Total 10,681.25 9,200 86.13
Chapter 1 Economy of Kashmir Since 1947
18
Table 1.3
Plan Outlay and Central Assistance-State wise (in Crores of Rupees)
Source: Report of the Jammu and Kashmir Commission of Inquiry, 19689 (Gajendragadkar
Report p. 116, Appendix 6)
Notwithstanding that the government levied certain taxes for the first
time during the Third plan Viz. Electricity Duty (from April 1962), Agricultural
Income Tax (from September 1962), and passenger tax (from July 1, 1963) and
increased the scope and pitch of sales tax to increase revenue and per capita
State
First Plan Second Plan Third Plan
Plan
outlay
Central
Assistance
Col(3)as %
of Col(2)
Plan
outlay
Central
Assistance
Col(3)as %
of Col(2)
Plan
outlay
Central
Assistance
Col(3)as %
of Col(2)
1 2 3 4 5 6 7 8 9 10
Andhra
Pradesh
107 61 57 181 96 53 349 220 63
Assam 28 22 78.6 63 31 49.2 132 100 75.8
Bihar 102 55 53.9 117 84 47.5 332 216 65.1
Gujarat 99 32 32.3 147 50 34 240 112 46.7
Jammu and
Kashmir
11.52 10 86.8 31.20 20 64.1 64.09 62 96.7
Kerala 44 24 54.5 79 38 48.1 182 122 67
Madhya
Pradesh
94 61 64.9 145 96 66.2 287 219 76.3
Madras 85 42 49.4 187 95 50.8 342 187 54.7
Maharashtra 125 48 38.4 214 74 34.6 435 167 38.4
Mysore 94 47 50 139 67 48.2 264 156 59.1
Nagaland -- -- -- -- -- -- 11 11 100
Orissa 85 77 90.6 89 66 74.2 224 137 61.2
Punjab 163 141 86.5 151 88 58.3 252 134 53.2
Rajasthan 66 60 90.9 100 59 59.0 213 161 75.6
Uttar
Pradesh
166 87 52.4 228 121 53.1 557 356 63.9
West Bengal 154 113 73.4 156 73 46.8 305 155 50.8
Chapter 1 Economy of Kashmir Since 1947
19
tax66 to decrease the state’s dependence on the centre, however, the fact
remains that even in 1968-69 the per capita tax in Jammu and Kashmir at Rs 14
was very low as compared to other states67 and the state’s income through all
its tapped sources was far less than its expenditure. Besides there had been a
fast increase in expenditure on police, famine relief, food subsidies and debt
services which had reduced the funds available for development68. Therefore,
the state continued to depend on the centre for financial assistance. However,
the generous financial assistance especially in form of loan led to heavy
indebtedness of the state and also increased its dependence on the centre. But
more than the level of central transfers it was the policy adhocism at the central
level which translated into a soft budget constraint for the government. This, in
the long run, had proved detrimental and had had an adverse impact on the
culture of management of state finances.69
From 1966/67 to 1975/76 a number of changes in the institutional
relationship of the state with the Union were brought about which though had
not a direct impact on the economy but did constrain the efficient functioning
of the economic system. The most important being the political instability. The
phase of political adhocism translated into extremely weak governments whose
legitimacy was in question and accordingly, the willingness to pursue rational
economic management in terms of either raising resources or pruning
expenditures was extremely limited.70 Notwithstanding that with regard to
raising the revenue and minimising the expenditure the Techno-Economic
Survey of Jammu and Kashmir had recommended, for the period between 1966
and 1975, that71 : i) the sales tax should be reviewed and tax rate on items which
were not of mass consumption be enhanced and the coverage of tax should also
66
In 1958-59, Kashmir was the least taxed state of India, the Per Capita tax in Kashmir amounted to Rs 4.23, in contrast to average of Rs 9.17 in all other states of India, see Tribune, 26
th May, 1977.
