Task Force on Development of Jammu and Kashmir

Task Force on Development of Jammu and Kashmir

1. Dr. C. Rangarajan Chairman

2. Dr. Haseeb Drabu Member

3. Shri Sunil Mittal Member

4. Shri Sunil Kant Munjal Member

5. Shri Moosa Raza Member

6. Shri S.H.H Rehman Member

7. Shri Analjit Singh Member

8. Dr. G.C. Srivastava Member

9. Shri T.N.Thakur Member

10. Dr. D. Subbarao Member-Secretary

11. Shri Sanjay Mitra Special InviteeJoint SecretaryPrime Minister’s Office

The Task Force on Development of Jammu and Kashmir was constituted by the Prime

Minister on March 29, 2005 (copy of Notification at Annex 1). The Task Force held 8

meetings in all between April 2005 and October 2006 (schedule of meetings at Annex

2). It also held consultations with the Chief Minister of J&K at Srinagar on August 29,

2006. The Task Force wishes to place on record its deep appreciation for Ms. Padma

I Kaul, Director and Ms. Seema, Senior Research Officer in the Prime Minister’s

Economic Advisory Council for their professional and logistic support in managing this

task. The Task Force also wishes to thank the officers of Government of Jammu and

Kashmir for their advice and assistance throughout this task.

CB

CB

Report of the Task Force on Development of Jammu and Kashmir

ii

Introduction and Overview

iii

1. Introduction and Overview 1

� Development Challenge 1

� Reconstruction and Maintenance of Existing Physical assets 2

� Investment in Physical infrastructure - Power and Roads 3

� Investment in Social Infrastructure 3

� Conducive climate for Private Investment 3

� Balanced Regional Development 4

� Comprehensive Fiscal Adjustment 4

� Approach of the Task Force 5

2. Power Sector 6

� Issues and Status 6

� Augmenting Generation Capacity - Short Term Measures 7

� Transfer of Dulhasti Project 8

� Transfer of Bursar with Associated Funding 9

� Long Term Measures 10

� Reform Measures 11

� Microhydel Projects 12

3. Rural Roads 13

� Rural Road Network – Development Priority 13

� Imbalance in Rural Road Density 13

� Rural Roads Improvement Programme 15

4. Telecom Sector 16

� Issues and Status 16

� High Rollout Cost 17

� Points of Interconnection 17

� Entry Tax Burden 18

� Security Concerns 18

� Bureaucratic Delays 18

� Broadband Services 18

5. Tourism Sector 19

� Context- Promise & Performance 19

� Existing Infrastructure and Gaps 20

� Challenges 20

� Way Forward 21

Contents


iv

6. Horticulture and Food Processing 23

� Current Scenario 23

� Problems and prospects 23

� Next Steps 24

� Market Development Scheme 26

7. Health Sector 27

� Context 27

� Health Indicators 27

� Infrastructure 28

� Manpower and Training 29

� Ongoing initiatives on J&K 29

� Way Forward 30

8. Quick Yielding Projects 35

� Asset Reconstruction Company 35

� Industrial Development-Special Industrial Zone 36

� Satellite City 37

� Image Enhancement on Indian Side of the LoC 37

� Strengthening of Panchyati Raj Institutions 38

� Agriculture Extension- Rehbar-e-Zirat 38

� Adult Literacy and Urban Employment 38

� Artisan Development 39

AppendicesAppendix 1 Task Force Recommendations – Summary 41

Appendix 2 Financial Package Implicit in the 45

Task Force Recommendations

Appendix 3 Structural Deficiencies in the Finances of 47

Jammu and Kashmir

Appendix 4 Transfer of Salal Hydroelectric Project to J&K 53

Issues and Options and An Alternate Proposal

(Executive Summary of Report dated October 2005)

AnnexuresAnnex 1 PMO Notification Constituting the Task Force 59

Annex 2 Schedule of Meetings of the Task Force 61


v

ANM Auxiliary Nurse Midwife

APDRP Accelerated Power Development and Reform Programme

ARC Asset Reconstruction Company

ARPU Average Revenue Per User

BPL Below Poverty Line

BSNL Bharat Sanchar Nigam Limited

CBR Crude Birth Rate

CDR Crude Death Rate

CERC Central Electricity Regulatory Commission

CHC Community Health Centre

CII Confederation of Indian Industry

DLHS District Level Health Survey

DOT Department of Telecommunication

FR Feeder Road

GSDP Gross State Domestic Product

HVDS High Voltage Distribution System

INTACH Indian National Trust For Art And Cultural Heritage

JKSFC J&K State Financial Corporation

NFHS National Family Health Survey

NHB National Horticulture Board

NHDP National Highway Development Programme

NHPC National Hydel Power Corporation

NRHM National Rural Health Mission

PATA Pacific Asia Travel association

PHC Primary Health Centre

PPP Public-Private Partnership

RGGVY Rajiv Gandhi Grameen Vidyut Yojana

Acronyms


vi

SCADA Supervisory Control And Data Acquisition

SEZ Special Economic Zone

SIDCO State Industrial Development Corporation

SIZ Special Industrial Zone

TFC Twelfth Finance Commission

TPA Third Party Administrator

UI Unscheduled Interchange

UNWTO United Nations World Tourism Organization

USOF Universal Service Obligation Fund


vii

Development of

Jammu and Kashmir

Growth Generating Initiatives

Report of the

Task Force on Development of

Jammu and Kashmir

November 2006

Report of theTask Force on Development of

Jammu and Kashmir


1


Development Challenge

1.1 Long-term development of Jammu and Kashmir (J&K) is a formidable challenge

in many ways. The state has to reconstruct an economy ravaged by two decades of

militancy and terrorism and at the same time deliver quickly on growth and poverty

reduction which, in the ultimate analysis, is the most sustainable solution to restoring

peace and order. The systems and processes of fiscal federalism that work for the rest

of the country are not necessarily optimal for J&K. The content and process of

development of J&K has to be designed keeping in view the state’s unique historical,

institutional and political factors. Then J&K has some unique economic disadvantages

arising out of remoteness and poor connectivity, hilly and often inhospitable terrain,

vulnerability to natural disasters, a weak resource base, poor infrastructure, sparse

population density, shallow markets and most importantly a law and order situation

threatened by militancy. Taken together, all these factors have resulted in a classic

‘backwardness trap’ of low economic activity, low employment and low-income generation.

1.2 The economic disadvantages indicated above have substantial implications for

the size and nature of the development problem and for the approach to be adopted.

First, the internal market is too small to take advantage of scale economies in

production. The alternative of scaling up production to viable levels by exporting to

markets outside the state is infeasible because of poor connectivity. Second, unit costs

of service delivery are high because of high costs of inputs as also low population

densities. Third, the private sector, which should be the engine of growth, has not taken

off in part because of low supply and demand linkages and in part because of inhibition

of the private sector on account of restrictive legislations. This private sector perspective

was compounded by security concerns. Consequently, the burden of generating economic

activity has had to be borne almost exclusively by the public sector. Fourth, the virtual

absence of the private sector has meant a low tax base. Fifth, the beneficial impact of

public expenditure has been lost to some extent. Such benefits have tended to spill over

beyond the state as much of the contractors’ payments are transferred and purchases

are made beyond the state – a phenomenon referred to as the ‘missing multiplier’.

Finally, excessive and prolonged dependence on central assistance has led to a

complacent attitude towards resource generation, fiscal responsibility and accountability

for results.

1.3 The above analysis suggests that the approach to long-term development of J&K

should aim at generating economic activity within the state and mainstreaming the state

Chapter 1


2

into the national and the global economy. The most efficient way of doing this is to focus

on sectors and projects that yield quick results while at the same time laying the

foundation for long term growth. The immediate priority in this regard is repair and

reconstruction of assets damaged by militancy and terrorism. Next, long term development

requires investment in physical and social infrastructure. This does not mean only

creation of new assets but it also means operation and maintenance (O&M) of existing

assets. Experience shows that O&M of existing assets yields a much higher return for

every rupee spent than creation of new assets. In practical terms this means repair and

maintenance of existing roads, irrigation and drinking water works as well as staffing and

equipping schools and health centers.

1.4 Inclusive growth means ensuring that the benefits of growth translate into poverty

reduction. In other words, growth should be such that the poor contribute to growth and

benefit from growth. This requires better education and health. The Government has a

critical responsibility in improving the reach and quality of education and health.

Investment in social infrastructure therefore assumes significance in this context.

1.5 Low level of employment opportunities is a dominant and vocal concern in J&K.

This results in the common argument that there should be a frontal thrust on explicit

employment generation programmes. Experience of the last 50 years has however

shown that the most effective way of generating sustainable employment is through

accelerating growth; special employment programmes through incentives and subsidies

have been both costly and ineffective. While heightened economic activity creates the

demand for jobs, state intervention will be required to improve the employability of the

job seekers so as to match the emerging demand with appropriate supply.

1.6 Like most large states, J&K too faces the problem of regional imbalances which

are not only inimical to growth but also engender political tensions. Balanced regional

development of the three regions of the state - Jammu, Kashmir and Ladakh should also

receive priority attention.

Agenda - Six Objectives

1.7 Accordingly, the development challenges of J&K can be defined by six objectives:

(i) Reconstruction and maintenance of existing physical assets

1.8 There is an urgent need to change the methodology of the plan. Currently there

is too much focus on creation of new assets at the expense of maintaining existing

assets although the latter yield better value for money. In the case of J&K what needs

to be done is to have three sub-plans within the state plan. The first is to have a

“completion of ongoing works” sub plan. There are works that have been ongoing for the

last twenty years for want of adequate funding. The second is a “comprehensive

maintenance sub-plan” and the third a “new capital plan” focused on only capacity


3

creation in the infrastructure sector. The maintenance plan will improve the productivity

levels in the short run, and the completion sub-plan will increase capacity instantly.

(ii) Investment in physical infrastructure – power and roads

1.9 Power is by far the most crucial infrastructure sector for J&K. Almost every other

development initiative of the government is linked in some way to improving the power

situation in the state. In fact, if expenditure on power purchase and receipts are netted

out of the revenue account of the government, the state will not only balance the revenue

account but will in fact generate a surplus for capital spending. The key priorities in the

power sector are augmenting capacity and more efficient management of the sector.

1.10 Improvement in road connectivity is another infrastructure priority. The road

density in the state is among the lowest in the country and what roads exist are in poor

shape. Improving and expanding the highway corridors is important. Equally important

is connecting the villages and towns to the main corridors through an internal road

network so as to facilitate movement of goods from the farms and firms to the major

markets and also to redress the imbalances in road density across the state.

1.11 In terms of expenditure allocations, it is best for the state to use the funds under

centrally sponsored schemes, in particular Bharat Nirman, to create the road infrastructure.

Both the PM’s Reconstruction Programme and the ADB assistance have components for

roads. The state plan should therefore focus on filling gaps in areas outside of these

programmes, particularly to balance the road density across the state.

(iii) Investment in social infrastructure

1.12 Investment in education and health is a priority across the country, but it has

greater urgency in a state like J&K where the delivery systems have atrophied on

account of the law and order problems. Education and health are not only important for

human resource development but also for restoring the faith of the people in the

institutions of governance.

(iv) Conducive climate for private investment

1.13 No matter how successful the fiscal adjustment, public resources will be limited.

The Government should use its scarce resources in areas where it alone can operate

such as in providing public goods and merit goods and leave the rest of the economic

space to the private sector. For the private sector to respond to this initiative by stepping

up investment, the state needs to create a policy and physical environment conducive

to private sector development. This will be the route to sustainable development of the

state.

1.14 Even as the India growth story is the global toast, much of the positive benefits

of this are bypassing J&K. The most important reason is the negative investor perception


4

about the security situation in the state. Second, competition among states for attracting

both domestic and foreign investment is very fierce and J&K is handicapped in joining

this competition because of its poor infrastructure situation and remoteness from

markets. The third reason is the land ownership issue which prohibits non-state subjects

from owing property in the state.

1.15 J&K is trying to overcome many of these problems. The perception on the

security situation can only improve over time as positive information percolates. What

J&K needs are a couple of demonstrable successes. For this purpose, the state needs

to attract some large and medium industrial houses to invest in the state. Second, some

of the geographical handicaps of J&K are sought to be neutralized by the tax incentive

package announced by the Center. However, J&K has not benefited as much from this

package as have some other states which too have a similar package such as Himachal

Pradesh and Uttaranchal. Here again, improving perceptions will help. Third, the state

government has relaxed some of the regulations relating to land lease like extending the

lease period to 90 years. It will help if the government launches a vigorous promotion

drive to disseminate information and correct the misperceptions. Finally, the state

government should review all economic legislation on the statute book and weed out all

legislation that is no longer relevant.

(v) Balanced regional development

1.16 Balanced regional development is important for every state but particularly so for

J&K. It is far easier to restore law and order and give a sense of security when every

region feels ‘included’ in the process of growth. The three regions of the state – Jammu,

Kashmir Valley and Ladakh – have different comparative advantages and the development

strategy for each region has to be consistent with these differences. Importantly,

resources should also be deployed in such a way that no region feels aggrieved or left

behind. While some of the initiatives suggested in this report aim at balanced regional

development, the issue is being examined in detail by the State Finance Commission.

It is also the subject matter of one of the Working Groups set up under the Prime

Minister’s Round Table.

(vi) Comprehensive fiscal adjustment

1.17 The nature and size of the development problem cast a significant fiscal burden

on the state. Fiscal adjustment in the state has to proceed at two levels. The first is to

restructure public finances to generate resources for development. This requires generating

own revenues, pruning unproductive expenditure and redirecting expenditures to productive

uses. While investments in new physical and social infrastructure is necessary, it is

equally important to spend on maintaining existing assets as that will provide good value

for money.


5

1.18 The second level of adjustment is to redesign the flow of central assistance.

Although J&K has been receiving a fair measure of central assistance, much of it has

gone to fill the non-plan revenue gap of the state rather than finance development

expenditure. This is not advisable. The state government should have the undivided

responsibility of managing its non-plan gap. Central assistance should be devoted

entirely to development where the end use can be monitored and where the outcomes

can be more concretely defined.

