EICC-GOPIO Conference

Jammu & Kashmir: Jammu & Kashmir:

Reform and ReconstructionReform and Reconstruction

November 9, 2006Brussels

6 November 2006 2

India story

• It is the CHINDIA decade• India is the flavour right now• Macroeconomics is looking good

– GDP growth will exceed 8%– Invisible exports up 106%– Manufacturing up 22 %

• FII flows graduating into FDI

6 November 2006 3

“29” state economies

• India is not a single economy• It is a group of 29 economies• Differential levels of development

– Different enabling environments– Diverse resource endowments

• Next phase of action and reform at state level

• India not one opportunity, 29 opportunity sets

6 November 2006 4

J&K is special

• J&K is a “Special Category State”• This status gives it:

– Limited applicability of national economic legislations

– Some rigidities in land laws– Flexibility in regulatory framework – Greater quantum of federal assistance on

more liberal terms

6 November 2006 5

Infrastructural gap analysis:

• Aggregate infrastructure:– Economic infrastructure– Social infrastructure– Administrative infrastructure

6 November 2006 6

Dreadful decade

• During 90s, J&K as an economy was devastated

• Biggest damage was decimation of institutional capacity, especially, economic administrative capacity

• Results: – government finances in a mess– Expenditure allocations non-developmental – Infrastructure not maintained and destroyed – Slump in growth

6 November 2006 7

Aggregate Infrastructure index

0102030405060708090

100

1985 2003

J&K

AllIndia

6 November 2006 8

Economic Infrastructure Index

55

60

65

70

75

80

1985 1990 2003

Years

Ind

ex

J&K

6 November 2006 9

Eco Infrastructure: Disaggregated

0

50

100

150

200

Agric

ultu

ral

Bank

ing

Elec

tric

ity

Tran

spor

t

Com

mun

icat

ions

1985

2003

6 November 2006 10

6 November 2006 11

6 November 2006 12

Cost of catching up

• J&K is 50 basis points below what it would have been

• Each basis point costs Rs 1000 crore

• Financial implications of being where J&K would have been : Rs 50,000 crore

6 November 2006 13

Strategy: Peace via economic reconstruction

•The three “R” mission:–Revive political initiatives–Reform the government–Reconstruct the economy

6 November 2006 14

Major constraints

• Infrastructure – Power – Connectivity– Communication

• Institutional capacity– Governance– Policy regime

6 November 2006 15

Requirements

• Overall enabling environment • Well laid out fiscal policy that ensures

government has investable surplus• Well defined and effective industrial

policy which overcomes structural negatives

• Autonomous investment in Infrastructure especially power

6 November 2006 16

J&K: Changing Conditions Socio-Political situation:

Domestic changes:

Democratically elected sub-national government

Local body election after 32 years

Same party in power at the Centre and the State after 24 years

First time a coalition government in the state

6 November 2006 17

Peace process:

International peace process:

Srinagar-Muzaffarabad road opened after 52 years

Visa requirement within the greater J&K abolished

Freer movement of people across the LOC

Trade relations on the anvil

6 November 2006 18

Reforming Government

• Creating institutional capacity for:– Instituting a proper policy framework– Bringing efficiency in expenditure– Improving delivery of services

• Bring a balance in state finances– Reduce pre-emption of resources – Align revenues and expenditures

6 November 2006 19

Institutional Capacity Building

• Economic Reconstruction Agency set up

• Financial Restructuring Authority in the works

• Privatisation of major corporations, starting with Power Development State Corporation

6 November 2006 20

Public Expenditure Policy

• Basic & maintenance activity financed through by government

• Series of well-designed interventions, in the nature of sectoral specific packages, with alternative private funding – J&K Development Fund– Multilateral Institutional Funding

6 November 2006 21

Industrial Incentives

• No income tax till 2013• Capital Investment Subsidy of 30%• Exemption on toll tax till 2015• GST exemption till 2015 • CST exemption to SSI units till 2015. • Interest Subsidy of 3% to new industrial units • 15% price preference to SSI units on landed cost. • Air freight subsidy of 50% at 15% till 2015  

6 November 2006 22

Industrial policy:

• Industrial Committee with the Chief Minister as the Chairman for providing response to emerging situations.

