Business thrives amid Kashmir war

Four years ago, when Jehangir Raina, an Indian businessman based in the United Kingdom, decided to start an information-technology company in Kashmir instead of in hot spots like Bangalore and Gurgaon, business analysts thought him a fool.

But Mr. Raina saw in this conflict zone what only a few others did: business potential.

"Initially, our clients were reluctant to do business with a company not based in a metro, but in a conflict zone in the Himalayas," he says with a smile. "Once they saw potential in us, their reluctance disappeared." Over the years, I-Locus, Raina's market-research company, has managed to woo more than 200 international clients, including Microsoft and Wipro.

In a way, Raina's success story demonstrates the growth prospects of a region that, for years, has been a crucible of terror and fear. Kashmir's economy has been sluggish compared with India's national average GDP growth of about 9.2 percent. But at nearly 5 percent growth, Kashmir still manages to defy the myth that armed conflict, which has raged here for 17 years, necessarily stymies economic potential.

Instead of the images normally seen in active war zones – bombed-out houses, empty shops, and abject poverty – what's conspicuous in Kashmir, says Adil Nisar, a manager at HDFC, Indian Kashmir's first private bank, are its opulent mansions, markets full of produce, and a burgeoning population armed with formidable purchasing power.

Despite years of militancy, Kashmir's poverty rate is the lowest in all of India. Only 3.97 percent of rural Kashmiris live below the poverty line, along with 1.98 percent of city-dwellers, according to government statistics. In the rest of India, those figures stand much higher, at 27.09 percent and 23.02 percent respectively.

"We dared."

Mr. Nisar moved two years ago to Srinagar, the summer capital of Indian Kashmir. It was a business move that made many far-sighted Indian financial analysts blanch.

"No private financial institution was then willing to risk investing in a conflict zone often roiled by bomb attacks," Nisar says, seated in his elegant office in a busy Srinagar shopping area. "We dared."

That daring is now earning the bank rich dividends. HDFC is today one of the many private banks in Kashmir. It has more than 8,000 accounts and has fetched business worth nearly 2.5 trillion Indian rupees ($58.5 million).

This year, the bank plans to start five more branches in the state, two of which will be in the notoriously violent Baramullah and Pulwama districts. The move, although potentially dangerous, demonstrates instinctive business acumen. HDFC hopes to cash in on a wealthy orchard-owning clientele that has long felt the vacuum of a full-service bank.

Thanks to land reforms nearly five years ago, a majority of Kashmiris own land, a fact that has contributed to the population's wealth.

Ironically, Kashmir's raging conflict has also enriched the region. Over the past 17 years, the local government has benefited from special treatment from the central Indian government, allowing it to manage a large conflict-oriented economy. Since the insurgency first began in 1990, the central government has financed 100 percent of Kashmir's budget. That's an exception in India: Generally, the central government funds only 20 percent of the cost of federal state development, requiring the states to raise the rest.

Also, even though tourism, Kashmir's main revenue-earner, declined during years of militancy, the huge expansion of India's armed presence in the region has since made up for the loss, say local businessmen. Over 600,000 Indian military personnel, all potential consumers for local products, are currently based in Kashmir.

But now that the violence is ebbing, Kashmir's fortunes may shift, says Daniel Markey, South Asia fellow at the Council on Foreign Relations in Washington.

"Now we may be seeing the beginnings of a 'postconflict' economy" in Kashmir, he says. "Reducing violence means that the cash of the conflict economy can now be more safely invested in the state to build lasting businesses."

Setting an ambitious target of 8 percent growth in the next few years, Tariq Hameed Karra, Kashmir's minister for finance and planning, says the region's economy is at a "takeoff stage."

To lure investors, the central Indian government will, until 2012, offer new industries a total excise-tax exemption for their first 10 years of operation.

Buoyed by the tax exemptions, BQE Software Inc. set up office in Kashmir six years ago. Since then, the number of its employees has risen from six to 40. A software company based in Torrance, California, and owned by Shafat Qazi, a Kashmiri-American, BQE sources a major part of its software development to its Kashmir office.

"One, the work force here comes considerably cheaper, nearly at half the rate compared to other Indian IT destinations," explains office manager, Ikhlaq Bhat. "Two, setting up business infrastructure is cheap and relatively free of red tape."

Navigating the challenges that remain

SIDCO's Industrial Electronics Complex, a mammoth industrial estate in Rangreth, outside Srinagar, was in shambles until a few months ago. Now it houses some 189 industries that employ more than 3,000 Kashmiris. The estate is promoting itself to potential investors as a major business hub. Nearby, the Software Technology Park of India (STPI) has been established to provide logistical support for IT businesses.

"We are trying to kick-start IT businesses in Kashmir," says Sanjay Puri, the head of Kashmir's Confederation of Indian Industry (CII). With help from Pricewaterhouse Coopers, the world's largest professional-services firm, Mr. Puri is working to encourage outsourcing companies to overcome their hesitation about moving to the valley.

Software and IT businesses are new to a state where, for several decades, nearly 90 percent of the population was eking out a living from traditional occupations such as handicrafts, agriculture, and the region's colonial-era tourism business.

Nonetheless, challenges remain. A residual insurgency has made attracting investors difficult. Militants declared hartals, or strikes, for 1,356 days between 1990 and 2003, according to government statistics, forcing many private businesses to remain shut on most of those days.

Government assistance has allowed several local businesses to sidestep the difficulties of doing business in Kashmir. Nissar Ahmad Baba was forced to close his electrical spare-parts business in 1991, when perpetual hartals were keeping him closed for more than a hundred days out of the year. But with a government loan in 1997, Mr. Baba started Alba Power, a small-scale industrial company that manufactures transformers in Rangreth. Alba power is emerging as a leading manufacturer of transformers in northern India.

Manufacturers like Alba Power, though, are forced to keep the scale of their operations small to minimize risk. Despite the potential, a dearth of investment money has kept away heavy and large-scale industries.

"We need more private investors in Kashmir," says Abid Shah, a senior manager at Alba Power. "This is a state with talented human capital. It still needs to unlock its full potential."