67 Techno-Economic Survey of Jammu and Kashmir, 1969, op. cit., p. 146.
68 Ibid. p. 174.
69 Haseeb A. Drabu, op. cit., p. 4.
70 Ibid.
71 Techno- Economic Survey of Jammu and Kashmir, 1969, op. cit., p. 174.
Chapter 1 Economy of Kashmir Since 1947
20
be extended ii) land revenue should be made more just and elastic by relating it
to productivity and charging different rates according to the size of the holding
iii) To decrease expenditure the non-developmental expenditure should be
kept to the minimum and policy of food subsidy should be reviewed to reduce
the burden on the expenditure; however, in reality the level and structure of
expenditure and the desire to raise taxes was determined by the need to take
populist measures to gain administrative acceptability, if not political
legitimacy.72
In 1969, while devising the formula for sharing Central Assistance among
states the Fifth Finance Commission, acting in line with the Gadgil Formula73,
had accorded special status to Jammu and Kashmir along with Assam and
Nagaland. Besides historical and political reasons, the basis of declaring the
three states as Special Category States were the harsh terrain, backwardness
and social problems prevailing in these states74. However, after its inclusion in
the Special Category States, the state of Jammu and Kashmir was treated
differently. The state was not provided with the facility of plan assistance at the
rate of 90% in the form of grant-in-aid and 10% in the form of loan, which was
the pattern applicable to special category states, and continued to receive
central assistance in the form of 70 per cent as loan and 30 per cent as grant up
to 1990.75 Moreover, with the inclusion of more states in the category of special
states the purpose of the scheme was diluted to a considerable extent as such
an inclusion led to the reduction in the central assistance to each of the special
category states. It goes without saying that in accordance with the Gadgil
72
Haseeb A. Drabu, op. cit., p. 4. 73
As per Gadgil formula a special category state gets preferential treatment in federal assistance and tax breaks. The special-category states get significant excise duty concessions, and thus help these states attract large number of industrial units to establish manufacturing facilities within their territory. Apart from that, 30% of the Centre’s gross budgetary support for Plan expenditure goes to special-category states. Earlier, 70% of the Plan assistance given to the states was loans and the balance 30%, grants. In the case of special-category states, 90% of Plan assistance was given as grants, and only 10% as loans.
74 See, Speech by Dr. Farooq Abdullah, Chief Minister, Jammu & Kashmir, 49th N.D.C.
Meeting, 1st
September 2001, Vigyan Bhavan, New Delhi. 75
Report of the Committee on Economic Reforms for Jammu and Kashmir, 1998, p. 17.
Chapter 1 Economy of Kashmir Since 1947
21
Formula after setting aside funds for externally aided projects and a reasonable
amount for special area programs, 30% of the balance of central assistance for
state plans had to be provided to special category state.76
Therefore, despite being a special category state, Jammu and Kashmir
continued to receive the central financial assistance as a general category state.
During the Fourth Five Year Plan, which had priorities for agriculture and the
development of infrastructural facilities such as power, communication and
expansion of irrigation, the state received a financial assistance of Rs 140 crore
from the centre which was more than double what the state had received
during the Third plan. This was in addition to the Rs 17 crore which the state
had managed to raise through the mobilization of additional resources.77 With
a State contribution of Rs, 63 crore including Institutional finance the Fifth
Plan in order to achieve the minimum objectives namely78: i) Five percent
annual increase in the per capita income ii) Creation of adequate job-
opportunities so as to provide gainful employment to the additional labor force
as well as to the existing un-employed, and iii) Reduction of inequalities in the
socio-economic development of various regions and population groups had to
be dependent on the central assistance for about 200 crore79. The development
of the state through planning received a new impetus with the introduction of
Single Line Administration in 1976 by Sheikh Mohammad Abdullah. Through
this process, which was a unique concept of decentralized planning80,
decentralization was brought at the district level and district development
boards were constituted for planning at the district level with the twin objective
of making planning more reflective of the hopes and aspirations of the common
76
Abdullah Speech, op. cit. 77
Government of Jammu and Kashmir, Fifth Five Year Plan (Srinagar: Planning and Development Department), pp. 9 & 42.
