Recession in Kashmir

Ejaz Ayoub
Economic activity in Kashmir is facing a serious slump which is reflected in all forms of manufacturing, commerce and trade. Indicators like GSDP growth, unemployment rate and credit off take are touching new lows. Despite the fact that state has been going through a continuous low intensity war since last three decades, most of the businesses in Kashmir have mastered the tactics of surviving the tides of unrest. However, the ongoing slump faced by the businesses in Kashmir is taking a colossal form never witnessed before. The prevailing miserable situation that our economy & businesses are in, is a result of exposure to sustained systemic risks and callous policy responses from the government over a period of time.
Starting with the great floods in September 2014, the valley’s businesses in particular are finding it very difficult to return to their previous turnover figures. Every time business community tries to put on a resilient face, something more lethal more devastating comes up. After floods the economy suffered a mammoth loss with estimates ranging from `40,000 Crore (by the then State Govt) to over `1 Lakh crore (by different trade and manufacturing bodies). Contrary to the package of `1 lakh crore announced by GoI, its real value amounts to few thousands of crores vis-à-vis flood rehabilitation. Even if the insurance claims are factored in along with this paltry government package, it will hardly cover 20 percent of the actual losses incurred by the state economy.
People somehow collected themselves from the ashes and started rebuilding in anticipation of better days. Due to various systemic factors, post 2014 the state has failed to restart its tourism industry. Although former chief minister of J&K, Late Mufti Mohammad Sayed did a sustained campaign in Bollywood to attract tourists to Kashmir but nothing worked. In anticipation of tourists, valley witnessed a sharp rise in construction of hotels and guesthouses after floods. This led to a lot of capital getting tied up in fixed assets which are yet to generate any considerable cash flows. The cash flows of numerous businesses associated with tourism are at their worst in the recent times and this is straight away getting converted to poor demand in the economy.
Year 2015 was entirely spent by valleyiets on reconstruction of loss assets with immense hopes from 2016. Many businesses went overboard in raising debt and returning to normal inventory levels. This over-leveraged position turned out to be a nightmare when all the hell broke loose in July 2016. Official estimates by GoJK pegged the losses caused due to the unrest from July 2016 to November 2016 at more than Rs 16,000 crore. People were never prepared for such an intense and bloody season. It broke the very bases of already fragile businesses. All business assumptions were left in dust and all of a sudden focus shifted from businesses to survival of life. And worst of all it didn’t stop there.
Then came the mother of all monetary shocks when GoI announced demonetization of 86% of its currency notes. The vast unorganized sector that Kashmir’s economy has runs mostly outside the banking system on cash. The impact resulted in the demand for goods and services drastically coming down pushing the economy into deep dark hole.
Amidst all these toxic economic disruptions, sustained Internet blockade in the valley catalyzed the process of fracturing the skeleton on which the present day commerce stands. Even if we take a short span of last four months, there are over ten instances where valley has witnessed a complete blockade of internet. If time is money, then in today’s world internet is the mint where they print it. Given the worsening situation in the valley post 2016 unrest, there is no tangible evidence which shows that internet blockade actually helps in calming nerves, however, the way it has severely affected small and big business houses, start-ups, SMEs and overall Kashmir economy, is gruesome in all respects.
The latest entry to this mayhem has been the introduction of Goods and Services Tax from July 5th 2017 in the state of J&K. Constitutional erosion apart, the unprepared implementation has resulted in extreme negative market sentiment which in turn impacted the decision on inventory levels, movement of goods, consumer demands and investment decisions. Costs of compliance to the new tax regime coupled with transitional challenges are turning out to be a perfect recipe for killing Kashmir’s numerous small businesses which derive their income from the massive unorganized sector that the state has. For example levying a tax of 12% on handicrafts (under IGST) has exposed the `1800 crore industry of state which provides livelihood to around 3.5 lakh families, to a very disadvantageous position. Export industry which has sustained valley’s cottage industries and home based artisan economy is feeling the heat of the prolonged global recession and GST implementation. J&K’s export houses have played a crucial role in generating foreign exchange for the state and sustaining the domestic economy in troubled times. War struck Arab economies, conservatism in US and fissures in European Union has directly impacted the demand of elite Kashmiri products. The exporters are left with piled up inventories and tied up capital.
For industries like these and numerous others, GST is turning out to be a nightmare in terms of its cost, regulation, compliance and transition.
Although GoJK has almost doubled its budget size since the new collation assumed office and RBI has allowed rehabilitation and restructuring of Banking loan books post 2014 floods and 2016 unrest, however, the situation that we are in, demands a holistic overhaul rather than short term cosmetic tac-tics. Ideally, reversal of the downward spiral is a matter of time and sentiment, but, given the nature of conflict and during times of colossal stress like the one we are in, an effective objective driven intervention from the policy makers becomes imperative.