The lack of a significant market sector in Jammu & Kashmir has been a major factor contributing to economic stagnation in the state. The dependence on state run enterprises and generous Central plan provisions has had the effect of creating a virtual command-style economy at the mercies of current Central government proclivities and political benevolence. While Habibullah has done well to address the more localised issues preventing the successful exploitation of economic resources, he has been less than effective in providing a nuanced account of the structural inhibitors of development, at both the state and central level.

     One such area is the current pattern of state funding arrangements. As a Special Category State, Central assistance to Jammu & Kashmir is provided on 90 per cent grant and 10 per cent loan basis in contrast to other states which obtain their funds at the ratio of 30:70. The reliance of the State of Jammu & Kashmir on official loans from the centre, as well as a history of mismanagement and corruption at state level, have resulted in a dependency relationship which has been institutionalised over successive generations by both State and Central governments. The key question in this arrangement is whether existing funding arrangements actually create incentives for the state to develop its own revenue generating capacity or acts to retard progress and obfuscate more alarming socio-economic problems.

     An article by Masood Hussain in The Times of India ('Costs escalating to maintain J&K', 19 March 2004) spoke of the increasing costs of funding the State's budget from the Central government purse. Since the onset of insurgency in 1989, Rs 5,000 crore has been spent on security-related expenditure (SRE), a large part of which is then reimbursed by the Ministry of Home Affairs. The preponderance of spending being deviated to SRE and the rehabilitation and reconstruction of conflict affected infrastructure and victims has come at the expense of furthering more medium to long-term expenditure on the development of economic capital and the promotion of indigenous entrepreneurial skills.

     As Habibullah has mentioned, a significant impediment besetting the state is the preponderance of state run enterprises and their monopolistic dominance over key sectors of the economy, such as forestry, tourism and furniture production. These are markets that the government could do well to stay out of. The role of government should be to provide the public goods such as law and order, the provision of an independent legal system, a stable money supply, an effective taxation system, as well as a fair regulatory environment to ensure standards of care, equity, quality control and accountability.

     The effectiveness of industrial policy in facilitating this process and providing incentives for development and expansion lies in the maintenance of common economic infrastructure, negotiating new markets in untapped regions, encouraging ecologically sustainable initiatives, and more importantly, reducing barriers to entry for private entrepreneurs to compete with public enterprises, if indeed they are required to maintain a presence.

     In the area of resource development, the government must expand its contingent of strong, incorruptible forestry officials and security personnel to ensure the protection of precious natural assets from indiscriminate logging and squatting by terrorist groups. In the piece, Habibullah emphasises the critical juncture facing the State government if it is to address the demands of greater economic rejuvenation with the need for stringent environmental regulation and repair. If Dal Lake is to form the centerpiece of a vigorous tourist and horticultural drive, it must be maintained by standards for sustainable use and the regulation of tourist traffic.

     The current state of J&K underlies the complexities of relationships between Centre and State, as well as vagaries of Indian federalism in its goal of maintaining territorial integrity. In failing to provide an adequate measure of developmental support by maintaining restrictive regulations and failing to curb the corruption of the local administration, the pattern of governance has yet to evolve beyond personalised centralism to a more legal rational and transparent medium. Does Special Category Status actually have a developmental goal or is it merely a tool of creating political fidelity with the end result of a state trapped in dependent subservience? For whose interest does this ultimately serve and at what point will this reach its climax?