78 Ibid. pp. 43-45
79 The fifth plan proposed an outlay of Rs 363 crore. But the actual expenditure during the
plan was only 278.54 crore, see planning and development outlays. 80
Jammu and Kashmir: Fifty Years, (Srinagar: Department of Information, 1998), p. 280
Chapter 1 Economy of Kashmir Since 1947
22
man and ensuring speedy implementation of the programmes.81 The system of
decentralized planning yielded considerable benefits in terms of extending the
impact of developmental programmes and in galvanizing public involvement as
well as reducing regional disparities. Far flung and inaccessible areas, hitherto
neglected, were attended to in a better manner. Also the tempo of expenditure
increased, thereby, checking the surrender of funds which was not uncommon
till then82. To make decentralized planning more effective larger freedom was
given to the District Development Boards during the Ninth Plan for the fixation
of priorities and inclusion of projects having local area relevance.83
The state’s continued dependence on the centre financial transfers had
been caused by a variety of factors. Failure to mobilize enough resources within
the state had been the foremost cause. Other factors responsible for the
situation were subsidization of consumption, continuous emphasis on creating
capacities and assets without adequate efforts to make them viable and a
disproportionate expansion of the services sector.84
Having ratified all post-1953 political changes in the state through the
Accord of 1975 Sheikh Mohammad Abdullah now received the Indian financial
assistance as enthusiastically as Bakshi had. The formula of assistance remained
the same i.e. 70% loan and 30% grant. The 6th Five Year Plan with a percentage
share of 26.19% for social and community services, 19.13% for Agriculture and
allied sectors, 18.83 % for power, 10.93% for transport and communication,
10.22% for irrigation and flood control, 7.11% for industries and mining and
5.68% for hilly and backward areas received a financial assistance of about 80%
from the centre85. However, the central plan assistance to the state did not take
care of the resource gap in the non-plan budget upto the 7th Plan (1985-1990). 81
Government of Jammu and Kashmir, Eighth Five Year Plan, Planning and Development Department, p. 22-23.
82 Ibid.
83 Jammu and Kashmir: Fifty Years, op. cit., p. 282.
84 Misri, op. cit., pp. 47-48.
85 Government of Jammu and Kashmir, Economic Review of Jammu and Kashmir, 1973-84, p. 13
& Economic Review of Jammu and Kashmir, 1984-85, pp. 10-13, Directorate of Economics and Statistics.
Chapter 1 Economy of Kashmir Since 1947
23
For the 7th Five Year Plan, the central assistance for the state was fixed at Rs
1838.68 crores out of which Rs 438.68 crores were meant for meeting the
resource gap in the non-plan budget and the balance of Rs 1400 crores was
approved as seventh plan outlay.86
It was because of this liberal financial assistance which the state received
from the centre that the plan expenditure in aggregate and per capita terms
since first five year plan, had increased over time– the per capita expenditure
had gone up from a mere Rs. 34 in the First Plan to Rs. 556 in 1987-88- and that
the state could formulate developmental plans which besides agriculture gave
thrust on the creation of adequate infrastructure like power, transport and
provisions of social and community services in the form of schools, health
centres, piped water supply, social welfare centres etc. The state registered
considerable gains in certain respects which were reflected in the increase in
per capita income, diversification of economic activities, growth of physical and
social infrastructure, decrease in mortality rates, increase in the availability of
food, commercialization and modernization of agriculture87 etc. The per-capita
expenditure in the state since the First Five Year Plan is tabulated as under:
86
Jammu and Kashmir: Fifty Years, op. cit., p. 286. 87
Misri, op. cit., P. 29.
