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Monday, July 19, 2010

JAMMU AND KASHMIR: THE ROAD AHEAD TO INVESTMENT---Report by YES BANK

JAMMU AND KASHMIR: THE ROAD AHEAD TO INVESTMENT

EXECUTIVE SUMMARY

The state of Jammu and Kashmir popularly known as the “Heaven on Earth” derives its main motivation from the observation and appreciation of nature as well as the traditional cultures prevailing in natural areas.

Jammu & Kashmir’s potential in key sectors such as Tourism and Hydel Power is well known. Its agro-climatic diversity offers very good prospects for development of high value adding Agribusiness Projects. In addition, the knowledge base of its people can be utilized to develop IT Services Sector in the state. The State has rich natural resources and a large pool of entrepreneurial and educated labour force, but has suffered from the consequences of misdirected economic policies, strained Indo-Pak relations, political turmoil and armed insurgency.

Potential and attractive investment opportunities exist in many areas in Jammu and Kashmir which have been identified based on their sectoral contributions to GDP and employment absorption capacity.

Tourism Sector

The natural beauty of the Jammu and Kashmir has deservedly won high praise from travelers which are attracted towards its well known scenic destinations.

Given the huge potential of this sector in Jammu & Kashmir, while making efforts towards the growth of tourism and scaling up of incentives; there is also the need to ensure that this growth is geared towards citizen empowerment and commercial and ecological sustainability. A focus on nature friendly technologies as well as waste management policies would ensure that the ecosystems within the state are not harmed and the natural beauty of the state preserved while expansion in tourism development takes place. In the context of Jammu & Kashmir it is essential to ensure that there are adequate flows of benefits to the local community through ample backward and forward linkages such as additional employment for the local community which would result in income generation within an ecofriendly framework, skill training, community development and micro financing.

The characteristics of ecotourism make it a perfect case for Jammu & Kashmir to apply to its tourism developmental plan. The sparsely populated locations along with the largely natural environments make it ideal for nature tourism whereas the focus of outdoor activities all year round is conducive to adventure tourism. Both these segments within eco tourism are seeing the fastest growth and the state can take advantage of this. Among domestic tourists, religious tourism remains one of the largest ecotourism forms. The state once again has an advantage in this given the large number of religious and pilgrim points in the state covering many religions.

Jammu & Kashmir would need to move towards sustainable ecotourism and along with addressing the issues of security and development, substantial attention also needs to be focused on the development and upgradation of associated infrastructure required for promoting sustainable ecotourism. The required infrastructure for promoting and sustaining ecotourism in any region is as follows:

• Administrative Infrastructure - covers issues related to the organizational structure of tourism operations, its liaison with the administrative departments of government, foreign bodies and other such entities.

• Physical Infrastructure - the development and strengthening of basic hardware e.g. land, rail, and air modes of transportation; hotels, bars and restaurants etc; set up of brick and mortar houses for facilitating tourism operations; basic amenities e.g. public utilities, destinations and the physical communication infrastructure

• Technological Infrastructure - deals with the software part e.g. designing of concepts and strategies pertaining to package tours, product offers, marketing strategies and use of technology to conduct e-commerce and above all the integration of administrative, physical and technological infrastructure.

To access the tourism readiness of the State a holistic view of the entire tourism infrastructure required for a comfortable tourist experience is essential. The

Government has to provide a catalytic role for running on the sustainability concept both by providing fiscal incentives and participation through Public-Private-Partnerships in order to facilitate the following:

• Internet marketing and portals by utilizing IT & IT Enabled services in order to ease online booking and reservations.

• Adequate transport facilities.

• Upgradation of airports and high quality roads in the region.

• Provision of adequate water facilities.

• Provision of Insurance to promote Adventure tourism.

• Community based approach for promoting Rural and EthinicTourism.

• Maintaining social harmony in the state.

