Half a State Lost: The Economic Cost of Terrorism in Jammu and Kashmir
With an annual GDP shortfall of ₹33,000 crore due to terrorism and conflict-related disruptions, J&K’s economic revival hinges on bold credit reform.
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Vikash Vaibhav, OP Jindal Global University, India.
Akhilesh K. Verma, Economic and Social Research Institute, Trinity College, Ireland.
SDG 8: Decent Work and Economic Growth | SDG 16: Peace, Justice and Strong Institutions
Institutions: Ministry of Home Affairs | Ministry of Finance
India may have forfeited the economic potential of half a state in Jammu and Kashmir (J&K). Not to war, not to sanctions, but to a prolonged, low-intensity insurgency and a national security approach that could not fully integrate for its economic fallout. The numbers are in, and they are stark: had terrorism not taken root in the late 1980s, J&K’s economy could be nearly twice its size today.
This is not alarmism: it is evidenced by data. The economic loss, measured by Net State Domestic Product (NSDP), is estimated at 86 percent of the region’s current economic output. In other words, J&K is operating at less than 54 percent of its potential. Even so, the decline is not beyond repair. With the right interventions, J&K can recover this untapped potential, transforming a long-standing challenge into a frontier for growth. The Government must begin to treat it as one.
A Synthetic Counterfactual, A Strategic Concern
To arrive at these estimates, a synthetic version of J&K’s economy was constructed by pooling data from Indian states unaffected by terrorism but otherwise comparable in geography and economic structure. This ‘synthetic J&K’ serves as a counterfactual – an estimate of what the region's economy might have looked like had terrorism not begun in the late 1980s.
The findings are striking. From 1987 to 2014, J&K’s economy grew at a compounded annual rate of just 4.4 percent. In contrast, the synthetic model suggests it could have grown at 6.8 per cent. By 2014, the terminal year of this analysis - this shortfall corresponds to a potential loss of ₹33,000 crore. The gap widened each year, not just in aggregate output but in per capita terms as well. By 2014, per capita income in J&K stood at ₹31,000. In the synthetic scenario, it would have reached ₹84,000.
This 3.7 percentage point loss in annual per capita growth is more than just a statistic. It marks over a quarter century of unmet aspirations, blocked mobility, and deepening economic inequality.
Conflict Kills Credit Before It Kills Growth
One of the most concerning findings is how terrorism undermines flow of formal finance. Conflict doesn’t just damage infrastructure - it erodes trust in institutions, especially banks. As terror-related incidents rise, access to formal finance contracts, especially in the districts most affected by violence.
This contraction in financial intermediation is neither marginal nor uniform. District-level data shows that the Kashmir Valley suffered sharper cutbacks across all lending categories - agricultural, personal, and industrial - compared to the Jammu region. Agricultural loans, already seasonal and risky, were hit the hardest. Personal loans also declined steeply. Industrial credit shrank less, possibly because demand itself collapsed amid prolonged instability.
The pattern is clear: terrorism raises perceived risk. Risk-averse banks pull back. And without credit, economic activity falters. What starts as a security crisis evolves into an economic one, weakening the flow of capital to families and firms alike.
A Long War, A Longer Decline
The drag on J&K’s economy is not episodic - it is structural and sustained. The analysis suggests that, in the absence of terrorism, the state’s economy could have been 1.87 times its current size. Each year of missed growth not only lowers present output; it shrinks the base from which future growth can happen.
This long-term divergence is reflected in sectoral data. Since the late 1980s, both agriculture and industry have shrunk in their share of Gross State Domestic Product. The services sector, which has propelled growth in much of India, has not been able to pick up the slack in J&K.
The contrast with Himachal Pradesh is telling. Despite similar terrain and developmental constraints, Himachal has diversified into tourism, horticulture, and hydropower. J&K has stagnated - a consequence of a protracted security-first approach, without a parallel economic strategy.
A Parallel Agenda for Economic Resilience
For too long, economic reconstruction in J&K has been seen as a post-conflict agenda - something to begin only once peace is restored. This approach is costly. Conflict does not pause development; it reverses it. A durable peace is more likely when economic strategy is aligned with security priorities.
This means going beyond road-building and special packages. It demands financial system reforms to allow conflict-sensitive credit frameworks. For instance, lending aversion in high-risk districts could be addressed through state-backed loan guarantees for small businesses. Banks need assurance that they won’t be left with unrecoverable loans during disruptions.
Equally important is ensuring that central funding and budget allocations are not absorbed entirely by security expenditures. A rupee spent on counterinsurgency is necessary, but a rupee spent on building a sustainable economic future is urgent.
The Numbers India Cannot Afford to Ignore
As India advances towards a $5 trillion economy, the cost of leaving one region behind grows heavier. Unlocking J&K’s economic potential is not just a regional priority; it is a national opportunity. The ripple effects of underperformance, in the form of lower output, reduced tax revenues, and shrinking consumption, can weigh down growth across the country.
There is also a human capital dimension. Educational disruptions, psychological trauma, and health infrastructure gaps leave scars that do not show up in GDP figures but are carried by generations. Reframing J&K not only as a security concern but also as an economic engine can help reduce long-term costs and instability.
The employment implications are equally severe. A credit contraction limits self-employment and entrepreneurship - two of the few viable options in conflict-ridden rural areas. With access to capital and opportunity, young people can become builders of local enterprise, not dependents on the state.
Call for a Change in the Policy Playbook
The economic distress of J&K can be reversed - but not with peacetime assumptions. It demands active economic counterinsurgency: policies that work amid conflict, not only in its aftermath. The Government must take the lead in this shift.
Three clear actions stand out.
First, introduce a conflict-sensitive financial regulation that allows banks to lend in priority districts with relaxed collateral requirements and underwritten risk.
Second, align security assistance with economic revival. This means assessing district-level peace not only through FIRs counts, but also by tracking the flow of formal finance and the creation of jobs.
Finally, establish a conflict-zone financial arm within existing institutions like NABARD or SIDBI, with a mandate to inject and absorb lending risk in sensitive areas.
J&K has long been seen as a security challenge, a diplomatic flashpoint, and an emotional symbol. It is time to widen that frame: the state is also India’s most underperforming economic region, yet one that holds immense economic potential. What has been lost in rupees must now be reclaimed through policy.
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Authors:
The discussion in this article is based on authors’ research published in Oxford Development Studies (2025). All the numbers reported here are in 2004-05 prices. Views are personal.