Chapter 1 Economy of Kashmir Since 1947
24
Table 1.4
Plan- wise Expenditure
Plan
Expenditure
Expenditure under the Plan
(Rs. In Lakhs)
Expenditure per
Capita
First Plan 1151.71 34
Second plan 2594.75 74
Third Plan 6185.09 161
Inter plan 5950.11 139
Fourth Plan 16284.80 344
Fifth plan 27854.71 517
1978-79 10164.95 179
1979-80 11972.71 206
Sixth Plan 91814.83 1458
Seventh plan 140000.00 1954
1985-86 27442.22 404
Source: Economic Review of Jammu and Kashmir, 1986-87, Department of Planning and Development
However, one major side effect of the policy of liberal funding was that it
failed to give the state an impetus to mobilise its own resources for economic
growth88. The state continued to be among the poorest states of India and the
impact of the plans in terms of developmental indicators had not been
significant. The output employment multipliers had remained very weak and
the dependence of the state on outside markets, even for the products, such as
mutton, ghee, vegetables, butter etc., in which the state enjoyed comparative
advantage or where there were vast potentialities, had grown over the years.
This was so because the state’s full production potential had remained
constrained due to the policy failures and shortcomings in implementation.
88
Siddhartha Prakash, op. cit., p. 2053.
Chapter 1 Economy of Kashmir Since 1947
25
The dependence of the state on different products is shown in table 1. 7 given
below:
Table 1.5
Import of Different Commodities into the State
[Quantity in 000, quintals]
Item Year
1973-74 1977-78 1980-81 1985-86 1990-91 1995-96 2001-02
Vegetables 206.20 313 468 589 1013 1387 1905.26
Edible oils 101 125.9 234.6 161.84 67.10 186.06 379.60
Oil Seeds 18.40 45.10 29.28 54.82 58.53 NA 63.82
Butter 1.50 4.7 2.52 1.45 NA NA NA
Milk
powder
8.2 65.60 71.78 94.63 12.78 NA NA
Source: Digest of Statistics, 2004-05
The performance of the state in respect of mobilisation of tax revenues
was very poor and the tax revenues as a percentage of State Domestic Product
[SDP] as also the rate of growth of tax revenues in Jammu and Kashmir were
considerably lower than even the Low Income states. Although, the state
enjoyed residuary powers under its constitution and could tax the services and
indivisible contracts, but the state did not exploit its capacity to raise resources
through sales tax either by increasing the rate of tax or by widening the tax
base89. Therefore, as compared to the other states of India contribution of sales
tax in Jammu and Kashmir had not been significant. A large number of
commodities had been kept outside the ambit of sales tax- the state had
perhaps the longest list of exempt commodities and almost all the agricultural
items including food articles, agricultural implements, seeds and handicrafts,
fertilizers, and pesticides were outside the ambit of sales tax. Also there was
consistent reduction of sales tax on cars since 1970’s which decreased the
89
Report of the Committee on Economic Reforms for Jammu and Kashmir, op. cit., pp. 43-45.
Chapter 1 Economy of Kashmir Since 1947
26
revenues to the state and favoured the elite90, thereby substantiating the view
that the state comprised of a group of self seeking individuals and groups
interacting strategically with private agents.91 The following table shows the
comparative position of tax revenue as a percentage of SDP and the growth
rates of tax revenues for major states for the decade 1980-81 to 1990-91.
Table 1.6
Comparative Position of Taxation Performance of States
(1980-81 to 1990-91)
S. No. State
Percentage of Tax
Revenue to SDP
Growth Rate of
Tax Revenue
1980-81 to 1990-91 1980-81 1990-91
1 Gujarat 8.1 9.7 16.1
2 Haryana 7.7 9.5 16.2
3 Maharashtra 7.5 9.2 15.9
4 Punjab 7.8 7.6 14.0
5 Rajasthan 5.6 6.9 17.2
6 J &K 4.5 5.1 12.8
High Income State 7.7 9.1 15.9
Middle Income States 7.4 9.1 15.9
Low Income States 5.4 6.9 15.7
All Major States 6.8 8.4 15.8
Source: Finance Department, Government of Jammu and Kashmir
Furthermore, most of the funds which the state received from New Delhi
for the economic development of the State were either siphoned off into the
pockets of the ruling elite or were spent as Non-Plan Expenditure92, needless to
mention that the central assistance to the state did not take care of the
resource gap in the non-plan budget prior to the 7th plan (1985-1990). It is also
90
Ibid. 91
Siddhartha Prakash, op. cit., p. 2053 92
Iffat Malik, op. cit., pp. 161-62.