Approach of the Task Force

1.19 The above objectives are being pursued by J&K through its state plan. Besides,

there is the large initiative through the Prime Minister’s Reconstruction Plan, with an

outlay of Rs. 24000 crores aimed at three basis thrust areas: (i) expanding economic

infrastructure; (ii) expanding the provision of basic services; and (iii) employment and

income generation.

1.20 This Task Force deliberated on the most effective way it can add value to the

ongoing thinking on and initiatives for J&K’s development. One option, and the obvious

one, is to draw up a comprehensive, detailed long term development plan for the state.

The Committee decided against this option for two reasons: first, it does not have a

comparative advantage to take on a task of this nature given its support structures; and

second, this is a task best left to the State Government and the Planning Commission.

Instead, the Task Force determined that it could best add value by leveraging on the

expertise of its members to identify initiatives that would yield quick results while also

laying the basis for J&K’s long term development. Accordingly, the Task Force focused

on the infrastructure sectors (power, telecom and roads), employment intensive sectors

(tourism and horticulture), one of the social sectors (health) and a few other initiatives

that will generate employment and lay the basis for growth.


6

Issues and Status

2.1 The rich water resources of J&K offer immense potential for commercial

hydropower generation. The potential is as high as 14,000 MW of hydro power but only

about 10% of this has been exploited so far. The reasons are the restrictions imposed

by the Indus Water Treaty, the high capital costs which reduce the viability of the

projects, the difficult terrain and scarcity of resources.

2.2 The power sector of J&K is characterized by huge revenue losses, structural

supply demand gaps, weak infrastructure and high T&D losses.

2.3 There is a gross mismatch between the load profile and the hydro-thermal mix

available to the state. The state’s power demand peaks during the winter months, but

the state’s energy generation, largely hydel, falls during the same period. J&K then

becomes heavily dependent on support from its share of central sector power which too

is not sufficient to meet its winter power requirements.

2.4 There is a wide revenue gap (> Rs.2 per kWh) between the aggregate cost of

supply and the aggregate tariff charged to the consumers. Moreover, metering at

consumer level is just about 30-40%. This highly subsidized tariff combined with poor

metering is financially unsustainable and economically distortionary.

2.5 J&K has one of the highest percentages of transmission and distribution losses

(including unaccounted energy) among the Northern Region states. The aggregated

transmission and commercial losses during 2003-04 and 2004-05 were as high as 67%

and 68% respectively. The state ranked among the lowest on this parameter in an all

India ranking study for the state power utilities conducted by CRISIL in 2004.

2.6 The State faced peak deficit and energy deficit of 418 MW (26.1%) and 352 MU

(35.1%) respectively in the month of March 2006.

2.7 In 2005-06, energy requirement grew by about 14% over the previous year

whereas the peak demand grew by more than 21%. The rapid rise in energy requirement

and peak demand could be attributed to the improvement in the economic activity and

ongoing reform in the distribution sector.

2.8 The state has been drawing heavily under UI (Unscheduled Interchange or UI

became effective in Northern region with effect from 1.12.2002) in the past. The state

Power Sector

Chapter 2

Power Sector

7

has an outstanding penalty amount of more than Rs.494 crores net payable to the UI

pool account as on 31.3.2006.

2.9 J&K has 14 hydroelectric power stations in operation with total installed capacity

of 1474 MW (304 MW under the State sector and 1101 MW under the Central sector).

These power stations account for only about 10% of the 14000 MW hydro potential in

the State. The state has pre-dominantly hydro power resource with run-of-the river

schemes, which are heavily dependent on seasonal flows.

2.10 Two hydroelectric schemes - Dulhasti (390 MW) by NHPC in the central sector

and Baglihar (450 MW) in the state sector - are at advanced stages of implementation.

While Dulhasti is likely to be commissioned by December 2006, Baglihar may be

delayed by another year or even longer.

2.11 In addition, 7 hydroelectric projects with total installed capacity of 2839 MW have

been handed over to NHPC for implementation in central sector. Out of these 7 projects

allotted to NHPC, the work on two projects namely Sewa-II (120 MW) and Uri-II (240

MW) has commenced. NHPC proposes to develop these projects during the 11th Plan.

Augmenting Generation Capacity - Short Term Measures

2.12 Salal is a 690 MW hydro electric project (HEP) located in J&K, and owned and

operated by NHPC. In October 2004, the Chief Minister of J&K wrote to the Prime

Minister requesting transfer of the Salal HEP to the state to meet its power shortages.

The request was based on the argument that J&K was not able to effectively utilize its

hydro potential on account of the restrictions imposed by the Indus Water Treaty and

hence should be compensated for the same.

2.13 When the matter was referred to it, the Ministry of Power expressed strong

reservations on the proposal on grounds of adverse commercial impact on the existing

beneficiaries, adverse commercial impact on NHPC, non-availability of expertise within

J&K required to run a large hydro project, and possibility of triggering similar demands

from other states.

2.14 Thereafter, the matter was referred by PMO to the Task Force on Development

of J&K for consideration. After studying both the financial and non-financial implications

of the proposal, the Task Force recommended that providing additional financial support

to the Baglihar project, already under execution by J&K, would provide the same level

of comfort to J&K’s power situation and would be a better option than transfer of a

central sector project like Salal. A copy of the Task Force Report “Transfer of Salal Hydro

Electric Project to Jammu and Kashmir –Issues and Options and an Alternate Proposal”

submitted to PMO in October 2005 is appended to this report.


8

2.15 The Task Force recommendation was based on the understanding that Baglaihar

would be completed and commissioned by December 2006. It now turns out that the

project will be delayed by another year to year and a half. Reflecting this concern, the

Chief Minister of J&K wrote to the Prime Minister urging reconsideration of the issue of

transfer of Salal by the Task Force.

2.16 The Task Force reconsidered the issue. J&K’s need for power is acute and

urgent. In view of the further delay in its commissioning, the option of additional central

assistance to Baglihar in lieu of transfer of Salal is no longer a feasible option. The Task

Force therefore reverted to the original issue of transfer of Salal as requested by J&K

or an equivalent option.

Transfer of Dulhasti Project

2.17 A candidate project for transfer to J&K in lieu of Salal is Dulhasti. Dulhasti is a

390 MW run-of-the river HEP located on Chenab in Doda district. The project is being

implemented by NHPC in the central sector and is scheduled to be commissioned by

December 2006. Dulhasti has gone through heavy time and cost overruns and the final

estimated cost is around Rs. 5050 crores. This translates to a project cost of Rs. 12.94

crore/MW and a levelized tariff of Rs. 5/kWh based on current Central Electricity

Regulatory Commission (CERC) norms for determining hydro tariff. This tariff of Rs. 5/

kWh is very high compared to the current long term hydro tariff of around Rs. 2.50/kWh.

2.18 NHPC has entered into long term power contracts with potential beneficiary state

utilities for the Dulhasti power. Those contracts were signed on the understanding that

the power tariff would be competitive, and in any case much lower than the levelized

tariff of Rs. 5/kWh. The contracting states will be extremely reluctant to honour their

contractual obligations at this level of tariff and NHPC will find it very difficult to make

them do so. It looks very likely that NHPC will have to reduce the tariff to make it

competitive and thereby absorb the operating losses.

2.19 The next question is relative costs to GoI of the transfer of Salal vis-à-vis transfer

of Dulhasti. In the case of Dulhasti, in view of the uncompetitive tariff, NHPC should be

quite satisfied if it is compensated for the equity investment and debt servicing. The GOI

liability for equity compensation to NHPC works out to Rs 2020 crores which could be

staggered over 5 years (NHPC would not be expecting return on equity for some years

in view of resistance to high tariff). Considering that NHPC is compensated for the entire

equity and GOI takes on the debt servicing liability (9.5% for 10 years), the net present

value (at 7% discount rate) of GOI’s liability would be Rs. 4933 crores. This would

involve a cash outflow of Rs. 984 crores in the first year tapering off to Rs 321 crores

in the 10th year. This is lower than the potential liability of Rs 5452 crores in case of Salal

transfer (Rs 875 crores as compensation to NHPC and Rs 4577 crores as liability

towards other beneficiary states).

Power Sector

9

2.20 Transfer of Dulhasti appears to be a better alternative than transfer of Salal as

it is a clear win-win option for all stakeholders. First, J&K would get a new project with

design energy of 1928 million units for 35 years at a levelized tariff of Rs 0.65/kWh1 . The

net gain to J&K at 10% discount rate would be Rs 6804 crores. This is much higher than

the gain of Rs 5622 crores that would accrue to J&K in case of transfer of Salal HEP

(assuming the market rate of Rs 5.0 /kWh). Second, the compensation liability of GoI will

be lower. Third, NHPC should be happy to take an uncompetitive project with financing

obligations off its balance sheet. Fourth, other beneficiary states which would have

resisted transfer of Salal may not offer such resistance for transfer of Dulhasti as they

will be rid off their contractual obligations of purchasing Dulhasti power at a high price.

Finally, there will be no legacy issues to contend with as Dulhasti, unlike Salal, is a new

project.

2.21 Accordingly, the Task Force recommends that GoI transfer the Dulhasti HEP to

J&K by compensating NHPC as indicated above. This will not only augment the power

supply position of J&K quickly and substantially but also make power accessible to J&K

at a low levelized tariff of 0.65/kWh.

Transfer of Bursar with Associated Funding

2.22 While transfer of Dulhasti as recommended above will ease the power situation

of J&K, it will not resolve it fully. J&K will need at least another major project in the

state sector to augment its generating capacity. Presently, 7 hydro projects with a

combined capacity of 2839 MW have been assigned to NHPC for execution while

J&K is pursuing 5 projects in the state sector. However, J&K does not have the

resources to implement any major project. On the other hand, J&K will be entitled to

only 12% of the power of the central projects to be implemented by NHPC even

though they are being financed largely out of the PM’s Reconstruction Plan for J&K.

In other words, J&K will only get 12% of the benefit under PM’s Reconstruction Plan

whereas it is only fair and appropriate that 100% of the benefit under the

Reconstruction Plan should go to J&K.

2.23 Keeping these considerations in view, the Task Force recommends that the

1020 MW Bursar Storage Scheme be transferred back from NHPC to J&K for

execution in the state sector. The equity contribution for this project worked out in

the debt equity ratio of 60:40 or even 50:50 should be allocated to J&K from out of

the PM’s Reconstruction Plan. J&K will raise the balance funds for the financial

closure of the project from financial institutions. This will enable J&K to have the full

benefit of Bursar power instead of just 12% that would be available if this were

implemented as a central sector project.

1 The levelized tariff will decline from Rs.5/kWh (para 2.18) to Rs. 0.65/kWh (para 2.20) as J&Kwill get the project virtually free of liabilities.


10

2.24 The transfer of Dulhasti and Bursar should be conditional on J&K implementing

the necessary reforms in the transmission and distribution sectors as per the package

already agreed with Government of India at the time of negotiating the power subsidy

grant. The reforms are aimed at achieving benchmark targets on T&D losses,

meterization and recovery.

2.25 Presently, the state government is spending Rs. 1700 crores annually for

purchase of power and is recovering Rs. 500 crores by way of tariff. Consequently,

the power sector imposes an annual burden of as much as Rs. 1200 crores on the

revenue account of the budget. The Centre has agreed to meet this cost by way of

a power subsidy grant of Rs. 1200 crores per year for the next three years starting

2006/07. The transfer of Dulahasti in the short term and the implementation of

Bursar in the medium term accompanied by sector reform conditionalities as proposed

above should not only make the power situation of J&K much more comfortable but

also reduce the burden of power subsidy grant on the Centre. Transfer of Dulahsti

should reduce the annual power purchase bill by around Rs. 700 crores while the

reform measures should yield additional revenue of Rs. 200 crores in 2007/08 and

Rs. 1200 crores in 2008/09. Consequently, the power subsidy grant can be reduced

to Rs. 300 crores in 2007/08 and completely phased out in 2008/09. It is important

to note though that these estimates are critically dependent on J&K implementing the

agreed reforms and realizing higher revenues by way of power tariff.

Long Term Measures

2.26 For meeting the base load demand and maintaining reliable and quality supply,

J&K needs to tie up long-term capacities in IPP projects, particularly based on coal

and gas. The state may approach such project developers themselves or take the

assistance of trading company(s) who would facilitate development of long-term thermal

projects at competitive prices.

2.27 Under Prime Minister’s 50,000 MW hydro initiative, Pre-Feasibility Reports

(PFR) are already available for hydro projects with an aggregated capacity of 2675

MW in J&K. The projects with attractive tariff that could be undertaken on priority are

Kiru (430 MW), Kawar (320MW), Ralte (560 MW) and Shamnot (370 MW) among

others. The State should also expedite the development of 600 MW Sawalkot HE

Project.

2.28 A policy framework needs to be evolved in order to develop the hydro power

potential of Jammu and Kashmir. This would need to address issues like direct and

indirect subsidies, single window clearance for projects, logistics supports to IPPs, a

strong securitization mechanism etc.

Power Sector

11

Reform Measures

2.29 The short term and long term measures to augment capacity as proposed above

will not be sustainable in the long run unless J&K implements reforms in transmission

and distribution sectors. Desubsidization of tariff, a time-bound loss reduction programme

and setting up performance standards for PDD would be the key challenge for J&K.

2.30 The J&K Power Development Department (PDD) is yet to undergo unbundling

into transmission and distribution entities. Also, though the state has set up the State

Electricity Regulatory Commission, it is yet to be fully functional. The process of

restructuring and corporatization of the PDD needs to be completed within a specified

time frame to enable the restructured entities to function on commercial lines.

2.31 As a part of reform measures, J&K should establish a state transmission utility.

A long-term transmission plan (15 years or longer) needs to be developed for the state.

More funds have to be provided for strengthening the transmission and distribution

(T&D) infrastructure in the state. Keeping in view the large hydro potential, limited

available transmission corridors in the valley and ever-increasing right-of-way problems

in laying transmission lines, it is important to develop an integrated transmission system

for the state that optimizes utilization of resources and serves long term requirement of

evacuating power from the ongoing and future hydro projects.