Hydropower

The hydropower sector in India in general, and J&K in particular, has faced problems for reasons besides the project specific issues. As demand for power grows and concerns on the environmental impact of thermal power and its sufficiency grows, as also the investment climate improves, there is a greater realization that increased reliance needs to be placed on benign sources of energy such as hydropower.

Jammu and Kashmir has abundant water resources and great potential for hydropower estimated at 20000 MW. Of this, less than 10% has been exploited and efforts are being made to effectively tap and harness the untapped hydropower potential of the state.

Despite the significant potential of hydropower and its benefits, it has still not been harnessed in a meaningful way due to high gestation periods for hydropower projects, unavailability of reliable hydrology data under projects offered, skewed tariff profile, instability in the political environment of the state and remoteness from large consumption centers.

These concerns can be addressed by appropriate structuring and implementation through Public-Private Partnership framework, with a risk sharing mechanism. This would allow the project stakeholders to identify project risk, assess the party best able to manage that risk and allocate the risk to that party, and in the event that the risk is not apportionable, to insure it out. The residual risk structure is one that all the project stakeholders are comfortable living with. The key principles underlying the contractual structure for implementation of large scale hydropower projects are:

• The risk allocation by contract is to the party best able to manage it.

• The risks that cannot be covered by the above method are covered by insurance.

• The residual risk left with the hydropower project company is minimized.

These principles would permit complex hydropower projects to be financed through maximum use of limited recourse debt and usage of lower cost equity. This would also facilitate lower tariff charged to the SEB. Thus the SEB’s interest is served by optimal risk allocation, not minimum risk borne by the SEB.

The unprecedented amount of financial resources required for implementation of hydropower projects entails a coordinated and seamless working of various stakeholders identified above in the project implementation phase. The Government of India needs to facilitate creation of a shelf of projects with all requisite approvals, and technical studies conducted. A nodal agency for such work would facilitate the process. The traditional public sector dominated financing methods would be inadequate to meet future demands and mobilization of requisite resources will require more radical changes in the sector organization and tariff structure to enhance attractiveness to the investors.

In conclusion one should not be daunted by the past performance of the sector and should strive towards making it a viable proposition for all the investors. As the saying goes “Never fear the shadows. They simply mean there is a light shining somewhere nearby.”

Horticulture

The State of Jammu & Kashmir has a high potential in the horticultural sector that contributes about INR400 crores of the state's domestic product. About 20 percent of the total cultivated area is under horticulture crops engaging approximately 4.5 lakh families directly or indirectly. In physical terms, the area under fruit cultivation was about 1.73 lakh hectares by the end of the Seventh plan period. The total fruit production in the state was 9.10 lakh tonnes in 1995-96. Fruit export was to the tune of 7.10 lakh tonnes in this period.

The State has a large area under horticulture production and a variety of fruits like apple, cherry, guava, plum, apricots, walnuts and almonds are grown all over the State. Apple occupies around 40% of the total area under fruit and accounts for 90% of the total production of fruits in the State. Walnut, where the state has almost a monopoly, covers nearly 18,000 hectares. Saffron cultivation is unique to J&K, the only other country engaged in production being Spain. The annual production of

saffron, confined to Pampore in the Kashmir valley and to the Kishtwar valley of Jammu province, varies from 10 to 12 tonnes. However, the skewed distribution of the production centres must be corrected so that the potential of horticulture in the state is realized.

The state also has suitable agro-climatic conditions for floriculture. The floriculture industry in the state has the potential to offer a varied and continuous source of flowers to both domestic as well as in the international market.

Jammu and Kashmir also has rare species of aromatic and medicinal plants. This newly emerging sector has vast scope in the State for providing required raw material for manufacturing plant based drugs and high grade perfumes and cosmetics having ever increasing demand world over. Research points out that the State has as many as 572 plant species of medicinal importance alone.

The State also has enormous investment opportunities for improving the health of the global eco-system and creating employment opportunities by investing in wasteland development programme. It has around ten lakh hectares of wasteland. Much needed Poplars, Willows, Shisham, Eucalyptus, Khair, Neem besides other medicinal and aromatic plants have extensive scope for growth on this land.