Chapter 1 Economy of Kashmir Since 1947
27
worth to mention here that the discriminatory 70:30 formula regarding the
devolution of funds between the centre and the state of Jammu and Kashmir
led to the indebtedness of the state to the centre as a result of which about 50
per cent of the state’s expenditure began to comprise of debt and interest
repayments.93 In 1978-79 out of the total budget plan outlay of Rs 108 crore,
56.8 crore were directed towards debt re-servicing, the debt servicing liability
on one rupee loaned by the centre to Jammu and Kashmir had reached to Rs
5.3594. The earlier theology of the plan funds being spent on capital works and
creation of permanent assets was also no longer true. The distinction between
Plan and non-plan activities had been eroded over the time and the non-plan
expenditure, over the years had grown at an alarming rate, thereby, strangling
the economy by decreasing the funds available for asset creation and
productive expenditure. Besides debt re-servicing, the non-plan expenditure in
the state included salaries, pension and retirement benefits, power imports,
fuel for gas based power generation, two subsidy items-food subsidy and
budgetary support to Public Sector Units [PSUs] etc.
Nevertheless, the investment efforts resulted in Structural
changes95/shifts in the state economy- the relative share of the primary sector
93
Siddhartha Prakesh, op. cit., p. 2053. 94
Government of Jammu and Kashmir, Budget Speech, 1978-79. In an Interview to Basharat Peer’s Ab. Rahim Rather, the Finance Minister of Jammu and Kashmir, remarked “just as accumulated interest the state has to pay Rs 1,250 crore to the centre, while the debt is around Rs 5,000 crore”
95 Structural changes do not only characterise economic development, they are also necessary
for sustaining economic growth [T.S. Papola, Emerging Structure of Indian Economy: Implications of Growing Inter-sectoral Imbalances, Presidential Address, 88th Conference of The Indian Economic Association, December 27-29, 2005, pp.2-3]. Economic growth in developing countries is about changing the structure of production [World Economic and Social survey 2006, p. 29]. The neoclassical view that sectoral composition is a relatively unimportant by-product of growth has been convincingly questioned by structural economists like Kuznets, who have empirically demonstrated that growth is brought about by changes in sectoral composition [T.S. Papola, op.cit. p.4] This is so both for the reasons of demand and supply. Though the emphasis laid on different factors by different economists has varied, the broad line of reasoning advanced by pioneers like Fisher and Clark and followed with some elaborations and modifications by later analysts has been as follows: Income elasticity of demand for agricultural products is low; that for industrial, particularly manufacturing goods, is high; and, for services, it is still higher. [T.S. Papola, op.cit.p4]. As a result, with rising levels of income, the demand for agricultural products
Chapter 1 Economy of Kashmir Since 1947
28
in SDP had decreased persistently whereas the relative shares of the secondary
and the tertiary sectors had increased. The sectoral composition of the Net
State Domestic Product at 1960-61 and 1970-71 prices are shown in table 1.7 and
1.8 respectively.
Table 1.7 Relative Share of Primary, Secondary and Tertiary Sectors in the Net SDP
of the State at 1960-61 prices
Sector Year Percentage points
increase/decrease 1960-61 1965-66 1969-70
Primary 67.67 56.21 57.05 -10.62
Secondary 08.70 13.59 12.74 04.03
Tertiary 23.61 30.19 30.19 06.58
Net SDP (in Lakhs) 9478 9307 12802
Source: Computed from the various issues of Central Statistical Organization’s Estimates of SDP and Capital Formation
Table 1.8 Relative Share of Primary, Secondary and Tertiary Sectors in the Net SDP
of the State at 1970-71 prices
Sector Year Percentage points
increase/decrease 1970-71 1975-76 1980-81 1986-87
Primary 56.63 54.44 51.76 44.53 -12.10
Secondary 14.56 15.007 16.41 20.18 05.62
Tertiary 28.79 30.54 31.82 35.27 06.48
Net SDP (in Lakhs) 24959 29638 37666 47110
Sources: Computed from the various issues of Central Statistical Organisation’s Estimates of SDP and Capital Formation.