2.32 Distribution regions/ circles based on suitable criteria need to be formed. Energy

audits need to be carried out to assess technical and commercial losses. Metering

should be made mandatory within a limited time period to correctly identify leakages in

the system and billing and collection have to be improved and losses reduced substantially.

2.33 J&K has got sanction of Rs. 1100 crores under the Accelerated Power Development

and Reform Program (APDRP) among Northern Region states, next only to Rajasthan

at 1193 crores. Schemes undertaken under APDRP are for renovation and modernization

of sub-stations, transmission lines & distribution transformers, augmentation of feeders

& transformers, feeder and consumer meters, high voltage distribution system (HVDS),

consumer indexing, SCADA, computerized billing etc. APDRP releases for J&K are also

the highest at Rs.409 crores; however the APDRP utilization as proportion of sanction

is only 28%, the lowest among the Northern Region states.

2.34 The state is said to have achieved 95% 11 kV feeder metering but is lagging

behind in consumer metering which is presently at a level of only 30-40%. Thus, the

state requires achieving significant improvement in the area of T&D.

2.35 APDRP could be an effective vehicle to restore the commercial viability of the

state distribution sector. Initially the focus could be on high-density urban centers where

investment would lead to substantial, quick & demonstrable results.


12

2.36 Rationalization of tariff, time-bound loss reduction program, improving APDRP

fund utilization and accelerated field progress towards completing APDRP schemes

through high level close monitoring would go a long way in putting power sector on

sustainable growth.

Micro Hydel Projects

2.37 J&K has significant micro, mini and small hydro potential (up to 25 MW

capacity) that can be gainfully exploited to provide electricity to remote villages in a

cost effective and environmentally benign manner. About 200 such schemes have

been identified in the state aggregating to a total capacity of 1207 MW. This option

needs to be pursued in two routes. The first is to develop projects that are close to

load centers or those that can easily be connected to the grid. The second route is

to identify projects that can be developed as distributed generation sources to meet

the energy needs of remote villages. This will obviate the need for comparatively

uneconomical extension of the grid system and also result in savings on T&D losses

in meeting such remote demand.

Rural Roads

13

Rural Road Network - Development Priority

3.1 The problem of connectivity in Jammu and Kashmir operates at two levels: the

problem of road connectivity to J&K - the state is connected to the rest of the country

through just one highway; and the problem of road connectivity within J&K - there is a

huge disparity in the road density across districts in the state. This disparity is particularly

pronounced in the rural roads sector.

3.2 The Task Force discussed the option of recommending a second national

highway from Jammu to Srinagar which would be a toll road primarily used for

commercial transport. This alternate highway would have cut the distance between

Jammu and Srinagar by about 100 kilometers and the travel time by four hours. This

would have been a good candidate for public-private partnership with viability gap

funding coming the form the Centre.

3.3 Such an alternate highway would cost Rs. 2500 crores. The obvious question is

whether this alternate highway is the best use for funds of this order or whether there

could be better uses. In evaluating this question, two considerations are important. First,

the existing highway between Jammu and Srinagar is undergoing some capital repairs

and improvement as part of the NHDP. Second, the railway line project is picking up

pace with the railhead already having reached Udhampur enroute to Qazigund. Given

this scenario, while the alternate highway is important, a higher development priority, it

was felt, would be to use funds of this order for improving the rural road density across

the state and for redressing the imbalance in rural road density.

Imbalance in Rural Road Density

3.4 At 13%, the road density (road length per 100 sq kms) in J&K (Table 1) is

amongst the lowest in the country. Moreover, there are huge inter-district variations in

road density ranging from a high of 81.8% in Budgam to a low of 2.6% in Leh. Kargil,

with a road density of less than 5% and Doda with just about 5%, need enormous

investments to be brought at par with the state level let alone the national level. The road

length per lakh of population, ranging from a low of 58 km in Rajouri to 989 km in Leh,

presents a similar picture of unevenness.

3.5 Using the ballpark norm that it takes Rs 2.43 crore per unit “index of road”, the

investment needed to equalize the road density across the state will be of the order of

Rs. 1750 crores.

Rural RoadsBetter Connectivity and More Uniform Distribution

Chapter 3


14

3.6 Some equalization of road density will come about through the Rural Road

Connectivity Scheme of Bharat Nirman which aims at connecting every habitation with

a population of 1000 in the plains and population of 500 in the hilly areas. J&K has 2060

un-connected habitations - 740 habitations with 1000 plus population, 903 habitations

with 500 plus population and the rest with population of below 500. The road length that

will qualify to be covered under Bharat Nirman is about 6600 kilometers and will require

an investment of Rs 4500 crores. The counterpart state funding required for this will be

Rs 550 crore for land acquisition. This counterpart funding cost has been factored in to

the above estimate of Rs 1750 crore.

3.7 Reviving rural J&K through a massive rural road creation and rehabilitation

programme as part of the overall connectivity strategy will have a large payoff by way

of peace dividend. Improving rural connectivity has been a growing concern and is

currently addressed under a number of programs. But in all these programs, the focus

is on administrative connectivity – that is to connect the growth centres or rural markets

which constitute focal points for economic and trading activities serving rural hinterland.

While that provides vital economic links, it still leaves a gap of connecting the rural

markets to the next higher level of growth poles – the tehsil and district headquarters.

Such a network of rural roads will lay the foundation for an integrated development of

Table 1: Road Density Across Districts of J&K

Total road length Area Road densitykm sq km km/sq km

Anantnag 1328 3984 33.3

Pulwama 878 1398 62.8

Srinagar 1425 2228 64.0

Budgam 1122 1371 81.8

Baramulla 1553 4588 33.9

Kupwara 823 2379 34.6

Leh 1164 45110 2.6

Kargil 676 14036 4.8

Jammu 1729 3097 55.8

Udhampur 719 4550 15.8

Doda 613 11691 5.2

Kathua 782 2651 29.5

Rajouri 511 2630 19.4

Poonch 217 1674 13.0

J&K 13540 101387 13.3

Annex 2

15

physical infrastructure within a tehsil or a nayabat with strong forward and backward

linkages.

Rural Roads Improvement Programme

3.8 The Task Force accordingly recommends a Rural Roads Improvement Programme

primarily aimed at connecting the growth centres with tehsil or district headquarters or

arterial roads and these can be identified as feeder roads (FRs).

3.9 International experience suggests a strong correlation between rural roads and

overall development through a variety of linkages. First, the development of rural

infrastructure has far-reaching implications for poverty reduction by improving income-

generating opportunities. Second, it raises agricultural production indirectly through

prices, diffusion of technology and the use of inputs. For instance, fertilizer prices are

15% lower, production 33% higher and price realization 20% better in villages having

access to better infrastructure facilities. Total earning as well as employment of poor

households were found substantially higher in villages with developed infrastructure.

3.10 The following criteria may inform the network of roads to be developed:

� The focus should be on connecting growth centers to markets. The

proposed FR should connect the growth centre with tehsil and district

headquarters and arterial roads system or provide a link from one growth

centre to another. Network development should be emphasized.

� The FR should, as far as possible, follow an existing alignment and a new

alignment should only be a reserve option when there is no existing

alignment.

� FRs should connect remote growth centres located remote from the RHD

(Road and Highway Division) road network.

� FR should connect an RHD road which is passable all year round by motor

vehicle.

� The norm for unit cost of road for km length should take into account the

difficult terrain in parts of the state and should accordingly be reset.

3.11 The next three to five years will witness further injection of funds into the rural

road sector with the intensification of existing programs and the introduction of new

initiatives. With technical programs running concurrently to address capacity constrains,

transforming the rural economy will ensure that all rural roads will pave the way for

development.


16

Issues and Status

4.1 Unprecedented progress in technology has made telecom the engine of growth

in parts of the developing world, most notably in India. Several research studies have

established a positive correlation between telecom growth and GDP growth. As per one

report, in the developing world, every 1% growth in teledensity (telephone per 100 of

population) is accompanied by a 3% growth in GDP and some surveys estimate this

multiplier to be as high as 6%.

4.2 Development of the telecom infrastructure holds out a considerable promise for

the development of J&K not only because of the economic benefits it will bring but also

because it will deepen J&K’s integration with the rest of the country thereby strengthening

social and emotional ties.

4.3 With mobile services launched only in August 2003, J&K has been a late

entrant into the telecom sector. Even so the state has caught up with the rest of the

country – the teledensity of J&K as of June 2006 at 11.0 was only marginally short

of the national average of 13.7. Disaggregated figures however show that telecom

penetration has been uneven across the urban and rural segments. While the urban

teledensity of J&K at 39.86 compares favourably with the national average of 42.65,

rural teledensity at 0.84 is significantly below the national average of 1.85. The

Average Revenue per User (ARPU) for J&K at Rs.440.56 is significantly higher then

the national average of Rs.339.492 evidencing that telecom growth is not likely to be

hampered by demand side constraints. If anything, demand is likely to grow further

as the falling cost of handsets and accessories combined with innovative tariff plans

has made initial entry costs affordable.

4.4 The main constraint to telecom growth in J&K emanates from the supply side,

and these are impinging on the expansion of services into virgin areas as well as quality

improvement of existing services. Reliance, which has a large presence in the rest of the

country, has not commenced services in J&K despite holding a license for the past few

years. Unless the competitive pressures arising from the multi-operator scenario of the

other states gets replicated in J&K, the growth rate of telecom services and the

introduction of value added services might get stymied.

4.5 The following are the major constraints to telecom growth in J&K.

Telecom Sector

Chapter 4

2 These are figures for BSNL but are representative of the industry trends.

Telecom Sector

17

High Rollout Cost

4.6 Both the capital and operating costs of telecom services in J&K are high

owing to a variety of factors. First, the poor road network and difficult terrain raise

the costs of transporting and installing equipment as also the costs of laying the

optical fibre network. Second, the mountainous terrain hinders the telecom signal

thereby limiting the reach of each telecom tower and increasing the number of

mobile cell sites required to provide coverage as compared to the plains. Third, the

poor power situation, non-availability of spare parts and lack of trained personnel all

add to the operating costs of service provision.

4.7 Reducing the costs of service provision is self-evidently necessary to improve

the penetration of telecom services. This Task Force’s recommendations on power

and infrastructure elsewhere in the report should help reduce some of these costs.

While those measures will be necessary, they will not be sufficient. The Universal

Service Obligation Fund (USOF), set up by the Government and funded by a levy

from service providers, is intended to finance the viability gap in extending services

to rural and remote areas. However, J&K has not been able to tap the USOF

because of the stringent restrictions under the scheme as well as security concerns.

Typically, the subsidy is based on the number of connections given. Such a prospective

connection based subsidy may be sufficient in the rest of the country but not in J&K

where inhibiting factors go beyond economic factors to security concerns. TRAI has

recently recommended that USOF should also subsidize provisioning of infrastructure

which covers the capital cost, operational cost and also permits infrastructure sharing

by multiple operators cutting across technologies. Such a policy shift will help states

like J&K. The quantum of subsidy for each state should be calibrated taking into

account the special circumstances of each state such as the quality of infrastructure

and the terrain with a hilly state with poor infrastructure like J&K qualifying for higher

subsidy. We recommend that the USOF subsidy policy be revised accordingly and a

pilot project under the revised guidelines be earmarked for J&K.

Points of Interconnection

4.8 As per existing TRAI guidelines, operators are obliged to provide connectivity

to other operators at points of interconnect (POI) on their respective networks. AIRTEL

has reported that BSNL which owns the largest network in J&K has not been able to

comply with this obligation. BSNL has reportedly been unable to do so owing to

capacity constraints. We recommend that as the apex licensing authority, Department

of Telecom (DOT), take cognizance of this and sort out the impasse as interconnectivity

is vital for healthy competition among service providers. This will improve the quality

of service and drive down the cost.


18

Entry Tax Burden

4.9 J&K charges an entry tax of 12.5% on telecom equipment. Prior to April 2006,there was discriminatory regime with BSNL suffering only a 4% entry tax as against12.5% tax imposed on other operators. In response to a complaint from the otheroperator against this discrimination, parity was established by increasing the rate to12.5% on BSNL too. Such a high entry tax burden adds to an already high capital costof service expansion. The gains to J&K arising from the economic buoyancy of telecomroll out will more than compensate for any tax revenue loss on account of entry tax. Wetherefore recommend that J&K withdraw, or at any rate, substantially reduce the entrytax on telecom capital equipment.

Security Concerns

4.10 Current licensing conditions prescribe that no telecom infrastructure can beinstalled within 10 km of the international border. This clause limits the reach of theoperators as a large chunk of the population in Jammu & Kashmir resides in towns nearthe international border with no telecom facility. DOT has reportedly taken up this matterwith the Ministry of Home Affairs (MHA). Further J&K, being a high military zone, SACFA(Standing Advisory Committee on Radio Frequency Allocation) clearance is mandatoryfor erecting mobile towers. This is very time consuming in the border areas because ofsecurity considerations and leads to delays in network rollout. There is a clear need forrevisiting these restrictions with a view to identify to what extent these restrictions canbe relaxed and how the remaining can be streamlined. At the minimum there is need forgreater coordination between MHA and DOT to expedite clearances and reduce thetransaction costs for potential investors.

Bureaucratic Delays

4.11 Service providers report that there are long delays in clearances from localbodies. Municipal permissions, which normally take more than six months and longer,hamper the network roll out. The delays in forest permission (which takes close to oneyear) especially in major towns like Poonch, Uri, Rajouri, Kishtwar, Mendher etc. wheresites fall under forest area cause time and cost over-runs. The state government muststreamline issue of clearances to minimize the transaction costs for the serviceproviders.

Broadband Services

4.12 Broadband Services, a crucial infrastructure for a knowledge economy and forthe growth of IT enabled services, have been recently launched only in two major citiesie Jammu and Srinagar. As against a total of 1.32 million connections in the country(March 2006), the state has only 4612 connections. There is an urgent need to promotebroadband since this will trigger the development of the IT-BPO sector with relativelyhigher employment intensity.

