Underlying anti-fragile drivers & emerging black swan risks
“I can be changed by what happens to me. But I refuse to be reduced by it.” – quoted the celebrated American poet, memoirist & civil rights activist Maya Angelou. This inspiring message has been an integral part of numerous campaigns across the globe during the times of natural calamities, wars, political movements and other crisis that demanded collective grit, perseverance and resilience. Kashmir economy, which has demonstrated a miraculous survival spirit despite operating within a consistently hostile & turbulent political environment, is nothing short of a living manifestation of this powerful quote.
Despite losing almost an entire decade (3000 days of shutdown since 1990 as per KCCI) in the last three decades to this never ending political turmoil, the statistics of the formal economy have surprisingly beaten some of the comparatively peaceful and economically diverse states of India with fair margins. Take for example the per capita income, which in case of J&K is far better than even Madhya Pradesh, Uttar Pradesh, Bihar & other north eastern states. The poverty ratio at 10.35 % is almost half of the national average (21.92). J&K ranks at an impressive 3rd place in life expectancy (73.5 years) and 10th in infant mortality rate (24) among all Indian states/UTs. In terms of Human Development Index (HDI) J&K at 0.68 is ahead of 18 Indian states including the likes of Gujarat and Andhra Pradesh. In terms of literacy rates, J&K at 77.3% has outperformed 9 major states of India. Now take a look at the credit discipline of the region’s borrowers. Despite being trouble torn, energy starved, geopolitically strangulated, under a hostile whether & treacherous road connectivity, the default rates in the region are remarkably low. J&K Bank’s (regions 2/3rd share holder in lending) gross NPA to gross advances ratio is 5.75% as on June 2020 (for within J&K loans), significantly lower than its “rest of India” loan portfolio. A similar pattern of low NPA ratio in J&K can be observed in other lending institutions and banks operating in the region.
The explanation for this paradox is beyond the standard economic models they teach in the universities. J&K’s economy is a classic case of resilience which fits in the category of extreme economies. The concept of economic evolution under extreme systemic shocks and the resulting unconventional economic structures was popularized by the former economics editor of “The Economist” who’s also been an adviser at the Bank of England-Richard Davies, in his popular book “Extreme Economies”. Akin to economies that develop in war torn regions, inside a prison or amidst refugee camps, Kashmir’s economy too has evolved in complexity & diversification over decades. The central principle which seems to have governed this evolution has revolved around the effective decoupling of some sectors from the domestic markets. By virtue of the nature of the turmoil, all those industries which were concentrated in domestic markets and were dependant solely on the regional conduciveness of the situations surrounding the buyers and the sellers were doomed. Contrary to this, there emerged five major pillars of J&K’s economic resilience, which over a period of decades, successfully evolved into more robust and some even into anti-fragile entities (entities that gain in disorder).
First is J&K state’s ever expanding Government salaries & pension bill. Irrespective of the scale and intensity of the violent cycles, which engulfs the valley every now and then, resulting in excruciatingly frequent & long curfews and strikes, this component of the region’s economy has never felt the mildest of the income shocks. With the current annual size of Rs. 37,000 crore, this conduit of income sustains over 4.5 Lakh individuals. Is this unique with J&K? Yes, the UT has one of the highest Government employee to population ratio in entire India. This conflict immune, stable and assured amount that they earn is around a quarter of J&K’s annual GSDP.
The fact that Government jobs have been one of the main selling points of mainstream political parties in the region, has over a period also resulted in an oversold market. Salaries sometimes drop and nature of employment gets engineered into various forms (daily wager, rehbre-taleems, contractual etc), but it is ensured that the numbers always remain high. This highly sought after job industry has gradually assumed an anti-fragile nature with a Government jobs bonanza announced every time a bout of turmoil grips the region. However, the fact remains that as this conduit of our income has helped us remain afloat all these troubled decades.