relatively declines and that for industrial goods increases and, after reaching a reasonably high level of income, demand for services increases sharply. Accordingly the shares of different sectors in the national product get determined by the changes in the pattern of demand. On the supply side, agriculture being mainly dependent on a fixed factor of production, namely land, faces a limit on its growth and is subject to early operation of the law of diminishing returns. Industry, specially manufacturing, on the other hand, offers large scope for use of capital and technology, which could be augmented almost without limit with human effort. Labour supply could constrain expansion of industry, but it is possible to overcome it by introducing labour-saving technological changes. The same applies to services, where application of technologies seems to offer much larger scope.
Chapter 1 Economy of Kashmir Since 1947
29
However, a deeper look at the sectoral composition of the SDP reveals a
different story. In the real economy, the critical feature of the J&K economy's
growth process was not/is not so much the sectoral distribution in terms of
agriculture, industry and services, but the sub-sectoral composition and the
relationship between them. The following tables [1.9 and 1.10] show the sub-
sectoral composition of SDP:
Table 1.9
Relative Shares of Sub-Sectors [at 1960-61 prices] in their respective
Sectors
Sub-sector
Year
1960-61 1965-66 1969-70 Percentage points
increase/decrease from the base to the terminal year
1. Agriculture 86.57 87.78 90.46 3.89
2. Forestry 13.13 11.60 8.77 -4.36
3. Fishing 0.11 0.48 0.52 0.41
4. Mining 0.19 0.13 0.24 -0.05
Primary[1 to 4 in lakhs] 6414 5232 7304
5. Manufacturing 66.34 56.99 45.46 -20.88
6. Construction 28.93 36.44 47.91 18.90
7. Electricity and gas 4.72 6.56 6.62 01.90
Secondary [5 to 7 in lakhs] 826 1265 1632
8. Transport 16.53 22.24 25.94 09.41
9. Trade 31.41 21.39 20.95 -10.46
10. Banking 01.83 02.84 03.54 1.71
11. Real estate 08.84 08.15 06.67 -2.17
12. Public Administration 16.58 20.14 21.15 04.57
13. Other services 24.80 25.23 21.72 03.08
Tertiary [8 to 13 in lakhs] 2238 2810 3866
Source: Computed from the various issues of Central Statistical Organisation’s estimates of
SDP and Capital Formation..
Chapter 1 Economy of Kashmir Since 1947
30
Table 1.10
Relative Share of Sub-Sectors (at 1970-71 prices) in their respective
Sectors
Sub-sector
Year
Percentage points
increase/decrease
from the base to
the terminal year 1970-71 1975-76 1980-81 1986-87
1. Agriculture 90.23 90.11 90.28 95.15 04.92
2. Forestry 8.71 8.80 8.60 3.80 -4.91
3. Fishing 0.77 0.75 0.81 0.87 0.10
4. Mining 0.29 0.33 0.31 0.18 -0.11
Primary [1 to 4 in lakhs] 14136 16137 19498 20981
5. Manufacturing 36.72 38.42 33.68 36.08 0.64
6. Construction 60.09 57.01 60.68 56.08 4.01
7. Electricity and gas 3.19 4.56 5.65 07.83 4.64
Secondary [5 to 7 in lakhs] 3636 4448 6181 9509
8. Transport 16.17 16.52 21.38 16.46 0.29
9. Trade 30.03 29.56 27.18 23.08 -6.95
10. Banking 2.92 3.61 5.57 07.69 4.77
11. Real estate 08.07 7.22 6.12 6.70 -1.37
12. Public administration 19.78 21.21 20.10 21.53 +1.75
13. Other services 23.02 21.87 19.63 24.52 1.5
Tertiary 7187 9053 11987 16620
Source: Computed from the various issues of Central Statistical Organisation’s estimates of SDP and Capital Formation
Though the primary sector mainly comprising of agriculture and the
allied activities registered a compound growth rate of 1.06 (at 1960-61 prices)
during the period 1960-61 to 1969-70 and 2.7 (at the 1970-71 prices) for the
period 1970-71 to 1986-87 but its contribution to the state NSDP decreased from
67.67% in 1960-61 to 44.53 % in 1986-87 [see table 1.10]. The state had not been
able to make any major break-through in agriculture. Food grains, milk,
Chapter 1 Economy of Kashmir Since 1947
31
mutton, eggs and poultry birds had continued to be imported and the yield
rates of principal crops like wheat and maize had either stagnated or gone
down96. There was no appreciable increase in the net irrigated area up to 1975-
the Net Irrigated Area in 1951 was 261 thousand hectares and only 295 thousand
hectares in 1975- and two-third area had continued to produce only one crop97.