Tourism Sector

19

Context - Promise and Performance

5.1 J&K was a mainstream tourist destination long before tourism in the modern form

emerged as a growth industry. The state’s scenic beauty, its temples and shrines and

its rugged terrain offered broad based attraction for tourists across the entire spectrum,

and tourism had for long remained the backbone of J&K economy. This healthy growth

got derailed in the wake of the insurgency of the 1990s. Over the last two years, tourism

has begun to recover, but it is still a far way off from becoming the preeminent engine

of growth that it once was. This is an opportune time for J&K to aggressively reposition

itself as a tourist destination riding on the back of the economic buoyancy around the

world and at home in India. The state needs to market itself in three distinct niches –

leisure tourism in the valley, religious tourism in Jammu and adventure tourism in

Ladakh.

5.2 The Valley attracted 7 lakh tourists in 1988/89, averaging a growth rate of 10+%.

This healthy progress was jolted by the insurgency in the 90s and tourism went on a

decline. There were early signs of recovery in 2003 when tourist arrivals touched 1.9

lakhs. The recovery accelerated in the following two years with tourist arrivals of 3.8

lakhs in 2004 and 6.1 lakhs in 2005. Sporadic incidents of violence through 2006 have

dampened the growth in 2006 with arrivals of 3.8 lakhs up to August 2006. Security is

after all a pre-requisite for tourism to flourish.

5.3 If there were no insurgency, tourism would have maintained its growth track and

it is estimated that annual tourist arrivals today would have been in the range of 15-18

lakhs. Tourism’s share of the state’s GSDP, which was 10% in 1988/89, would have gone

up to 15%-20% if not higher.

5.4 Pilgrim tourism to the Jammu region of the state has remained largely unaffected

by the insurgency. The Mata Vaishnodevi temple which is a year round attraction and the

Amarnath Yatra for which Jammu is a base have maintained healthy flow of tourists into

Jammu. The number of pilgrims was 61 lakhs in 2004, 62 lakhs in 2005 and 47 lakhs

in 2006 (up to August 2006).

5.5 Ladakh too has had a steady growth in arrivals (both domestic and overseas).

In 2005, the arrivals were 38,448 and in the first eight months of 2006 the figure was

40,450.

Tourism Sector

Chapter 5


20

Existing Infrastructure and Gaps

5.6 The Valley: It has 18,000 beds in hotels and houseboats. According to one

assessment, about a third of these beds are not suitable for visitors. The rest also

need upgrading. With refurbishing, this can meet the current needs. If the projected

growth is achieved, the Valley will need 6,000 additional beds in 2010 and 3,000

more by 2015. One measure for augmenting capacity in the short term is to have

hotels presently under the occupation of the para-military forces vacated and returned

to the owners. The owners should then be given soft loans to have them renovated

quickly.

5.7 Jammu: The present accommodation in Jammu and Katra taken together is

15,000 beds with the bulk of them below required standards. Even this is inadequate

to meet the growing needs. It is estimated that an additional 10,000 beds would be

required by 2015.

5.8 Ladakh: The region has 5,400 beds which are totally inadequate in the season.

It urgently needs 2,000 extra beds.

Challenges

5.9 The most important challenge for J&K on the tourism front is to inspire the

confidence of potential tourists as a safe and secure destination and the most urgent

task is to prepare a tourism vision document.

5.10 The state authorities are addressing the issue of restoring confidence. The

effort needs to be supported by the central agencies and trade associations.

5.11 To achieve its tourism dream, J&K needs to have (a) Vision Document and

(b) a Master Plan based on research by a reputed organization with support from

international sources like UNDP, UNWTO and PATA. J&K tourism has to be particularly

sensitive to environmental concerns because of the fragile nature of its ecology. The

Master Plan has to be centred round sustainable tourism.

5.12 For closing the infrastructural gap within a time frame, concerted efforts to

attract investments in tourism from the rest of the country are needed.

5.13 Connectivity is also crucial for major growth. The good news about air services

has to be sustained by airport modernization and fast track completion of road and

rail projects into the Valley. Tourism-friendly facilitation at airport and checkpoints are

a must.

Tourism Sector

21

Way Forward

Short Term

5.14 Until upgrade of accommodation and building of new rooms, tented accommodation

(the state pioneered this segment in Pahalgam decades ago) should be provided on an

urgent basis. The state plan envisages the creation of 30 new tourist villages and

improvement of 70 existing villages for which a provision of Rs. 272.50 crores has been

earmarked. It will be advisable to take up this activity in the PPP mode.

5.15 To accelerate renovations and new constructions of house boats, hotels, and

shikaras, an additional sum of Rs 30 crore may be allocated for immediate disbursement

as soft loans with an appropriate monitoring mechanism. Soft loans should also be given

for developing paying guest accommodation.

5.16 There is a similar need to provide auto-financing to transport providers such as

coaches and cars etc. State Bank of India and the J & K Bank along with finance

companies should be encouraged to draw up action plans.

5.17 HRD and technical inputs are other areas waiting for effective action for

upgrading skills and service standards. Help could be sought from leading hotel chains.

5.18 Connectivity: In the past the Valley drew the bulk of its visitors by road but now

much larger numbers are coming by air. Only 600 air seats are available on a daily basis.

Fortuitously, apex fares and low cost carriers flying into Srinagar will make a difference.

The Ministry of Civil Aviation should be able to persuade Indian, Jet and Sahara to offer

special fares for travel to Jammu, Srinagar and Ladakh. At the same time the

government should incentivize low cost carriers (like lower landing/navigational/parking

fees) so as to encourage them to introduce services. Reduction in the state sales tax

on ATF could also help reduce fares even further. Charters from within the country and

also from abroad could make travel even more affordable.

5.19 Facilitation: Security checks for air travellers need to be fine-tuned to appear

tourist-friendly. In addition, the 11 km road from the airport requires an upgrade and

constant maintenance.

Mid and Long Term

5.20 While an effort will be necessary to attract entrepreneurs from the rest of the

country to J & K with incentives, single window clearances, hassle free availability of

land, the already announced projects of upgrading Srinagar Airport to international status

and extension of the railway from Bannihal to Uri will be additional attractions for

investors.


22

5.21 The proposed Master Plan for tourism should cover ten and twenty year periods

as done by other front rank states. For sustainable tourism, issues like carrying capacity

of destinations should be part of the Master Plan. For a proper assessment of tourism’s

contribution to the economy, an institute with expertise in this area could be assigned the

task of developing Tourism Satellite Accounts for the state.

5.22 It is noteworthy that the J&K Government has already granted ‘industry’ status to

tourism, thereby extending all the provisions of the “New Industrial Policy 1998-2003” to

tourism related projects. Apart from various other benefits, this status permits tourism

entrepreneurs from outside the state to take land on a 90-year lease. The state

government must immediately give wide publicity to this.

5.23 J & K needs to spend more on promotions, and to aid this, allocation for tourism

in the state’s budget needs to be increased. This is particularly so in view of launch of

campaigns like Kashmir for all seasons and promotion of special products like heli-skiing,

golf and conventions which bring in high spenders.

5.24 J & K has little or no entertainment to offer to enhance the tourist experience. The

state’s rich cultural heritage may be exploited along with modern allurements like

shopping, food courts, multiplexes and music festivals and sports events like cricket,

golf, football. Fishing in J & K can be a big draw.

5.25 J & K snows have been certified by the renowned skier Sylvan Saudan (who

introduced heli-skiing in the state) as the best in the world. This offers promise for a

major Ski Resort project on the lines of the Himalayan Ski Village which Alfred Ford, the

great grandson of Henry Ford is setting up in Manali in association with the Himachal

Government.

5.26 With India poised to receive more international conferences and conventions

Srinagar could stake its own claim by upgrading the Sher-e-Kashmir complex with state

of the art facilities.

5.27 Heritage tourism is not only an asset for the hospitality sector it can also be

harnessed for preserving J & K’s vast, rich and varied legacies. INTACH we are sure will

be only too happy to offer help.

5.28 In conclusion if the above recommendations are implemented, it would mean an

investment of Rs 4,000 crore over the next five to seven years. But it would create

40,000 jobs directly and 1,25,000 jobs indirectly and reestablish tourism as the engine

of J&K’s growth.

Horticulture and Food Processing

23

Current Scenario

6.1 With an annual turnover of fruits and dry fruits of the order of Rs. 2000 crores,

horticulture plays a significant role in the economy of Jammu and Kashmir. An estimated

25 lakh people are connected directly or indirectly with the horticulture sector. Fruit

production expanded from 0.93 million tons in 1999/2000 to 1.4 million tons by 2005/06.

Productivity, however, remains low compared to international levels: for apples, the main

horticulture commodity, productivity has been hovering at 10 tons/hectare compared to

26 tons in USA, Australia and New Zealand. The sector as a whole is locked in a sub

optimal cycle of low productivity and low investment.

Problems and Prospects

6.2 The horticulture sector of the state faces several problems. The first problem is

the locational disadvantage. The main consumption markets of the country are a far way

off from the production centers in the state; apart from the costs, the perishable nature

of fruit accentuates the problems. The locational disadvantage is exacerbated by poor

connectivity: the only National Highway in the state from the valley to Jammu is

particularly vulnerable to rain/snowfall during the main season when the fruit is harvested

and transported to the rest of the country.

6.3 The second problem arises from the several layers of intermediation in the

distribution chain for fruits which raises the transaction costs. To take an example, most

of the fruit is not graded at the production/collection centers and is subject to the same

process of packing, transportation and storage irrespective of its value in the market.

This practice of indiscriminately mixing all grades of fruit, packing them together and

rushing them to the market results in oversupply over a very short period, low overall

price realization and erosion of the potentially valuable brand equity of the Kashmir fruit.

The poor marketing strategy, low transparency of the market and weak supply chains

have together completely eroded the incentive for producers to improve quality and

productivity.

6.4 The third problem is that the virtual absence of post-harvest infrastructure has

locked the horticulture sector of the state into a low level equilibrium. As per current

estimates, about 30% of the apples produced in the state are low grade fruit which

should be processed for value addition rather than direct sale. This requires processing


Chapter 6


24

capacity of 3 lakh tons per annum. The current capacity is barely 65,000 tons, and even

this capacity is underutilized in view of the misguided propensity of growers to sell fruit

without grading and sorting. The 1980s did in fact witness some significant investment

in post-harvest infrastructure such as grading/packing facilities, cold stores and fruit juice

manufacturing. However, during the period of militancy starting 1990, much of the

physical facilities got damaged or even destroyed. Despite relative calm, investment

interest has not picked up yet because of persisting adverse perception about security.

6.5 The fourth problem is the absence of an institutional structure for credit and

inputs which has turned the terms of trade against the producers. The fruit market is

predominantly controlled by commission agents who act on behalf of Delhi’s Azadpur

market. These agents supply credit and inputs to growers and enter into futures contract

to buy the entire produce. This practice has eroded the margins of the producers and

sapped their enthusiasm for productivity improvement.

6.6 Given the high rates of growth witnessed by the Indian economy – especially in

urban centers and the higher levels of disposable incomes, the market opportunities for

a growing horticulture sector are immense.

Next steps

6.7 The action plan in the horticulture sector should be guided by the following goals.

Making farmers market opportunity driven

6.8 This is a longer-term payoff thrust but work on this must start immediately. J&K

has unexploited capability to produce products which have a high value demand and

ready, attractive markets both in India and overseas (e.g. bio aromatics, medicinal herbs,

organic specialty vegetables etc.). To enable exploitation of these opportunities, major

programs are needed to educate and enable farmers to change their production

techniques and grow efficiently what the market will reward. This is a 3-4 year effort at

the minimum, but large scale action programs must start now.

6.9 These programs need to be holistically implemented in a market relevant manner

by having three stakeholders involved in this – the National Horticulture Board (NHB)

which has huge expertise, private companies who service markets through dedicated

sources of supply through procurement contracts with growers and the growers themselves

(or preferably the producer company which is an aggregate of farmers). The specific

“business model” and structure of the program will need to be developed, as well as

whether the funding will come from banks operating in the state or the NHB itself. For

example the bank can be the active link between them.


25

Broadening the market for what is already being grown

6.10 This can be characterized as a “quick win”. There is a definite under exploited

opportunity to market current J&K produce to the rest of the country – the time is

absolutely right because with rising incomes, all data shows increasing consumption of

fruit and vegetable in urban Indian homes, both upper income (for the more exotic

products) and lower middle income (for the more basic).

6.11 Connecting Kashmir to Kanyakumari, going beyond the apple as a commodity to

varieties of apples and fruits and niche products like saffron, and going beyond a single

entry point into the market of Azadpur mandi to several more entry points are the key

tasks. Further, there is a considerable amount of early pay off that systematic market

development efforts can create – e.g. including an apple a day as part of the mid day

meal schemes since it is a robust easy to store and handle fruit (and supposed to keep

the doctor away as well!), e.g. tapping in on the cultural label of saffron, the consumption

of which is aspirational all over the country, and where right priced supply would

definitely release latent demand etc.

Increasing farmer price realization

6.12 This can be achieved through supply side initiatives that improve price realization

as well as market mechanisms which improve supplier bargaining power and staying

power.

Supply side initiatives

6.13 Two supply side initiatives are required. First, better sorting and grading so that

the overall price realization improves well over the blended price. Second, better

packaging that facilitates price advantages in transportation, (e.g. collapsible crates) and

price increases due to perception improvements as well as better cold chain storage

facilities that enable manipulation of supply to the advantage of the seller

Market mechanism initiatives

6.14 There are two initiatives required. First, there is need to increase the number of

buyers and the geographic spread of the buyers by creating a formal and modern market

place and through a transportation subsidy to establish a direct link between producers

and buyers. The second initiative is to provide farmers information on pricing (dealer

price and end consumer prices all over the country) as well as on volume off take by

buyer type through an IT enabled service so as to improve their “what to sell, when to

sell” decision making and their bargaining power with buyers.


26

Promoting processed food manufacturing units which are market connected

6.15 There are immense opportunities to use apple pulp etc. for baby foods, jams,

jellies, squashes, juices etc. Manufacturing units run by private enterprise, preferably

those already in the business, can create a win-win opportunity for both the state and

the marketer.

Market Development Scheme

6.16 In order to kick start the horticulture sector in the state, we propose a Market

Development Scheme. This will be centred on creation of a network of 10 state of the

art mandis which are modern marketplaces with all the support facilities (finance,

logistics, communication etc) as well as post harvest management facilities like grading

and sorting (either mobile or fixed), pack houses and chilling facilities. This is conceptually

a community/collective post harvest management facility to serve suppliers, as well as

an integration centre for buyers to buy efficiently. In order to ensure signaling to all that

this is a different mandi, renaming these as IMs or integration markets may be helpful.