• Permanent Grievance Redressal Committee established.

• No consignment claiming benefit under the Industrial Policy 2004 will be detained at the entry point of the state for more than 24 hours.

6 November 2006 23

Economic Reconstruction Plan• Objectives of intervention:

– Expanding economic infrastructure; – Expanding the provision of basis services– employment and income generation.

• Phase I: – Revive the rural economy of J&K by– Restoring critical rural infrastructure

• Phase II:– Create urban infrastructure– fiscal consolidation of govt– Build utilities through PPP

6 November 2006 24

Peace through Economic Reconstruction Prime Minister’s Reconstruction Plan:

Timeframe : 2005-06 to 2008-09Size : Rs 240 bnFocus areas: Power, Roads, Hospitals and Tourist Infrastructure

Asian Development Bank’s Multi-sectoral Investment Plan:

Timeframe : 2005-06 to 2009-10Size : Rs 20 bnFocus areas : Rural connectivity, Urban Infrastructure

Japanese Bank of Industrial Cooperation: Timeframe : 2007-08 to 2010-11Size : Rs 35 bnFocus areas : Water supply and Urban sanitation

6 November 2006 25

Staggering Numbers

Prime Minister’s Reconstruction Plan: Rs 240 bn

Asian Development Bank’s Multi-sectoral Investment: Rs 20 bn

Japanese Bank of Industrial Cooperation: Rs 37 bn

In addition to this,

Normal spending plans: Rs 45 bn p.a

Three year autonomous expenditure of: Rs 340 bn+

All this money will be managed by and will pass through the banking channels of the Jammu and Kashmir Bank

And this is not all…..

6 November 2006 26

Trickle down impact

Crowding in of investment:

- public investment in infrastructure will induces private investment with backward and forward

linkages

- Growth of SME’s

- Growth of ancillaries associated with projects picks up

- Pick up in induced demand of the private sector

6 November 2006 27

Private Investment :Picking Up Quantity:

Investment in the SME sector till July 2006 : Rs 70 bn

Proposals in the pipeline: Rs 120 bn

The flow of funds is in the range of : Rs 500 bn

Quality:

Top notch Indian corporates:

Bharti

Reliance (ADA) Infocom

Mahindra and Mahindra

Lupin Laboratories

Essar telecom

6 November 2006 28

Infrastructural spending

9851198

1598

2646

500

1000

1500

2000

2500

3000

2002-03 2003-04 2004-05 2005-2006

6 November 2006 29

In real terms

• New Roads = 1100 kms

• Macdemisation = 2300 kms

• Primary Health Centres = 66• Sub-districts Hospitals = 7• District Hospitals = 2

6 November 2006 30

This means, everyday..

• 5 kms of new roads will be laid out • 10 kms of roads will be macdemised• Every week one PHC will be

opened/upgraded• Every two months one SDH

6 November 2006 31

Economics of Peace:A. Pure growth effect

– Increased level of economic activity due to improved socio-political situation

– For example:• Tourist inflow in 2006 has already crossed 1989

levels:– Income multiplier of tourism sector is 1.66– Private sector investments in tourist

infrastructure – Credit to tourism industry has picked up

6 November 2006 32

Reconstruction ImpactB. Normalcy plus economic reconstruction

- Economic growth accelerates due to reconstruction of economy through :* autonomous investments in physical infrastructure* Induced investment in production activity

Example:Acceleration of Economic growth:

