The fifth part of Habibullah's report deals with the role of international financial institutions in contributing to economic regeneration in Kashmir. This question is important because it presents a further challenge to India's insular attitude by its centralised economic management of the state despite attempts by the J&K Government to assert greater self-reliance in the conduct of its affairs. While these initiatives, including the provision of tax concessions for companies that base their operations in the state are admirable, they will never realise their potential unless adequate consideration is given to issues of security, period of tenure, domestic employment and supply chain linkages with local firms.

Despite the Union government relaxing its position to allow the state government to negotiate directly with international financial interests, the Centre still retains a key role in the financial management process. Based on the 7th schedule of the Indian constitution, all matters involving international affairs, including foreign loans, fall in the domain of Central government's jurisdiction. This means that loans from organisations like the World Bank or Asian Development Bank must be negotiated by the Central government before it is devolved (with an additional interest as a risk guarantor) to the State coffers. Issues relating to the degree of harmony between State political parties and the Central government often come up in discussions of the propriety of the Centre in releasing funds for sub-national work. As a result, the Central government has effectively taken on a gatekeeper role which accentuates the politicisation of regional development efforts by the State.

Given the Central government's primacy in the external relations of the State, it is no surprise that there would be restrictions on the types of activities the IFI's can get involved in, or find favour with the government in the sphere of regional development. Multilateral groups like the Asian Development Bank have been a recent donor for State reconstruction projects on both sides of the Line of Control, whereas USAID (despite its positive negotiations with the State government) and the UK's DFID have been barred from working in the region. DFID has gone on record that "Britain would like to fund development activities in Kashmir if the Government of India permits it" ('Britain keen to fund Kashmir projects', Hindustan Times, 24/09/03). Habibullah's assertion is that these organisations are seen as "busybodies" by the Ministry of External Affairs. The imposition of restrictions on donor activities is a deliberate effort to discourage advocacy and political interference in the affairs of the Union government.

Apart from funding by IFIs, the encouragement of both foreign and domestic firms to base their operations in the State has been a feature of J&K industrial policy since the late 1990s. In addition to the State waiving its sales tax, the Central government's policy has begun to extend excise duty concessions since late 2002. Currently companies like Hitachi, Videocon, LG and Samsung have a presence in the State to produce consumer durables like televisions and air conditioners. If this industrial growth is to be encouraged, administrative problems like corruption, poor infrastructure, and excessive regulation must be addressed. Besides, risk management and insurance considerations are significant factors in assessing the financial viability of conducting business in the State, despite the benefits of tax concessions.

The energy sector is an area which has attracted considerable attention from foreign interests. In early 2003, the then US Ambassador to India, Robert Blackwill, visited the Valley and spoke of the role that US companies could play in exploiting its water resources to supply power for the whole of North India. While such proclamations are encouraging, again, the political dimension comes to the fore. As Habibullah has mentioned, the Indus Waters Treaty, agreed to by India and Pakistan in 1960, has been used by Pakistan, to object to the development of hydroelectric projects in the region. While the treaty presents a unique opportunity for joint management and exploitation of water resources for mutual benefit, the rivers themselves have taken on a strategic conflict dimension, leading to "sporadic and wholly inadequate development of this resource," despite the chronic power shortages in the State.

If J&K is to make significant headway in improving its economic situation and reducing its reliance on Central government handouts, it must employ a more holistic, interlinked form of policy-making to give confidence and coherence to potential investors, both domestic and international. The encouragement of foreign investment into the region should not be seen as an opportunity for the government to absolve itself from its social responsibilities of encouraging employment and social services, but as a chance to provide opportunities for such firms to develop real and lasting links with local suppliers, domestic recruitment and the promotion of entrepreneurial skills for indigenous development.