6.17 This initiative should ideally be done in a public-private partnership (PPP) mode.

As regards design and implementation, there are several options. One option would be

a hub and spoke model which is already under contemplation. Again the facilities can

be built by the Government and leased to a private party for operation or could be built

and operated by a private party in a PPP mode. The details need to be worked out by

the Government in consultation with all the stakeholders.

6.18 We recommend an allocation of Rs. 50 crores for this to be deployed as equity

or viability gap funding depending on the model adopted. The Government could also

be allowed to use a part of this money for technology development on a demand driven

basis.

Health Sector

27

Context

7.1 Human capital, as characterized by good education and good health, is an

important determinant of economic growth. That three of the eight goals, eight of the

sixteen targets and eighteen of the forty-eight indicators of the Millennium Development

Goals of the UN relate directly to health is an indicator of the importance of health to

growth. In J&K, health care delivery is important not only for human resource development

but also for restoring the faith of the people in the institutions of governance.

Health Indicators

7.2 At one level, the health indicators of J&K present a favourable picture (Table 1).

The birth rate at 19.2, death rate at 5.7 and infant mortality rate at 45 (per 1000)

compare quite favourably with the all-India figures of 25.0, 8.1 and 63 (per 1000)

respectively. The morbidity rates for asthma, tuberculosis, jaundice and malaria indicate

lower prevalence rates vis-a-vis the rest of the country. The maternal health indicators

of the state are also better than the all-India averages and have shown an improvement

over time. The prevalence rate of AIDS is low and leprosy has been brought down to

the elimination level (achieved in 2005).

Table 1: Health Indicators - Comparative Analysis

Crude Crude Infant Sex Maternal Health Indicators

Location Birth Death Mortality Ratio Institutional SafeRate Rate Rate Delivery Delivery

J&K 19.2 5.7 45 892 70.5% 73.2%

All India 25.0 8.1 63 933 40.5% 40.6%

Best 14.0 4.6 10 1058 97.2% 98.5%(Goa) (Manipur) (Kerala) (Kerala) (Pondicherry) (Pondicherry)

Worst 31.6 9.8 87 821 20.2% 27.8%(U.P) (Orissa (Orissa) (Delhi) (Chattisgarh) (Jharkhand)

& M.P)

7.3 These aggregate indicators reflect a satisfactory picture of the health status of

J&K. But to assume on this basis that the public health delivery system of J&K is a

well functioning machinery would be misleading. On the contrary, the public health

care delivery system of the state has atrophied over the years of militancy forcing

Health Sector

Chapter 7


28

people to buy health care from the private sector. On several parameters reflective of

the ‘public good’ nature of primary health care such as full immunization of children

(38.9% against all India average of 47.6%), high dropout rate for polio and DPT

vaccinations and sex ratio, J&K lags behind the rest of the country. Also on practically

every parameter, J&K lags behind the best performing state reflecting the amount of

‘catch up’ the state has to do. This clearly points to the need for revitalizing health

delivery particularly targetted at poorer segments of the population who cannot afford

private health care.

Infrastructure

7.4 The health infrastructure in J&K at all levels (primary, secondary and tertiary)

suffers from shortages that are both qualitative and quantitative in nature.

7.5 Primary level health care is provided by Sub Centers, Primary Health Centers

and Dispensaries. As per the Bulletin of Rural Health Statistics 2006, the number of

health centers in the state is in surplus. The state government has contested this

computation and has argued that the Bulletin has taken a lower figure for the population.

If the correct population number were used, the number of centers would in fact be in

deficit (Table 2). Moreover, it will be erroneous to use the same norm for health coverage

uniformly across the country. In J&K, the low density of population, difficult terrain,

militancy, poor road infrastructure and lack of public transport all add to the costs and

accessibility of health care, and these variables should be factored in evaluating the

adequacy of coverage.

7.6 The secondary level health care is provided by Community Health Centers,

Sub-divisional and District Hospitals where again there are physical shortages.

Moreover, here too the numbers do not convey the poor picture of health care

delivery. Even as there may be a health care facility, its effectiveness is eroded if

it is not adequately staffed and equipped. Some survey evidence suggests that many

of the secondary health facilities in J&K are not fully functional for want of staff and/

Table 2: Health Infrastructure

S.No Health Care As per report of the As per report of the StateLevel Ministry of Health* Government

Norm Availability Shortage Norm Availability Shortage

1. Sub Centre 1666 1879 None 3360 2211 1149

2. PHC 271 334 None 503 410 93

3. CHC 67 70 None 126 80 46

1288

*Bulletin of Rural Health statistics

Health Sector

29

or equipment such as diagnostic services like X-Ray Machines, ECGs, DG sets and

Ambulances.3

7.7 The state of tertiary health care is worse. There has been virtually no private

investment in this segment and the public facilities are in serious deficit both by way of

personnel and equipment. Several specialties and super specialties are totally absent

forcing people to go outside the state for tertiary care.

Manpower and Training

7.8 There is acute manpower shortage in the health sector stretching from midwives,

health assistants, lab technicians and pharmacists to doctors and specialists. Each CHC

caters to about one lakh plus population and as of September 2005, the 70 CHCs in the

state were being serviced by 37 surgeons, 26 obstetrician & gynecologists, 46 physicians

and 33 pediatricians which works out to less than half a specialist per center. Similar

shortages exist for paramedics and health workers. Considering that the CHCs are also

the first level referral units, these shortages severely compromise the quality of health

services available to the rural population.

7.9 Education and training facilities in the health sector too are limited. The state has

four medical colleges with an admission capacity of 350 for the MBBS course and very few

for specializations. The eight ANM Training Schools are far short of what is required to

service the population even minimally. Let alone attracting doctors and paramedics from

outside the state, J&K is not even able to retain its trained pool. Many doctors and

paramedics tend to seek opportunities outside the state because of the poor work

environment and facilities and because of the negative perceptions on the security situation.

7.10 The net picture that emerges is of a state with some health indicators above the

national average (though not among the best in the country), poor public health delivery

systems characterized by crumbling infrastructure with shortages in equipment and

debilitating shortages in skilled manpower and of people being forced to spend out of

pocket for buying private health care.

Ongoing Initiatives in J&K

Prime Ministers Reconstruction Plan

7.11 The PM’s Reconstruction Plan (with a total outlay of Rs 24,000 crore) has a

health segment with the following components:

� setting up 6800 anganwadi centres with an outlay of Rs 20 crore annually

3 In fact, the Chief Minister of J&K told the Task Force during their meeting on 29.8.2006, ofhow even the hospitals in the capital city of Srinagar that he visited have been ineffectivebecause of poor infrastructure, facilities and equipment.


30

� increased outlays under National Rural Health Mission (NRHM) from Rs 65

crore to Rs 100 crore per annum

� construction of health centre buildings with external assistance (Rs1000

crore)

� upgradation of health facilities at Jammu Medical College to the level of

AIIMS at an outlay of Rs 120 crore

� upgradation of the Government Medical College in Srinagar with an outlay

of Rs. 120 crore

National Rural Health Mission

7.12 J&K has been identified as one of the high focus states under the NRHM

launched in 2005. With an outlay of Rs. 100 crore per annum over the mission period,

the mission targets outcomes by way of reduction in IMR (infant mortality rate), MMR

(maternal mortality rate) and TFR (total fertility rate). The core strategy elements of

NRHM are:

� Capacity building of Panchayati Raj Institutions to manage public health

services

� Increasing access to healthcare at household level through ASHA (accredited

social health activist)

� Decentralized planning - preparation and implementation of village, district

and state level health plans.

� Strengthening Sub Centres, PHCs and CHCs

7.13 Both the above initiatives are welcome and will fill some vital gaps in the health

care delivery infrastructure. However, they will not be sufficient and need to be

complemented by other efforts. These efforts should focus on improving the access and

quality of health care and engaging the private sector at all levels in innovative PPP

(public-private partnership) mode.

Way Forward

Getting Started on NRHM

7.14 The NRHM with its focus on quality healthcare for the most vulnerable sections

through a community-based approach provides a unique opportunity to the state to carry

out the necessary architectural correction in the basic healthcare delivery systems. The

Mission has specific timelines for achievement of clearly defined and objectively

Health Sector

31

measurable goals. However, the programme has yet to get off ground in J&K because

some preparatory work is yet to be completed.

7.15 It is important for J&K to capitalize on the funds, programme mode and expertise

available under the NRHM. Any further programmes and projects in the health sector

need, in fact, to build on the foundation to be laid by NRHM. If J&K makes a success

of NRHM, it will have put its heath sector on a virtuous circle of higher efficiency, lower

costs to the poor and better outcomes. On the other hand, if the opportunity provided

by NRHM is frittered away, it will simply not be credible to recommend additional

allocations.

7.16 J&K should start implementation of NRHM without further delay by completing all

preparatory work. Once the NRHM goes on stream, some initiatives can be added on

at all levels - primary, secondary and tertiary to synergize with the foundation laid by

NRHM.

Mobile Clinics

7.17 A ‘quick win’ intervention, given the difficult terrain and dispersed population,

would be Mobile Diagnostic and Primary Clinics. These units, apart from having doctors

and paramedics, would also have diagnostic facilities like X-Ray, ECG and Ultrasound.

A specific route or beat for these units would ensure predictable service, regular

availability and follow-ups. It would be desirable to have one such unit for each block i.e.

107 such units for the state as a whole. These units would not only improve access and

coverage but also optimize utilization of healthcare services. At an estimated capital cost

of Rs. 30 lakhs per unit, each consisting of one vehicle for the staff and one for the

equipment, the total capital cost for 100 units will be Rs. 30 crore. The operating cost

will be Rs. 23 lakhs per unit or a total of Rs. 23 crores for 100 units4.

7.18 We recommend an allocation of Rs. 30 crore for this scheme to cover the capital

cost phased over three years. The release should be linked to progress under NRHM

as measured by predetermined and agreed criteria and should also be subject to the

state government making the corresponding allocation in the budget for the recurring

costs.

One-off Capital Maintenance

7.19 Another immediate priority would be repair and reconstruction of assets in the

heath sector damaged by militancy and terrorism. This will be in the nature of a major

one-off capital repair and maintenance of buildings and equipment as distinct from the

regular O&M. The goal is to get all the facilities and systems in which investments have

already been made to become functional. We recommend an allocation of Rs. 30 crores

4 Figures taken from the NRHM document.


32

for this scheme phased over three years with the releases again linked to performance

under the NRHM.

PPP in the Health Sector- Best Practices from Other states

7.20 The relative success of some states health care is not only on account of better

public health systems but also because of their ability to attract private investments in

ways that complement the public sector effort. A PPP model is particularly suitable for

J&K to provide an entry point to the private sector and to inspire their trust and

confidence about making long term commitments in the health care sector of the date.

It can be argued that the PPP mode will only work in states where the private sector

already has big presence and that J&K is handicapped in this regard. This view, arguably

impressionistic, may not be correct. Although no precise data is available, the rough

numbers from the Indian Medical Council show that the population per doctor in J&K is

1400, approximately in the mid-range of states in the country (Goa population of 634/

doctor, Gujarat 1454 and UP 3915). The fact that J&K has reasonably good heath care

indicators in spite of a non-well functioning public heath delivery system also suggests

that private clinics and doctors do operate in J&K, even if they may be concentrated in

the urban areas. This is sufficient evidence to assume that there are sufficient doctors

and clinics in the state to make PPP a workable idea in J&K, and going forward, the

emphasis of the PPP mode will have to be to engage the private sector in ways that will

synergize with the public sector effort.

7.21 Across the country, there have been several PPP initiatives in the health sector

of varying delivery content and contractual obligations. The Working Group on PPP for

the 11th Plan constituted by the Planning Commission has listed several models initiated

in various states of the country. Notable among them are the following:

� Empanelling doctors and giving them an advance for attending to institutional

deliveries. The advance is made in lump sum to cover a fixed number of

cases taking into account mix of cases (simple vs. complex deliveries). The

scheme is targetted at BPL families and the benefit package includes

cashless delivery, free medicines and transport reimbursement. In the five

districts where this scheme was implemented, the success rate of institutional

deliveries was reported to be 100% with 0% maternal mortality.

� Contracting local private practitioners to deliver health care during weekends

in under-served areas for payment on a per visit basis.

� Contracting out the management of a health center to an NGO with an

arrangement for sharing a portion of the salaries and operating costs.

� Engaging health volunteers on a fixed monthly honorarium for rendering

service in urban slums.

Health Sector

33

� Engaging private specialists such as anesthetists or specialist surgeons to

provide service in a government hospital for a retainer fee and/or per case fee.

� Contracting with private parties for developing and running tertiary hospitals

and medical centers.

7.22 A more comprehensive PPP would be to contract out an entire PHC to a private

doctor for management for a fixed and/or per case contractual fee to cover both out of

pocket expenses and remuneration for service rendered. The expected outcomes, say

IMR, MMR, immunization rate etc. should be explicitly defined and built into the contract.

The grade of remuneration to the doctor could be indexed to performance with a clause

even for transfer of the entire facility to her in case of outstanding performance with the

evaluation criteria being clearly spelt out apriori.

7.23 What the above examples reveal is that PPP in the health sector is a very

workable idea and a good way to optimize the resources of the government. The design

of an appropriate model has to be informed by the local needs and local context. Given

the urgent need to revive the health delivery systems in J&K particularly in remote areas,

it will be useful for J&K to study the examples from across the country and explore the

options of delivering health care in a PPP mode. Since there is a lot of learning by doing,

it would be advisable to start on a pilot basis and expand the programme based on the

lessons of experience.

General/Specialty Hospital in PPP Mode

7.24 To attract the private sector into secondary healthcare, the state needs a couple

of demonstrable successes. An entry point would be to start off a Secondary Care /

General Hospital in the PPP mode. The package would be roughly as follows:

� The state government would make land available on a long-term lease (say

90-years). Alternately the value of the land may be treated as the equity

contribution of the government

� The private partner would bring in an equity contribution of 51% or more

and raise the debt portion of the funding from J&K Bank or any other

financial institution.