Second is the time tested and “shutdown & curfew” immune agrarian Industry. We might not be cultivating enough rice even to suffice our domestic consumption but we have made sure those apples, saffron and walnuts fetch us more money to buy anything including rice. J&K has a comparatively well developed horticulture sector with cash rich flagship products like apples, walnuts, cherries & almonds. The rapid pace at which paddy fields were converted into orchards raised many alarm bells initially, but the volume of money that this industry earns and the forward integration in terms of processing which is taking place, though slowly, has shelved all the apprehensions with confidence. By virtue of the seasonality of this sector, less impact of “shutdowns and curfews” and importantly its limited dependence on regional markets, this sector has been a stable backbone of our survival economics. Importantly the sector supports over 16% of the states GSDP.
Third is our wide base of home based artisans. According to the directorate of handicrafts in Kashmir, with earnings of around Rs 1,700 crore as foreign exchange every year, there are nearly 2.5 lakh artisans directly dependent upon handicrafts for their livelihood. As per various estimates done by Government and Non-Government agencies almost 60% of the households in the Valley are connected with crafts one way or another. This sector, although not that big in size in terms of dollar value when compared to the first two, has three distinct risk mitigants which makes it very robust, less volatile to shocks and more lucrative. First is the nature of processing which is almost entirely home based making it immune from the vagaries of frequent political cyclones that hit the region. Second is the nature of its market which is mostly high end, elite, resourceful customer segment and the third part is the geographically diversified markets spanning across the globe. This stable and growing tributary of income from foreign exchange and from mainland India has been one of the significant bed rocks of the economic resilience demonstrated by J&K in last so many decades.
Fourth is the export of human resource to various states of India and across the world. Scores of highly educated youth who fall outside the ambit of farming and artisan segments find it extremely difficult to fetch decent earnings outside the limitedly available Government sector. As a result there has been a conscious and gradually increasing trend of exporting human resource to more resourceful geographical locations across India and outside India. As per official data, the annual foreign remittances received by J&K from people working outside country range from Rs 1300 to Rs. 1500 Crore. This figure gets even more inflated if we factor the large base of Kashmiris working in various states of India. Although data for domestic remittances is not available, however, it is very likely that the number of people working and the volume of money received are comparatively higher than foreign remittances. The aggregate of both these incomes has consistently been growing with more channels of communication getting established in various countries generation after generation. This segment too gets a shot every time a wave of turmoil hits the valley evolving into anti-fragile entity for the regional economy.
Fifthly, as ironic as it may sound, but, the argument that the conflict industry also helps the regional economy in surviving the frequent tides is not misplaced. Traditional economics says peace is the basis of economic growth but when it comes to Kashmir, we have presumably learned the art of even milking the conflict. It is a matter of fact that the region of Jammu & Kashmir has been the epicenter of conflict between three nuclear armed countries. The stakes vis-à-vis national security in and around this region are therefore extremely high. As a result, the size of investments on security & discourse management that flow from the national coffers to this region is quite substantial. This pillar, although immeasurable, always grows in disorder making it one of the most anti-fragile conduits of the regional economy.
As long as the wide steel frame of Government servants and the ability to produce cash rich apples, walnuts, saffron & handicrafts remains, J&K economy’s ability to survive economic shocks will refuse to give in. However, the emerging black swan risks posed by the global slowdown and the Indian recession are exposing the otherwise stable drivers of J&K’s economy to serious systemic threats. The export of handicrafts is getting contracted and is impacting lakhs of artisans due to the ongoing global recession. The cash rich horticulture is facing a dent in demand, posing a serious challenge to lakhs of apple, walnut and saffron growers. The job and salary cuts for people working outside J&K and India is severely reducing the remittances which otherwise formed an essential component of the regional economy. Unlike previous shocks, this time the basis of our risk mitigation i.e. geographical diversification of markets is getting drastically compromised. In this emerging backdrop, how the regional economy evolves this time and responds to the challenges never witnessed before is surely going to be the real test of our economic resilience.