Chapter 1 Economy of Kashmir Since 1947 - …shodhganga.inflibnet.ac.in/bitstream/10603/3378/5/05...Chapter 1 Economy of Kashmir Since 1947 2 Furthermore, unlike India, which along

Chapter 1 Economy of Kashmir Since 1947

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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).


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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.


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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


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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.


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‘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.


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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.


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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


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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.


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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.


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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.


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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.


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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.


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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.


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.


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.


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.


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


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


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.


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.


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


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.


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.


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.


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.


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.


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


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.


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..


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,


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.


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.


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.


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.


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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