� The private partner will manage the Hospital.

7.25 The managing private partner will deliver free/subsidized healthcare to targeted

sections as may be indicated by the government. This will be formalized through an

agreement between the government and the private partner. The agreement will clearly

define the target population and the norms for objectively measuring the fulfillment of this

obligation.


34

Telemedicine

7.26 Innovations in information technology have revolutionized the reach and coverage

of health delivery systems. Telemedicine, one such thrust area, could partially bridge the

infrastructure gaps and enable access to enhanced diagnostic and therapeutic care by

specialists. It also opens up new possibilities for continuing education and training for

isolated or rural health practitioners. A beginning in telemedicine has already been made

in J&K with the Indian Space Research Organization connecting 12 centres (District

Hospitals/Medical Colleges/Others) in J&K to its telemedicine network which includes,

amongst others, super specialty hospitals like AIIMS. The state should now expand on

this by linking up all the district hospitals (8 have already been linked up and remaining

18 have to be connected). Once these are operational, investment in a dedicated hub

station in Srinagar/Jammu would enable the state to add on other applications like tele-

education on the same network. We recommend an allocation of Rs 1 crore for the

additional nodes in the first phase and an allocation of Rs1cr in the second phase for

the dedicated hub. The Karnataka Integrated Telemedicine and Telehealth Project

undertaken by the state government in partnership with ISRO and Narayan Hrudayalaya

would be a useful model to study.

Insurance Coverage

7.27 Health insurance with a variety of flexible packages to suit different costs and

benefits is a norm in the developed countries. The much acclaimed ‘Yeshaswani’

scheme in Karnataka has shown that a fund created by the state government and

managed by a Third Party Administrator (TPA) can provide effective cashless treatment

to the beneficiaries for hospitalization and critical illness. There are other examples of

insurance packages sponsored by state governments to cover targetted segments of

population with varying costs and benefits package. Examples include schemes sponsored

by Accord in Tamil Nadu and SEWA in Gujarat. Given the weak tertiary care structure

in J&K, an insurance package that delivers the following package will be warranted.

� A network of hospitals in and around J&K for tertiary care where the state

subjects could get treated without making any cash payments.

� Airlifting/Air ambulance services for emergencies and life threatening

accidents (evacuation facilities).

7.28 J&K can learn from the experience of Karnataka’s Yeshaswani, examine also

other alternatives, discuss with experts in insurance and stakeholders and design an

appropriate health insurance scheme.

Quick Yielding Projects

35

Asset Reconstruction Company

8.1 A critical requirement for private sector development is availability of finance.

However, almost all of the financial institutions in J&K are burdened with non-performing

assets which have eroded their ability to extend fresh loans to new ventures or to

rehabilitate existing units. Restoring the financial viability of the financial institutions (FIs)

is important to ensure flow of finance. This can be done by establishing an Asset

Reconstruction Company (ARC) which will take over the non-performing assets and

refurbish the balance sheets of the financial institutions. The justification for this is as

follows.

8.2 Most of the FIs in J&K were working well till 1989. The J&K State Financial

Corporation (JKSFC) which was the lead financial institution for term lending to industry

was earning cash profits till 1989. However, the viability of JKSFC was severely dented

by the militancy in the valley. Most small-scale units, particularly in the valley, were

closed down. As tourist flow dried up, hotels and houseboats as well as transport

operators became sick ventures. These units defaulted on their loan repayments which

in turn eroded the financial viability of JKSFC. Between 1990 and 1997, the non-

performing asset (NPA) portfolio of JKSFC increased by a whopping 645%. The track

record of SIDCO, the State Industrial development Corporation was similar. Its NPA

accounts rose from 8 in 1990 to 68 in 1997 with the infected assets accounting for

Rs.198 crores. The only financial institution operating at full capacity presently is the J&K

Bank. With the collapse of the public sector FIs, most of the financing for trade and some

minimal production activity is coming from the informal sector which is both limited and

costly.

8.3 Revival of the financial sector of the state calls for the setting up of an Asset

Reconstruction Company. The ARC will take over the infected assets of the state level

FIs. This will clean up the balance sheets of the FIs, restore their viability and make them

eligible for drawing refinance from central institutions. It is proposed that the initial corpus

of the ARC can be Rs 300 crores with a contribution of Rs. 200 crores from the Center

and a contribution of Rs. 100 crores from the FIs in J&K.


Chapter 8


36

Industrial Development – Special Industrial Zone

8.4 Creating employment opportunities is the biggest problem and by far the most

complex development challenge for J&K. Even as efforts should be made to improve

agricultural productivity, its promise on the employment front is limited because of the

state’s adverse ratio of agricultural land to the total geographical area. The bulk of new

employment opportunities will have to come from industry and service sectors.

8.5 In order to encourage industrial development, Government of India announced a

package of incentives comprising relief on excise duties, income tax and central sales

tax. While this package has been helpful, the flow of investment into J&K is far less

enthusiastic than that into Uttaranchal and Himachal Pradesh which enjoy similar

incentives. The reasons for this poor response are obvious. First, perceptions of poor

security inhibit potential investors. Second, skill levels are low. Third, land is not readily

available. Even though the State Government has relaxed the land lease policy,

information regarding this has not disseminated widely. Finally, the power situation in the

state hardly inspires investor confidence.

8.6 J&K has comparative advantage in food processing, particularly fruit processing

and in handicrafts. While the Government has launched several schemes to promote

these sectors, the results have been modest and slow.

8.7 What J&K needs is a big banner initiative – one that will raise the profile of the

state among potential investors. The best option in this regard is an SEZ. However, the

viability of an SEZ is doubtful given the state’s land locked geography, infrastructure

deficit and distance from the ports. Instead what J&K should attempt is a Special

Industrial Zone (SIZ). The SIZ will mimic all the physical attributes and governance

structures of SEZs but not necessarily their fiscal and statutory dimensions. Like SEZs,

the SIZ too will be a large area with world class infrastructure, captive power generation

and distribution, high quality services and utilities, dedicated infrastructure facilities, fast

track and single window clearances, and to the extent possible liberalized labour laws.

Units in an SIZ however will have neither tax concessions nor export obligations. They

will be free to sell in the country or export. The main effort should be to provide a hassle

free environment where entrepreneurs are free of all the disadvantages that cripple their

productivity and efficiency and are enabled to compete at the global level from a level

playing field.

8.8 The most compelling argument for an SIZ is that it is by far the most efficient way

for J&K to spend its limited resources to attract investment. Ideally, the Government

should improve infrastructure across board but given its fiscal pressures, that is hardly

possible. On the other hand, spreading the available resources too thin is sub-optimal.

What will be optimal will be for the Government to concentrate its resources in one focal

area.


37

8.9 The SIZ is a model that other states too can adopt. But it is particularly

appropriate for J&K as the SIZ will make it possible to ringfence the zone in a physical

sense to protect against security threats.

8.10 We recommend that an amount of Rs. 200 crores be provided by the Centre for

this.

Satellite City

8.11 The civic infrastructure of historic Srinagar is crumbling owing to pressures of

militancy, overcrowding and lack of maintenance. If urban issues are not addressed

on a priority basis, the city runs the risk of losing its brand equity as a global tourist

attraction. Since Srinagar is the gateway for all leisure tourists coming to the state, it

is important to improve the urban infrastructure here and give the entire city a

facelift. The goal of restoring Srinagar to its famed allure cannot be achieved unless

the city is decongested in a permanent sense. This calls for a two-pronged approach.

8.12 The first initiative is to encourage business and commerce which is not in the

frontline to move away from the city. This can be done by developing a satellite city

in close vicinity of Srinagar. One candidate location is Parihaspur but there could be

other alternatives. The focus of the satellite city should be business, commerce,

finance and communication. While the Government should develop the master plan,

the bulk of the development should be left to the private sector. The new city should

have high quality physical infrastructure and state of the art communication facilities.

The satellite city can also be positioned as an international financial centre.

8.13 The second initiative is to improve the civic infrastructure of Srinagar consistent

with the livelihood of the poorer segments of the city’s residents. This will improve

the quality of life of the poor while also increasing the attractiveness of Srinagar as

a tourist spot.

8.14 We recommend an allocation of Rs. 200 crores for this purpose phased over

three years.

Image Enhancement on Indian Side of the LoC

8.15 With the opening of the Srinagar-Muzaffrabad road, the traffic across the Line

of Control (LoC) has multiplied several times over. This will increase further when the

trade route is opened up. Owing to militancy and neglect over the years, the physical

infrastructure as also the appearance on our side of the LoC is very poor. This not

only causes inconvenience to the traffic but also presents a very poor image. Giving

a facelift to the area will not only improve the convenience but also give an emotional

fillip to the visitors from across the LoC. This requires improving the infrastructure in

the area including in the towns of Baramulla and Uri. To start with there is need for


38

a Facilitation Center at the LoC. Along the route, we need to improve the roads, and

build rest houses and commercial complexes and develop green belts. There should

also be uniform road markings and signanges. The Government offices along the

route should also be given a facelift. We recommend an allocation of Rs. 200 crores

for this purpose.

Strengthening of Panchayati Raj Institutions

8.16 Panchayati Raj institutions in J&K are being revived after two decades. Much of

the institutional and physical infrastructure has crumbled or been destroyed. It is difficult

to revive panchayats without providing some basic infrastructure and facilities. We

recommend a grant of Rs. 100,000 for each panchayat to build basic facilities and

provide some minimal administrative infrastructure. The total cost for the 2700 panchayats

of the state will work out to Rs. 27 crores.

8.17 Once the basic facilities are established, it should be possible use them as a

nuclei for a variety of development activities. They could double as hubs for commercial

activities, information dissemination of the e-choupal type, and for formation and

consolidation of self-help groups and micro-finance initiatives. With this infrastructure in

place, banks could also be persuaded to use them as centres for credit disbursal and

for positioning ATMs.

Agricultural Extension - Rehbar-e-Zirat

8.18 Agricultural extension effort in J&K has suffered over the last 20 years in part

because of the pressures of militancy and in part for want of adequate staff. This is a

vital gap that needs to be filled on a priority basis. One cost effective way of doing this

is to appoint a Rehbar-e-Zirat for each of the 2700 panchayats in the state. These could

be drawn from the 3500 agricultural graduates available in the state. The main

responsibility of the Rehbar-e-Zirat would be to set up an agri-clinic in the respective

panchayat for disseminating improved agricultural technologies and practices. They

would also be responsible for supplying seeds, fertilizers and pesticides. The Rehbar-e-

Zirat would be employed by the panchayat on a consolidated salary. Should their

performance be satisfactory, a limited number of them could be absorbed into the regular

state agricultural extension service. The performance criteria for absorption should be

clearly defined and objectively measured so as to incentvize performance. The Rehbar-

e-Zirat can also be used for monitoring the implementation of the various rural

development programmes. We recommend an allocation of Rs. 250 crores for this

phased over three years.

Adult Literacy and Urban Employment

8.19 Improving adult literacy can be an important instrument for curbing militancy.

Adult literacy is a classic merit good with large positive externalities. It not only improves


39

the livelihood of the poor but also gives them a stake in societal progress. One way of

delivering the programme is through ‘literacy volunteers’ drawn from the ranks of the

educated unemployed in the state.

8.20 At the rate one for 30 adults, the requirement will be for 85000 literacy

volunteers. At a consolidated stipend of Rs. 2000 per month, the total bill will be of

the order of Rs. 17 crores per month or Rs. 200 crores per year. If necessary the

programme could be started on a pilot basis in 2-3 districts and rolled out in phases

after building in the lessons of experience.

8.21 The programme can be linked to skill upgradation in five sectors which are

employment intensive – tourism, horticulture/floriculture, handicrafts, food processing

and environment. The programme structured this way will deliver several benefits. It

will improve adult literacy, it will improve the income earning capacity of the poor,

and it will mitigate the problem of educated unemployment.

8.22 The employment of these ‘literacy volunteers’ will be limited to two years

whereafter the programme will be gradually wound down. By then other employment

avenues should open up to provide alternate avenues to the disbanded volunteers.

This literacy volunteer programme will go a long way to meet the foremost concern

of the state – that of providing employment avenues to the educated unemployed.

Artisan Development

8.23 J&K, once famous for its handicrafts, has lost its niche in this segment owing

to neglect and lack of an organized effort to keep up with the changing market

dynamics. Revival of the handicrafts through an artisan development programme is

potentially an important avenue for improving the livelihood of a sizeable segment of

the rural population. Handicrafts sector has the advantage that it can be developed

independent of the power situation or the security situation. Development of handicraft

requires interventions across the entire chain – skill upgradation, organization of

production, finance and marketing.

8.24 The Confederation of Indian Industry (CII) had recently undertaken a project

by forming Kiran, a self-help group with 45 women in the 18-25 age group. The

project was supported through a tripartite agreement between CII, Dastkar and

Sadbhavana Trust. An internal assessment by CII found that the project had lost its

momentum in the second year itself primarily due to two factors – design and

marketing. Other constraints identified were inadequate government initiatives, lack of

facilities for skill upgradation (which affected both quality and consistency) and limited

number of NGOs which could assist in capacity building and commercial development.

8.25 The CII experience suggests that the two key challenges to be addressed

moving forward are: (i) reestablishing the niche for J&K handicrafts in both domestic


40

and external markets; and (ii) improving the skill endowment. This calls for a two-

stage approach.

8.26 The first stage effort which can yield quick wins is to find markets for what is

already being produced. The focus is on market development by working with the

Directorate of Handicrafts, Export Promotion Council (the key player in the Moradabad

brassware success story) and adequately stocking and refurbishing the J&K State

emporia across the country.

8.27 The second stage approach with a medium term focus will be to identify

consumer demand in domestic and external markets so as to reorient supply to

match this demand. This would ideally start with a market survey followed by creating

an enabling infrastructure in the state to have international buying houses to visit the

production facilities in the state. The key priorities from the supply side will be

capacity building aimed at improving the skill endowment, raising productivity, and

enhancing quality followed by finance and marketing support. This is an initiative

ideally done in a PPP mode. The state government should identify a high profile

corporate house which will invest in the soft and hard infrastructure with an eye on

long-term sustainable profits.

