Has Jammu and Kashmir’s Economy Been Affected by Terrorism?


Jammu and Kashmir (J&K) has been suffering from the scourge of terrorism for more than 25 years. There is not much doubt that the ‘Deep State’ in Pakistan has played a major role in instigating terrorism as part of its long-standing aim of bleeding India by a thousand cuts. After decades, though, the question remains on whether Pakistan has succeeded in affecting the Indian economy. There is relevant data until 2014 to analyse this claim.

The growth rate in J&K is dependent on terrorism. Other factors such as the quality of governance and infrastructure are symbiotic with this. Unfortunately, data on these are not easily available. Looking at Himachal Pradesh (HP), it shares many of the same features as J&K. For example, they share a border with Pakistan, have a similar climate and topography, and depend significantly on tourism. One crucial difference between these two states, however, is that HP does not suffer from terrorism. For all practical purposes, HP appears to be a clone of J&K without the issue of international warfare. Therefore, the difference in the growth rates of J&K and HP should be explained primarily by the intensity of terrorism in J&K. We would, therefore, expect the gap between their growth rates to increase during times of violence in J&K.


Figure 1: Relative growth rate (%) in J&K as a function of terrorism

Figure 1 is a scatter plot of the intensity of terrorism in a given year and the economic performance of J&K in the subsequent year. The primary sources of the data are South Asian Terrorism Portal and Database on the Indian Economy provided by RBI and the period considered is from 1981 to 2014.

It is quite common in the academic literature to use the number of persons (civilians and security personnel) killed as an index of terrorism. This index is measured along the horizontal axis. The relative growth rate of J&K in the next year is measured along the vertical axis.

It is helpful to consider benchmarks for the index of terrorism and the relative growth rate. Let us use 100 deaths as a cutoff to distinguish between ‘peak years’ of terrorism with ‘off-peak years.’ In Figure 1, the vertical dashed line separates the peak years from the off-peak years.

As far as economic performance is considered, J&K grew at a slower rate than HP for most of the years since 1981. Before the beginning of the insurgency, J&K’s growth rate was 3.5% less relative to HP. What this indicates is that there are certain entrenched factors that caused J&K to grow at a slower rate than HP even in the absence of militancy. Examples of such factors are high levels of corruption, poor governance, etc. The average relative growth rate of – 3.5% is an indicator of how the J&K economy would have performed in the absence of terrorism and therefore is a proper benchmark to evaluate the effects of terrorism. This benchmark is drawn as the horizontal dashed line in Figure 1. If terrorism indeed affected the J&K economy adversely, then the relative growth rate would be significantly lower than the benchmark during the peak years of militancy.

It is evident from Figure 1 that the relative growth rate in the peak years of the insurgency was greater than the benchmark of – 3.5% for most of the years. There are only 6 years in which observed points lie below the benchmark, while there are 15 years in which the observed points lie above it. Indeed, the deficit in the growth rate of J&K in the peak period was only 2.5% on an average which was better than the period before the insurgency. If terrorism had indeed affected the J&K economy substantially, then the deficit would have increased and not gone down. In summary, J&K was historically an underperforming state but this situation did not change for the worse after the rise of militancy.

There are formal statistical models (Vector Autoregression) that can be used to test the relationship between the index of terrorism and relative growth rate in J&K. These models are capable of handling many other nuances of the aforementioned data. They also confirm that till 2014, terrorism did not have any systematic effect on economic growth in J&K.

To understand this, we must view the data from the side of Pakistan: As long as the problem in Kashmir does not affect the common folk in India, they will support their government’s policies in Kashmir. Pakistan, then, has little chance of wresting the province from India. However, if Pakistan can engineer sustained violence in J&K, it will hurt the Indian economy sooner or later. In that case, common folk in India will be adversely affected by the Kashmir issue and they will pressurise their government to negotiate with Pakistan.

This is one of the ways in which Pakistan’s policy of bleeding India by a thousand cuts can pan out. It is designed to change India’s bargaining power at very little cost to Pakistan. Unfortunately for them, this policy has failed because their proxy war has not hurt even the J&K economy, let alone the Indian economy. Not surprisingly, as of now, India has a strong bargaining hand in J&K and is in no hurry to negotiate. However, the situation can change quite rapidly. Till now, the violence in J&K pales in comparison to that of other conflict zones such as Afghanistan or Syria. If that ever happens, then the balance will tilt instantaneously towards Pakistan.