J&K’s Investment Frenzy

Of irrelevance risks & implementational safeguards

“BARRIER to investment”, that was one of the central arguments around which the narrative of abrogation of the special status of J&K, in August 2019, was spun. There is no denying the fact that, since then, the Union Government of India along with the bureaucratically run Govt. of Jammu and Kashmir, have been working overtime to attract investors to Jammu and Kashmir. After limited success in luring business houses from mainland India to invest in this landlocked Himalayan region for the past two years and more, people at the helm started looking at their affluent friendly Arabian allies.

A flurry of announcements regarding investment agreements between GoJK and UAE based business groups have finally started pouring in since the last few weeks. Investments, as per official reports, will be deployed in real estate, horticulture, tourism, healthcare and other infrastructure. The Govt. claims that it has secured a whopping amount of Rs. 45,000 Crore investment proposals in addition to Rs. 18,300 Crore in real estate sector.

So, how does this investment benefit the local economy?

Being the 4th engine of the Gross Domestic Product (GDP), investment in capital asset creation is always welcome in any economic system, however, the nature of investor (public, private or external) and the variables of implementation in terms of Men, Material, Money and Management Control determines the effectiveness of its contribution towards the host region’s economic growth. The purpose of foreign capital from investor’s perspective is always to achieve a higher investment rate or sometimes a foreign policy objective. From host region’s point of view, it’s the higher rates of national income, impetus to productive capacity and acceleration of economic development in comparison to the development which would be achieved by using only domestic capital.

There are two main layers of external investment which deserve to be looked at while engaging with a foreign investing entity. Firstly, it is the quantum and control of the economic value created during formation of the capital asset in terms of requirement for human resource, material, finances and taxes earned by the host economy. In case, if for developing the proposed shopping mall or a hospital in J&K, the investor imports majority of engineers, contractors, workers and project managers from outside; imports steel & cement from places like Jamshedpur & Rajasthan; elevators, electric components and other fittings from China and Korea; finances it from some global bank based in middle east and also gets tax waivers and leased land on throwaway prices from the GoJK, then it makes the entire exercise a very bad bargain for the economy of Jammu and Kashmir. The first layer advantage of this investment in such a scenario will therefore be negligible. Of course, we will be left with the asset at least and that’s when the second layer benefit (if any) of investment comes into play.

Essentially, investments that are in line with the economy’s productive capacities are considered much effective than those that amplify the existing structural flaws. In other words, it is the relevance of the asset to the underlying economic system that matters. For example, the proposal to develop an inland port by Dubai ports giant DP World in Jammu and Kashmir can prove to be a game changer. It has the potential to exponentially increase the export potential of the region which has been held back because of logistical disadvantages. Counterproductively, the plan to establish a mammoth shopping mall by Emaar Group might aggravate the already toxic consumption driven and rentier laden layer of the UT’s economy. In other words, investments that improve the productive capacity in traditionally strong sectors of J&K like Agriculture, Handicrafts, Energy and Tourism, where the quotient of scalability in terms of global market place is very high, deserves to be embraced with open arms. In addition to this, any investment which can harness the sizable supply of qualified human resource towards the 4th industrial revolution and web 3.0 can bring about a paradigm shift in the regions battered economy. Conversely, investing in assets like shopping malls and residential apartments might have limited layer 2 benefits. Eventually investment in such assets creates sales outlets for merchandise which is being manufactured somewhere else. The benefits of which in terms of trading are quite minimal. Moreover, the eligible players to afford such spaces in the region are very limited which further limit the asset’s utility in terms of adding any lasting impact on the indigenous economy’s productivity. Therefore, the choice of assets created as well as the implementational variables shall determine if the external investment in the host economy is of any value.

What implementational safeguards can amplify the benefits of the proposed foreign investment that J&K is reportedly supposed to receive in coming years?

Management Control

Since the Foreign Direct Investments (FDI) of this scale are autonomous transactions of long-term capital movements, motivated by economic interests; foreign investors in this case prefer to keep 100 % ownership right and management control of the project unless otherwise stated in the terms of engagement.

J&K has had a very bad experience of such investments previously. NHPC, though a domestic PSU, for example, invested billions of rupees over the last many decades in the energy sector in J&K. The benefits in terms of implementational spillovers as well as its relevance are extremely restricted because of the monopolistic management control of the assets that it has created on J&K’s water resources. This is where the mechanisms of BOOT, PPP and other variants of distributed management control among foreign investors, regional Govt and even indigenous private players can act as a strong risk mitigant.