Appendix I

41

Task Force Recommendations - Summary

Appendix 1

1. Power Sector

� Transfer of 390 MW Dulhasti Hydel Power Project from NHPC to J&K (para

2.21)

� Transfer of 1020 MW Bursar Storage Scheme from NHPC to J&K for

execution in the state sector (para 2.23)

� Tying up long-term capacities in IPP projects, particularly based on coal and

gas (para 2.26)

� Projects with attractive tariff to be undertaken on priority - Kiru (430 MW),

Kawar (320MW), Ralte (560 MW) and Shamnot (370 MW) among others

(para 2.27)

� Expedite the development of 600 MW Sawalkot HE Project (para 2.27)

� A policy framework to be evolved to develop the hydropower potential of

Jammu and Kashmir. This would need to address issues like direct and

indirect subsidies, single window clearance for projects, logistics support to

IPPs, a strong securitization mechanism. (para 2.28)

� Reforms in the transmission and distribution sectors like desubsidization of

tariff, a time-bound loss reduction programme and setting up performance

standards for PDD (para 2.29)

� Restructuring and corporatization of the PDD to be completed within a

specified time frame (para 2.30)

� J&K to establish a state transmission utility and develop a long-term

transmission plan (15 years or longer) as well as an integrated transmission

system (para 2.31)

� Implement distribution system reforms aimed at improvement in metering,

billing and collection (para 2.32)

� Improve APDRP utilization (para 2.33)

� Exploit micro, mini and small hydro potential (upto 25 MW capacity)

(para 2.37)


42

2. Rural Roads

� Improve rural connectivity and redress the imbalance in rural road densityacross districts of the state (para 3.8)

3. Telecom Sector

� USOF subsidy policy to be revised and a pilot project under the revisedguidelines be earmarked for J&K (para 4.7)

� Department of Telecom (DOT) to sort out the impasse on interconnectivitybetween the operators (para 4.8)

� J&K to withdraw, or at any rate, reduce the entry tax on telecom capitalequipment (para 4.9)

� Need for greater coordination between MHA and DOT to expedite clearancesfor covering areas within 10 Kms of the international border (para 4.10)

� Streamline issue of clearances to minimize the transaction costs for theservice providers (para 4.11)

4. Tourism Sector

� Prepare a tourism vision document and a master plan based on sustainabletourism (para 5.11)

� Airport modernization and fast track completion of road and rail projects intothe Valley (para 5.13)

� Provide tented accommodation till regular hotel infrastructure can be created(para 5.14)

� Accelerate renovations and new constructions of house boats, hotels andShikaras (para 5.15)

� Provide auto-financing to transport providers such as coaches and cars(para 5.16)

� Upgrade skills and service standards with the help of leading hotel chains(para 5.17)

� Government to incentivize low cost carriers (with lower landing/navigational/parking fees) and reduce the state sales tax on ATF (para 5.18)

� Security checks for air travellers to be made tourist-friendly (para 5.19)

� Upgrade the 11 km road from the airport (para 5.19)

� Attract entrepreneurs from the rest of the country to J & K with incentiveslike single window clearances and hassle free availability of land (para 5.20)

Appendix I

43

� An institute with relevant expertise in the area could be assigned the taskof developing Tourism Satellite Accounts for the state.(para 5.21)

� Give wide publicity to the fact that land can be procured on 90-year leasebasis since there is still much confusion and lack of public clarity in view ofArt. 370 (para 5.22)

� Need to increase expenditure on promotions, and accordingly allocation fortourism in the state’s budget to be increased (para 5.23)

� Exploit state’s rich cultural heritage and develop modern allurements likeshopping, food courts, multiplexes, music festivals and sports events likecricket, golf, football and fishing (para 5.24)

� Upgrade the Sher-e-Kashmir complex with state of the art facilities(para 5.26)

� Harness heritage tourism (para 5.27)

5. Horticulture And Food Processing Sector

� Launch major programs to educate and enable farmers to change theirproduction techniques and grow efficiently what the market will reward (para6.8)

� Systematic market development effort for what is currently grown (para6.11)

� Better sorting and grading, packaging and cold chain storage facilities toimprove price realization and manipulation of supply to the advantage of theseller (para 6.13)

� Transportation subsidy to establish a direct link between producers andbuyers (para 6.14)

� Provide farmers information on pricing as well as on volume off take bybuyer type through an IT enabled service (para 6.14)

� Encourage food processing units in the private sector (para 6.15)

� Create a network of 10 state of the art mandis, in PPP mode, with supportfacilities (finance, logistics, communication etc) as well as post harvestmanagement facilities like grading and sorting (either mobile or fixed), packhouses and chilling facilities (para 6.16)

6. Health Sector

� Get implementation of NRHM started without further delay by completing allpreparatory work. (para 7.16)

� Set up Mobile Diagnostic and Primary Clinics at block level (para 7.17)


44

� Accord priority to repair and reconstruction of assets in the heath sectordamaged by militancy and terrorism (para 7.19)

� Lay emphasis on the PPP mode to engage the private sector in ways thatwill synergize with the public sector effort (para 7.20)

� Contract out an entire PHC to a private doctor for management for a fixedand/or per case contractual fee to cover both out of pocket expenses andremuneration for service rendered (para 7.22)

� General/Specialty Hospital in PPP Mode (para 7.24)

� Create a telemedicine network by linking up all the district hospitals (para7.26)

� Design and implement an appropriate health insurance scheme (para 7.27)

7. Quick Yielding Projects

� Establish an Asset Reconstruction Company (ARC) which will take over thenon-performing assets and refurbish the balance sheets of the financialinstitutions (para 8.1)

� Create a SIZ with world class infrastructure, captive power generation anddistribution, high quality services and utilities, dedicated infrastructurefacilities, fast track and single window clearances, and liberalized labourlaws (para 8.7)

� Develop a satellite city in the close vicinity of Srinagar (para 8.12)

� Improve the civic infrastructure of Srinagar consistent with the livelihood ofthe poorer segments of the city’s residents (para 8.13)

� Image enhancement on Indian side of the LoC (para 8.15)

� Build basic facilities and provide some minimal administrative infrastructurein Panchayats. Use Panchayats for commercial activities, informationdissemination of the e-choupal type and for formation and consolidation ofself-help groups and micro-finance initiatives (para 8.17)

� For each of the 2700 panchayats in the state appoint a Rehbar-e-Zirat (tobe drawn from the 3500 agricultural graduates available in the state) (para8.18)

� Deliver the adult literacy programme through ‘literacy volunteers’ drawnfrom the ranks of the educated unemployed in the state (para 8.19)

� Drawing from the pilot project launched by CII, design and implement anartisan development programme in two stages (para 8.25)

Appendix I

45

1. Transfer of Dulhasti Hydel Power Project (para 2.19) 4933

2. Rural Roads Improvement (para 3.5) 1750

3. Renovation and new construction of houseboats, 30hotels and shikara’s (Tourism) (para 5.15)

4. Integration Markets (Horticulture) (para 6.18) 50

5. Health

(i) Mobile Clinics (para 7.18) 30

(ii) Capital Maintenance (para 7.19) 30

(iii) Telemedicine (para 7.26) 2

6. Quick Yielding Projects

(i) Asset Reconstruction Company (para 8.3) 200

(ii) Development of SIZ (para 8.10) 200

(iii) Satellite City in the close vicinity of Srinagar (para 8.14) 200

(iv) Image enhancement on Indian Side of the LoC (para 8.15) 200

(v) Strengthening of Panchayati Raj 27Institutions by making 2700 Panchayat officesfunctional (para 8.16)

(vi) Rehbar-e-Zirat (para 8.18) 250

(vii) Adult Literacy and creating Urban Employment 400@ Rs 200 p.a (paras 8.20 & 8.22)

Total 8302

Financial Package Implicit in Task ForceRecommendations

Appendix 2


46

Appendix I

47

Table 2: Jammu & Kashmir – Self Reliance Indicators (2004/05)

Ratio of own Ratio of Ratio of own Ratio ofState revenue to revenue revenue to Index of central

GSDP expenditure revenue self reliance transfers toto GSDP expenditure (2004/05)* total revenue

(1) (2) (3) (4) (5) (6)Percent Percent

Jammu & Kashmir 10.0 39.2 25 0.45 78.6

NE states average 12.1 38.8 31 0.56 67.6

All states average 9.6 17.4 55 1.00 38.5

* Computed as per the formula designed by TFC as the ratio of own revenue to expenditurerelative to all state average.

1. The structural deficiencies of J&K state finances are most evident from the state’s

excessive dependence on central transfers. Surprisingly the indicators of own revenues

for J&K are comparable to those for all states (Table 1). The own tax revenue to GSDP

ratio of J&K at 6.7% is marginally lower than that for all states which is 7.6%. But

importantly, the own total revenue (tax+non-tax) to GSDP ratio of J&K at 10.0% is

marginally higher than the all-state average of 9.6%.

Table 1: Jammu & Kashmir - Own Revenues(2004/05)

State Ratio of own tax Ratio of ownrevenue to GSDP revenue to GSDP

(1) (2) (3)

Percent

Jammu & Kashmir 6.7 10.0

NE states average 5.0 12.1

All states average 7.6 9.6

Source: Finance accounts of States

2. This shows that the weakness of J&K state finances emanates not from lower

revenues but higher expenditures. The ratio of revenue expenditure to GSDP of J&K at

39.2% is more than twice that for all states (Table-2). In fact, J&K’s own revenue covers

only 25% of its revenue expenditure as compared to more than 50% for all states on the

aggregate. Consequently, the index of self-reliance of J&K calculated as per the formula

Structural Deficiencies in the Financesof Jammu and Kashmir

Appendix 3


48

designed by the Twelfth finance Commission (TFC) is 0.45 compared to the normalized

ratio of 1.00 for all states.

3. J&K is able to meet this substantially higher revenue expenditure far in excess

of its revenue receipts through generous central transfers. This is borne out by the ratio

of central transfers to total revenues which, at 78.6% for J&K, is twice that for all states.

Fiscal Position of Jammu and Kashmir - Comparative Perspective

4. There has been a steady deterioration in the finances of all states thorough the

1990s due to a number of reasons including rising cost of salary and pension bills,

burgeoning subsidies and rising interest liabilities. The deterioration has been much

sharper since 1995/96 on account of the steep increase in salary bill occasioned by the

Fifth Pay Commission recommendations. Not only has the fiscal deficit of all states

increased but also almost every state slipped into a deficit on the revenue account as

well. Quite unsurprisingly, JK mimicked these trends.

5. The revenue account surplus of J&K which was 9.1 percent of its GSDP in 1995/

96 dropped to 7.6 percent of GSDP by 2004/05 (Table - 3). What is significant is that

the deterioration in the revenue account of J&K of 1.5 percentage points was sharper

than the 1.0 percentage deterioration for all states on the aggregate. That this deterioration

occurred despite significantly larger central transfers is an indication of the vulnerability

of J&K public finances. A similar trend is repeated on the fiscal deficit side too where the

deterioration in the case of J&K of 3.6 percentage points of GSDP is sharper than the

deterioration of 1.9 percentage points of GSDP for all states.

6. The impact of continued high fiscal deficits is expectedly reflected in the

deteriorating debt position of J&K (Table - 4). The debt to GSDP ratio of J&K deteriorated

by over 2 percentage points between 1995/96 and 2004/05, which is modest compared

to the all-state average, but J&K’s debt GDP ratio was already over 50% to start with.

More than 50 percent of J&K’s own revenue goes towards servicing debt clearly

demonstrating the excessive burden of debt.

7. Under our system of fiscal federalism, all states receive central transfers primarily

through three channels: (i) tax devolution and non-plan grants as per the Finance

Commission award; (ii) plan assistance; (iii) assistance for central sector and centrally

sponsored schemes. The vulnerability J&K state finances persists despite their receiving

a significantly higher proportion of central assistance on a per capita basis than general

category states (Table - 5). The average per capita transfers to J&K at Rs. 6919 is more

than five times the all state average of Rs.1356 and more than 1½ times the average

for the NE states.

Appendix 3

49

Tab

le 3

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Def

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tate

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For

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and

fis

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50

Table 4: Jammu and Kashmir - Indebtedness Indicators

Ratio of debt Ratio of interest Ratio of interestState to GSDP payments to total payments to total

revenues own revenue

(percent)

1995-96 2004-05 2004-05 2004-05

Jammu and Kashmir 56.5 58.8 12.0 56.4

N-E states average 32.2 47.4 12.8 39.4

All states average 21.2 42.2 22.9 37.2

Source: CAG

8. Despite low own revenues, the public expenditure level of J&K is higher than that

for all states both as a percentage of GSDP and on a per capita basis (Table - 6). The

ratio of total expenditure to GSDP for J&K at 51.4 percent is more than twice the all-state

average of 20.2 percent. Also in per capita terms, both revenue expenditure and total

expenditure of J&K are higher than the corresponding number for all states. The per

capita capital expenditure of J&K at Rs.2285 is more than thrice the all-state average.

9. These higher public expenditures in J&K have not, however, translated into

growth mainly for two reasons. The first reason is the higher unit cost of service delivery

– the cost of providing schooling to a child or the cost of providing health care to a

person are typically higher than the all India average because of sparse population

density, difficult terrain, poor connectivity and a host of other causes. The second reason

is that the beneficial impact of public expenditure spills over beyond J&K as much of the

contractors’ payments are transferred to and purchases are made beyond the state – a

phenomenon referred to as the ‘missing multiplier’.

Table 5: Jammu and Kashmir – Per Capita Central Transfers(2004/05)

Ratio of Ratio of perTotal own Current central central capita transfers

State revenue transfers transfers to to all statetotal revenue average

Rupees per capita Percent

Jammu and Kashmir 1878 6919 78.6 510

N-E states 2100 4390 67.6 324

All states 2171 1356 38.5 100

Source: State Finances 2005/06, RBI

Appendix 3

51

Jammu and Kashmir and Twelfth Finance Commission

10. As indicated earlier, the Twelfth Finance Commission (TFC) has significantly

stepped up the central transfers to states. The TFC award is in line with the earlier

Finance Commission stance of devolving significantly larger amounts to J&K. The per

capita transfers (tax devolutions and non-plan grants) to J&K for the five-year period

2005-10 at Rs. 18811 is 250 percent of the transfers to other states of Rs. 6934

(Table - 7).