Within primary sector, agriculture consisting of the ‘reform’ sector that
includes the subsistence agriculture and the ‘non-reform’ sector that includes
the horticulture and plantations sector, the horticulture sector used to be the
major contributor to the SDP. However, the growth of the dynamic part of the
agricultural sector that is horticulture was exogenously determined as its
market was lying outside the administrative boundaries of the state. This had
an adverse impact on the development of forward linkages in the primary
sector and placed an exogenous factor as a necessary constraint on the
domestic capacity to produce. However, the decrease in the contribution of
primary sector to the state domestic product should not be taken at its face
value as the corresponding increase in the contribution by secondary and
tertiary sectors was from those sub-sectors which were economically less
important, like construction and public sector/Government employment.
(Agriculture of the valley has been discussed in rest of the chapters)
The secondary sector mainly involving Industries and allied
manufacturing activities registered a compound growth rate of 7.75 during
1960-61 to 1969-70 and 6.4 during 1970-71 to 1986-87. However, barring a few
large and medium factories, the industrial activity remained confined to the
small scale sector, handicrafts, village and cottage industries and handlooms. In
1952, Kashmir valley had just 27 registered factories which provided
employment to 4,742. The corresponding figures for Jammu division were 19
and 1067 respectively. With the efforts of the government which provided
subsidized transport facilities, concession credit and raw material quotas and
96
For details see the chapter on Technological Changes in Agriculture. 97
Government of Jammu and Kashmir, Report of the Development Review Committee Jammu and Kashmir, 1975, Part V: Agriculture and Irrigation, P. 1.
Chapter 1 Economy of Kashmir Since 1947
32
set up industrial estates and sheds the number of registered units went up to
720 ending 1985 and the number of small scale units registered with the
Directorate of Industries increased from 2,233 in 1973-74 to 23,930 in 1987-88,
and the khadi and village units from 489 to 10, 66 in the corresponding
period98. The cause of medium and large scale industries was further promoted
with the setting up of The Jammu and Kashmir State Industrial Development
Corporation in 1969 which provided finances in the form of long term loans,
equity assistance, capital participation, under writing and guarantee and seed
capital assistance etc99. The income from industrial sector to the state revenue
was 13.53 crores in 1950-51, which increased to 169.60 in 1989-90 but in terms of
percentage the contribution of the industrial sector declined during the period
from 24.36 to 19.87. The following table depicts the income from the industrial
sector to state economy from 1951 onwards.
Table1.11
Contribution of Industrial Sector to State Economy
Year Income from industrial sector in
Crores
Percentage to State
income
1950-51 13.53 24.36
1955-56 15.47 22.76
1960-61 20.18 23.35
1965-66 22.19 21.35
1970-71 26.01 21.03
1989-90 169.60 19.87
Source: Directorate of Economics and Statistics, Srinagar, Kashmir.