Men/Human Resource

The projects of this scale deserve human resource with global expertise of handling big dollar projects. J&K might not have such human resource in abundance, however, ensuring engagement of indigenous contactors, engineers, semi-skilled workers and unskilled laborers at middle level and operational level of projects can be an invaluable investment in future. Besides immediate economic gain, it is projects like these where global expertise, work culture and professionalism pass on from best practices to host economies. The terms of engagement of the MOUs with the investors can be devised in such a way that they take these factors into consideration. Otherwise, the risk of local population’s absorption limiting to menial jobs like watchmen, office boys and cab drivers is quiet tangible. This is what happened in business states like Maharashtra and how Maratha Reservation became a big political debate in the region.

Material

These projects can be leveraged effectively to scale-up the local manufacturing base of the battered industrial sector of J&K. This investment, no doubt, is expected to create a huge demand for construction material like cement, steel, construction equipments and various electrical, sanitary, furnishing and other supporting components. Manufacturing escalators and other high-tech machines might be way beyond J&K’s manufacturer’s league, however, there is still a range of construction related manufacturing units which can serve these projects economically. Besides, if given a chance and proper support by the foreign investors, local manufacturers can be graduated to fill in the simpler component manufacturing requirements locally in the long list of goodies. These are the opportunities where technology transfer from advanced economies to developing economies takes place. This is where the terms of engagement with the investors can be maneuvered so that this investment irrigates the dry lands of J&K’s manufacturing sector generously in terms of economic value and technology transfer.

Foreign investment can also cause negative effects on domestic companies, if foreign investors squeeze domestic producers from the market, and become monopolists. The apprehensions among local businesses regarding deep pocketed capitalistic buyers entering the traditional agrarian and trading economy is very much palpable. Securing such interest should be among the top agendas of the UT’s Government.

Money

The stated FDI in the announced projects is about Rs. 63,300 Crores. The investors can avail numerous routes to raise this capital. Another value adding element of this investment could potentially be incase a portion of this money is raised from the local economy. And when it comes to J&K, a huge pile of its monetary resource is locked up in Bank deposits earning less than the prevailing inflation by over 100 basis points. As much as Rs. 1.43 Lakh crore, of which two thirds sits in J&K bank only, are lying with the banks operating in Jammu and Kashmir as on September 2021. Since the Government of J&K has a unique feather of having its own bank, any lending by this bank towards these projects will end up fetching fat dividends for the UT’s exchequer. Thus, giving a shot to dilapidated state finances besides improving the Banks credit portfolio substantially. There might be an argument that this can lead to choking of credit space for regional retail businesses that are solely dependent on these financial institutions. However, the credit absorption capacity of the region over decades has been quiet low. As a result, Banks operating in J&K often end up lending almost 50% less than the amount raised as deposits from the region. Therefore, there is plenty of headroom to accommodate these investment projects from domestic savings.

Putting in place the above mentioned arrangements in the terms-of-engagement with the foreign investing entities, can ensure that the proposed investments have a multidimensional implementational benefit to the economy. Notably, these benefits will come up even before the assets created are ready to add to the productive capacity of the region.

The Real Test

Securing investment is just the first step, though a significant one. However, the real test starts during the course of the project cycle. The problem with investments is that in order to meet its profitability and wealth maximisation goals, it demands a secure, somewhat predictable and stable macro environment and that too for a long period of time. As an investment destination, these factors do not fit with J&K’s turbulent reputation. It’s anything but secure, totally unpredictable and frequently unstable. With complete political disenfranchisement and simmering unrest, the fate of these systemically significant investments lies on the shoulders of aristocratic bureaucrats. The host economy can only hope that its interests are secured and a fine balance of give and take is maintained with foreign entities while engaging in the proposed “economic transformation”. For investors, it is expected that they have factored all the known and unknown risks before entering into this graveyard of reputations. There is an old Arabic proverb “Ally Bedow Yaleabe Maeal Qati Bedow Yalqaa Kharamishahu” which means “Whoever plays with a cat will have to bear the annoyance of its claws' '.


Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer

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Ejaz Ayoub

Ejaz Ayoub has been working in the BFSI industry in the field of Financial Risk Management, Strategy and Foreign Exchange. He can be reached at:[email protected]

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