The state has also got a significant advantage on the human resource front with abundant labor resource which is very important for agricultural operations and processing. According to the Horticulture department, around 20 lakh people are currently employed in the sector.

The government of Jammu and Kashmir has been very forward looking on the reforms and improvements in the agriculture sector. The following steps could strengthen their objective:

• Reduction of cycle time from the farmer’s field to the consumer’s plate and suitable infrastructure in case of perishable produce segment.

• Increasing extension efforts in order to facilitate diversification in the portfolio of crops.

• Consolidation of highly fragmented land holdings in which 90% of the farmers fall.

• Strengthening the extension infrastructure in order to facilitate transfer of technologies to farmers for better productivity in their endeavor.

• Reduction in Mandi / Market transaction costs in areas such as freight, commissions, bulk breaking and value loss.

• The State faces the problem of marketing at present and a branding strategy for the state would help it to differentiate its produce from the other states or countries.

The state has an established presence in the case of certain horticulture crops such as walnut, almonds, apples, cherries, saffron, etc. In case of such crops, the business opportunities are immense as the state is unique in having the required agro-climatic conditions. One major revenue source could be through enterprises that can market by-products of such crops and into alternative products such as fried walnuts kernels, dried apples, etc.

Hence, the strategy for improvement of Horticulture in Jammu & Kashmir should be an implementation - oriented strategy that would:

• Identify high potential areas/segments in the horticulture sector where J&K is competitive.

• Identify the gaps/constraints which are hindering growth and business viability.

• Support initiatives to build an umbrella brand name for ‘Produce of Kashmir’ for food and agricultural products in the international market.

The three pronged strategy mentioned above needs to be enabled with suitable enterprise structures that would help in giving stability to the business venture. Such enterprise structures must take into account a “Closed loop Model”, discussed in greater detail in the Investment Strategy Theme Paper, which would address the total value chain and bring efficiency in the operational and cost aspects.

The potential of Horticulture in Jammu and Kashmir is high given the rich diversity in its flora and fauna and varied agro-climatic situation. The state enjoys monopoly in certain fruits, vegetables and medicinal plants and there is an immense scope for increasing the production of other horticulture produce that are marketed in niche and export markets. 

In order to achieve this objective, it is important that the limiting factors in both production and marketing of fresh produce is addressed speedily and linkages between farmers and buyers are established. This would not only reduce supply chain costs but would also help the farmers with an assured market for their produce. Technological improvements are necessary to bring about lower costs in processing as well as reducing wastages in fruits and vegetables. Suitable incentives must be provided by the government aided with adequate extension efforts.

The food processing and horticulture industry is intimately related to areas of infrastructure that includes processing facilities such as cold chains, refrigeration

facilities, transport by both rail and road to destination markets as well as market infrastructure for farmers to sell their produce effectively. This when addressed in totality would bring about a lower cost high value delivering value chain that can change the face of horticulture in the state.

Conclusion

Based on its belief in enhancing Public-Private Partnerships (PPP) to ensure development in the state, the Government of Jammu and Kashmir has started inviting private sector participation/investments and encouraging the creation of long term partnerships in a number of areas such as Tourism, Hydropower and Horticulture among others with the State Government playing the facilitation role.

YES BANK, the new age private sector bank in India, is knowledge partner to PHDCCI in its all important centenary year. It is fully committed to opening itself to business in the state. Having extensive expertise in Public-Private Partnerships across the country, it is apt that this publication brings out the Public Private Partnership efforts and areas where prospective development of Jammu and Kashmir should take place and further areas where this robust and commercially sustainable method of project development can be maximised.

We are sure that this publication will go a long way in demonstrating the tremendous investment potential and financial attractiveness in Jammu and Kashmir. YES BANK remains committed to assisting stakeholders in developing sustainable and commercially viable projects in the state. The Bank is confident that all stakeholders interested in Jammu and Kashmir development, Government, Private Sector and Citizens will benefit from this document

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