Table 6: Jammu and Kashmir - Expenditure Parameters(2004/05)

Ratio ofState total Per capita expenditure (Rupees)

expenditureto GSDP Revenue Capital Total

Jammu and Kashmir 51.4 7377 2285 9661

All N-E states 50.0 6713 1924 8637

All states 20.2 3934 0626 3969

Source: State Finances 2005/06, RBI

Table 7: Jammu and Kashmir - Per Capita Transfers as per TFC Award2005-10

State Per capita central transfers Per capita transfers as(tax devolution + non-plan grants) a multiple of all states

(Rupees) average

Jammu and Kashmir 18811 2.71

NE states average 14879 2.14

All states average 6934 1.00

11. Furthermore, the TFC also recommended a two-part debt relief package that is

by far more generous than any scheme of any earlier Finance Commission. The TFC

debt relief package comprises two schemes: first, a debt restructuring scheme whereby

the outstanding loans of the states contracted up to 31.3.2004 and outstanding as on

31.3.2005 are consolidated into a single loan for a fresh term of 20 years and carrying

an interest of 7.5 percent per annum. The only precondition for availing this incentive is

the requirement that the state pass a fiscal responsibility legislation. The potential

interest payment relief that will accrue to J&K on this works out to Rs. 264 crores over

the five-year period 2005-10 (Table - 8, column 2).


52

Table 8: Jammu and KashmirPotential Benefit Under TFC Debt Relief Package

2005-10

State Relief during 2005-10 (Rupees crore)(1) Interest relief on account Potential debt write off linked

of debt consolidation to revenue deficit reduction(2) (3)

Jammu and Kashmir 264.02 473.85

Total all states 21275.65 32198.70

12. The second component of the TFC debt relief package is a debt write-off

scheme. Under the scheme, the repayments due on central loans from 2005/06 to 2009/

10 after consolidation and reschedulement will be eligible for debt relief. The quantum

of write off is linked to the absolute amount by which the revenue deficit is reduced in

each successive year during the TFC award period. The maximum debt amount that can

potentially be written off if J&K brings its revenue account into balance by 2008/09 works

out to Rs. 473 crores (Table - 8, column 3).

Appendix I

53

Transfer of Salal Hydroelectric Project to Jammu & KashmirIssues and Options

And an Alternate Proposal(Executive Summary)

Task Force on Long Term Developmentof Jammu & Kashmir

October 2005

Improving the Power Situationin Jammu & Kashmir

Appendix 4


54

Appendix 4

55

Transfer of Salal Hydroelectric Project toJammu & Kashmir

Issues and OptionsAnd an Alternate Proposal

Executive Summary

1. The 690 MW Salal Hydro Electric Project (HEP) is located on the Chenab River

in Jammu and Kashmir. The project is owned and operated by the National Hydro

Electric Power Corporation (NHPC).

2. In October 2004, the Chief Minister of J&K wrote to the Prime Minister requesting

transfer of the Salal HEP to the state. The request was based on the argument that J&K

was not able to effectively utilize its hydro potential on account of the restrictions

imposed by the Indus Water Treaty and hence should be compensated for the same.

3. PMO referred the matter to the Ministry of Power which expressed strong

reservations against the proposal on the following grounds:

� Adverse commercial impact on the existing beneficiaries

� Adverse commercial impact on NHPC

� Non-availability of expertise required to run a large hydro project

� Possibility of triggering similar demands from other states

4. Thereafter, the matter was referred by PMO to the Task Force on J&K Development

for consideration. The Task Force has attempted to factor in both financial and non-

financial implications in order to reach a rational decision.

5. The non-financial implications of transfer of Salal HEP to J&K would be the

following:

� Lack of expertise on the part of J&K to run a large hydro project like Salal

HEP.

� Possibility of establishing a precedent for transfer of central sector power

projects to states and thereby triggering similar demands from other states.

This would jeopardize power sector planning and create disincentives for

capacity planning both in the central and state sectors.


56

� Vehement protests from the states which are the present beneficiaries of

power from Salal HEP if they are deprived of their shares in the power

generated from the project.

6. The financial implications of the transfer of Salal HEP to J&K for NHPC, for the

existing beneficiaries and for Jammu & Kashmir have been analyzed. In the event of the

project being transferred, NHPC will need to be compensated to the tune of Rs 875

crores, the estimated fair value of the project. The existing beneficiary states will need

to be compensated for the losses suffered by them on account of being driven to

purchase expensive power from the market to replace the cheaper power from Salal

HEP. This compensation has been estimated at Rs 2862 crores.

7. The financial benefit to J&K on account of the transfer of Salal HEP has been

estimated at Rs 4064 crores. This is of course assuming that NHPC and the existing

beneficiaries will be compensated through central assistance.

8. Considering the formidable financial and non-financial implications of the transfer

of Salal HEP to J&K, the Task Force studied an alternate option which is to provide

additional central assistance to Baglihar Hydro Electric Project by way of GoI taking on

the obligation of servicing the debt on the project.

9. Baglihar HEP is a state sector project being implemented by J&KPDCL with a

projected energy generation of 2773 Million Units. The estimated completed project cost

of Baglihar HEP is Rs. 4000 crores with the following scheme of financing: equity from

Government of J&K: Rs. 1600 crores; additional central plan assistance from PM’s

Economic Package for J&K: Rs. 630 crores; term loans from Financial Institutions: Rs.

1770 crores.

10. One of the covenants mandated by the Financial Institutions against the term

loans for the project is that J&K will have to tie up the long-term sale of power to an

intermediary like PTC India Limited for the full off-take of power from the project without

allowing for any free power. As such, under the current arrangement, even though J&K

might finance and implement the Baglihar HEP, it will not have the benefit of power from

the project for at least 10 years, the repayment period of the term loan.

11. The alternate proposal studied by the Task Force is that the debt servicing

obligation of the term loan of Rs 1770 crores will be taken over by the GoI through

Additional Central Plan Assistance (ACPA). This arrangement will make power available

to J&K right from the first year of commissioning without the 10-year wait. Moreover the

energy that would be available will be 2773 MUs against 2020 MUs in the case of Salal

transfer.

12. However, J&K will continue to have a power problem till Baglihar is commissioned

which, as per current schedule, is December 2006. One option for resolving this more

Appendix 4

57

immediate problem is to raise the share of J&K is Salal power from the present 34.39

percent to 50 percent (an additional 415 MU), proportionately reducing the share of other

beneficiary states that will be suitably compensated. This arrangement will be in force

for only one year by when Baglihar is scheduled to be commissioned. The power sharing

arrangement will revert to the present pattern at the end of this one year. The

compensation to be paid to the other beneficiary states as per this arrangement (the

difference between the market rate of Rs. 3/kWh and the Salal power price of Rs. 0.86/

kWh) works out to Rs. 90 crores.

13. From the perspectives of both GoI and J&K, providing additional central assistance

by way of debt servicing for Baglihar appears to be a better alternative than transfer of

Salal for the following reasons:

(i) The energy available to J&K under Baglihar (2773 MUs) will be higher than

under Salal (2020 MUs). This should be valuable to J&K not only from the

power augmentation point of view but also to provide a position of comfort

to take much needed long term power reform measures.

(ii) Over the first 10-year period, J&K will benefit more financially from Baglihar

(Rs. 3632 crores) than from Salal (Rs. 2959 crores). However, over the 25

year period, Salal will yield larger financial benefit (Rs. 4064 crores) against

Baglihar (Rs. 3632 crores). However, the first 10-year period is more crucial

for J&K.

(iii) Also over the first 10-year period, the Baglihar option will give J&K benefit

of the order of Rs. 500 crores per year which will be more or less similar

to what J&K would get under Salal.

(iv) The immediate problem of power shortage in J&K till Baglihar is

commissioned (December 2006) will be met through an increase in J&K’s

share of power from Salal as discussed in para 12 above.

(v) The NPV of the burden on GoI at Rs. 2775 crores under the Baglihar option

will be much lower than Rs. 3735 crores under the Salal transfer option.

Moreover, under the Salal transfer option, GoI will have to bear the entire

burden of Rs. 3735 crores up front as both NHPC and other beneficiary

states will not wait for compensation. On the other hand, under the Baglihar

option, the burden on GoI will be by way of debt servicing and therefore

spread over 10 years, starting from Rs. 336 crores in the first year and

dropping to Rs. 193 crores in the tenth year.

(vi) The Baglihar option will avoid setting a precedent for transferring a central

sector project to a state and thereby circumvent the complex issues

discussed earlier.


58

14. The transfer of Salal HEP to J&K or debt servicing assistance for Baglihar HEP

are only short-term solutions. As a long-term measure, J&K should try and exploit fully

the hydro-potential of the state and undertake reform measures.

15. As a part of reform measures, the state should establish a state transmission

utility. A long-term transmission plan (15 years or more) needs to be developed for the

state. More funds have to be provided for strengthening the transmission and distribution

(T&D) infrastructure in the state. Distribution regions/ circles based on suitable criteria

need to be formed. Energy audits need to be carried out to assess technical and

commercial losses. Metering should be made mandatory within a limited time period to

correctly identify leakages in the system and billing and collection have to be improved

and losses reduced substantially.

16. Support should be given to the State Electricity Regulatory Commission (SERC)

by providing adequate resources for proper functioning.

17. It is also felt that a policy framework needs to be evolved in order to develop the

hydro power potential of Jammu and Kashmir. This would need to address issues like:

� Direct and indirect subsidies

� Single Window Clearance for projects

� Logistics supports to IPPs

� A strong securitization mechanism

18. A quick study of the Power Supply Position of J&K reveals that state of J&K faces

peak shortage of 11.4% (150 MW) and an energy deficit of 9.2% (751 MUs). The

demand in the state peaks during winters on account of large heating loads.

19. Besides, the state has largely hydro based generating resources available to it

that generate most of their annual generation during monsoons and have low levels of

generation during the winters.

20. Thus, in order to enable overall development, it is essential that J&K meet its

winter power demand. Hence it is recommended that J&K look at balancing their hydro

thermal generation mix by taking larger shares in upcoming thermal power stations. J&K

could also purchase capacity in some large reservoir based hydro projects which will

offer peaking power even during winters. In addition, projects which are expected to

generate competitively priced power have been identified and hence J&K should focus

on developing these on priority.

Annex 1

59

(PMO Notification constituting the Task Force)

No.670/57/C/18/05-E&S.IGOVERNMENT OF INDIA

(BHARAT SARKAR)Prime Minister’s Office

(Pradhan Mantri Karyalaya)New Delhi

Dated: 29th March, 2005

Notification

Sub: Constitution of a Task Force to frame a long-term plan for the integratedsocial and economic development of Jammu and Kashmir

For preparing a long-term plan for the social and economic development ofJammu & Kashmir, it has been decided to set up a Task Force with:-

(1) Dr. C. Rangarajan : ChairpersonChairman,PM’s Economic Advisory Council

(2) Shri Haseeb Drabu : Member

(3) Shri Sunil Mittal : Member

(4) Shri Sunil Kant Munjal : Member

(5) Shri S.H.H. Rehman : Member

(6) Shri Moosa Raza : Member

(7) Shri G.C. Srivastava : Member

(8) Shri T.N. Thakur : Member

(9) Shri Analjit Singh : Member

(10) Shri D. Subbarao : Member-SecretaryPM’s Economic Advisory Council

Annex 1


60

2. The Terms of Reference of this Task Force will be as follows:

i) To advise the Prime Minister in respect of:

a) an integrated approach and measures for the long-term economic andsocial development of Jammu & Kashmir; and

b) identification of sources of finance – locally, nationally and globally – tofund the development of Jammu and Kashmir.

ii) To analyze issues, economic or otherwise, referred to it by the PrimeMinister.

iii) To attend to any other in respect of the socio-economic development of theState of Jammu & Kashmir as may be desired by the Prime Minister fromtime to time.

3. The above Task Force may be provided all possible assistance by Ministries/Departments and other bodies under the Central/State Governments to ensure timelycollection of data and information to facilitate their task.

4. The task Force may co-opt or invite such person)s) as it deems appropriate, toparticipate in any of its meeting as special invitees(s).

5. The Task Force will be located in the Planning Commission and will be coveredwithin the definition and explanation of High Level Committees as given in CabinetSecretariat O.M. No. 105/1/1/75-CF, dated 20.11.1975.

6. The Chairperson of the Task Force shall work in an honorary capacity. However,he shall be provided conveyance facility and traveling facilities/allowances as admissible.

7. The Task Force will be provided required office space, equipment and secretarial/other staff. An officer not below the rank of Director to Government of India, will beattached to the Task Force during its tenure. On the recommendation of the Task Force,the Planning Commission may appoint Consultants for specific periods, in accordancewith the prescribed guidelines, to carry out specific technical tasks such as datacollection, collection and analysis. Expenditure relating to the conveyance and travelingfacilities/ allowances made available to the Chairperson of the Task Force, the meetingsof the Task Force, the functioning of its Secretariat, fees payable to Consultants, TA/DAof the Members of the Task Force (as admissible to Grade-I officers of the highestcategory in Government of India) and the TA/DA of the Consultants to cover the travelrelated to the work of the Committee, etc., will be borne by the Planning Commission.

8. The Task Force will submit an interim report within six months. The final reportwill have to be prepared within a year. However it may, if required, submit periodicreports.

Sd. T.K.A NairPrincipal Secretary to PM

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Meetings of the Task Force

1st Meeting New Delhi 20 April 2005

2nd Meeting New Delhi 4 May 2005

3rd Meeting New Delhi 3 June 2005

4th Meeting New Delhi 5 October 2005

5th Meeting New Delhi 14 March 2006

6th Meeting New Delhi 10 August 2006

7th Meeting Srinagar 30 August 2006

8th Meeting New Delhi 13 October 2006

Annex 2

Task Force on Development of Jammu and Kashmir

Documents

Transcript of Task Force on Development of Jammu and Kashmir