Despite, the efforts of the government the state continued to be the least
industrialized among the states of India and a number of small scale industrial
98
Misri, op. cit., p. 33. 99
P. S. Verma, Jammu and Kashmir at Political Cross Roads (New Delhi: Vikas Publishing House Pvt. Ltd, 1994), p. 97.
Chapter 1 Economy of Kashmir Since 1947
33
units became dysfunctional/non-functional. A couple of factors, viz., paucity of
resources, treacherous terrain, infrastructural bottlenecks, and crippling effect
of transportation had been responsible for the industrial backwardness of the
state in general and that of the valley in particular. Furthermore, the absence of
forward looking entrepreneurial elite in the state as well as the lack of proper
infrastructure (power, roads, railways etc) and dearth of raw material sources
within the state which failed to attract the entrepreneurial elite from outside
the state also acted as an impediment to the industrialization of the state.100
However, same is not true of the handicraft sector which played an important
role in the economy of the Kashmir valley. In the absence of large scale
industries in the state, handicrafts remained a key economic activity from the
time immemorial. The valley is known for carpets of various types and sizes,
wood carvings, crewel, numdas, papier-mâché and other such crafts which hold
a significant share in the overall production and export of the state. The
handicrafts and handlooms were the major employment oriented enterprises in
the valley and the government had been providing various incentives and
facilities to diversify these activities and spread them to far flung areas. The
incentives/ facilities provided by the government included the opening of
training centers, organization of industrial cooperative societies, opening up of
sales outlets and market assistance, opening of raw material depots, grant of
subsidies on various inputs and bank credits at differential rate of interest. The
cumulative impact of this all was that by 1989 the handicraft sector had
expanded to account for about 6 per cent of the state GDP101. However, like the
horticulture sector growth in the handicraft sector was also being determined
by the external factors- growth was largely fuelled by the inflow of tourists from
the external markets. A more detailed analysis of the composition of SDP by
industry of origin reveals that unlike other states, the secondary sector is not
only much smaller, but it is also dominated by construction instead of
100
Report of the Committee on Economic Reforms for Jammu and Kashmir, op. cit., p. 180. 101
Iffat Malik, , op. cit., pp. 162-63.
Chapter 1 Economy of Kashmir Since 1947
34
manufacturing activities. The contribution of construction has more than
doubled since 1980-81102.
In case of the tertiary sector which mainly comprises of trade, transport,
banking, real estate, tourism and Public administration sectors the compound
growth rate during 1960-61 to 1969-70 was 5.95 and during 1970-71 to 1986-87
was 5.51. However, instead of trade, transport and communication in reality the
sector was dominated by an export dependent "tourism" sector and a public
expenditure driven government administration which was much contrary to
what happens in the other developed states. The tourism sector played a
significant role in the valley’s economy through the generation of various
linkage activities like production of handicrafts and the construction of hotels
and restaurants. The inflow of tourists in the state is shown in the table below:
Table 1.12
Growth of Foreign and Domestic Tourist Inflow into the Valley
S. No. Year Home
tourists % change
Foreign
tourists % change
Total
tourists % change
1 1981 598555 - 43745 - 642300 ---
2 1982 560987 -6.28 42851 -2.04 603833 -5.99
3 1983 398428 -28.98 41101 -4.08 439529 -27.21
4 1984 192684 -51.64 36458 -11.3 229142 -47.87
5 1985 465599 141.64 38015 4.27 503614 119.78
6 1986 536598 15.25 53118 39.73 589716 17.10
7 1987 664081 23.76 57573 8.39 721654 22.37
Source: Dutta (1989); M. L. Misri (Poverty, Planning and Economic Change in Jammu and Kashmir)
From the above analysis of the different sectors of the state economy
and their contribution to SDP it becomes quite evident that the growth process
in the state economy was unique in the sense that the different sub–sectors
worked in an autonomous way. There was no basic relation evident between
102
Haseeb Drabu, op. cit., p. 10.
Chapter 1 Economy of Kashmir Since 1947
35
the performance of either the sectors or sub-sectors. Moreover, the growth of
the different sectors/sub sectors was exogenously determined. This unique
character of the economy resulted in a high degree of sectoral disarticulation
wherein the traditional forward linkages for production of primary products
and backward linkages in the industrial product were not developed.
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