State SDP growth : 13.5 per cent

Commercial Agricultural growth : 9.7 per cent SMEs projected at : 16.3 per

cent

6 November 2006 33

Economic Growth: Trends

3

3.5

4

4.5

5

5.5

6

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

6 November 2006 34

State Income: Composition

Tertiary

53%Primary

34%

Secondary

13%

6 November 2006 35

Credit gap

 • J&K accounts for 0.70 per cent of national GDP

•Yet, it absorbs only 0.30 per cent of total national credit

• Productive sectors of the economy account for less than 5 per cent of the credit disbursed in J&K

•Comparable national average is 30 per cent

• J&K accounts for 1 per cent of India’s population

•Yet it accounts for only less than 0.2 per cent of personal credit disbursed in India

6 November 2006 36

Results of Fiscal Reforms

• Three consecutive zero-deficit budgets

• Revenue surplus up from Rs 128 crore in 02/03 to Rs 2800 crore in 05-06 ;

• Fiscal deficit down from 7.5% in 2002/03 to 5% of SDP in 04-05

6 November 2006 37

Revenue Performance

0

1

2

3

4

5

6

7

8

9

10

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

tax/sdp

non-tax/sdp

6 November 2006 38

REVENUE SURPLUS : TRENDS

-542-960

-334

128

10251438

-1500

-1000

-500

0

500

1000

1500

2000

1999/0 2000/1 2001/2 2002/3 2003/4(RE)

2004/5(BE)

YEARS

Rs C

rore

6 November 2006 39

Fiscal balance

Revenue Surplus as % NSDP

3.80 4.224.93

7.01

10.10

12.75

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

6 November 2006 40

Power : Options

• Increase physical availability by:– Developing 7000 MW over the next 3

years– Changing the power mix of J&K by

accessing thermal capacity especially in winter

– Increasing the share of J&K in some central power projects on J&K rivers are commissioned

6 November 2006 41

On the anvil

• Opening up of Power sector

• PPP in Health sector

• Privatisation of Tourist sector

• Development of Financial services sector

• Incentivisation of crafts and SME sector

6 November 2006 42

Power Development

• J&K’s water resources offer immense potential for commercial hydro power generation.

• The potential is as high as 14,000 MW of hydro power ; investment of 1,50,000 crore

• Only about 10% of this has been exploited so far

6 November 2006 43

Power sector:

• Taking PDC public to create India’s largest power utility company

• Reforms in transmission and distribution sectors– Unbundling transmission and distribution

entities.  – Establish a transmission utility company

6 November 2006 44

The Financial Universe

New York

Tokyo

Sydney

RegionalGap

6 November 2006 45

A Proposition : JK IFC

• JK International Financial Centre: A hub for institutional financial services

• A financial cluster in the vale of Kashmir

• Window to access regional wealth

• World-class regulations

• International legal system including a commercial court

• State-of-the-art communication infrastructure

• 100% foreign ownership

6 November 2006 46

Sectors of Focus

• Banking Services & Capital Markets

• Asset Management & Fund Registration

• Islamic Finance

• Reinsurance & Captives

• Business Processing Operations

• Ancillary Service Providers

• Non-Regulated & Others

6 November 2006 47

Value Proposition

• JKIFC has its own legal, regulatory & judicial environment based on best-practices from International jurisdictions

• Laws are distinctly different from National laws

• Will provide the platform to list & trade in financial instruments like Bonds, Equities, Funds etc. without restriction of ownership

6 November 2006 48

To sum up

• J&K government is enroute to:– Financial stability– Infrastructure Development– Creation of an enabling environment for private

business

• J&K economy is poised for– Growth– Absorption of private investment– Specialisation in financial services under the

“stewardship” of J&K Bank

Jammu and Kashmir Bank

An introduction An introduction

6 November 2006 50

Profile Incorporated in 1938 as a limited

liability company

Governed by the Companies Act and Banking Regulation Act of India

Regulated by the Reserve Bank of India and SEBI

Listed on National stock exchange (NSE) and Bombay stock exchange (BSE)

Rated “P1 +” by Standard and Poor-CRISIL: highest degree of safety

Four decades of uninterrupted profitability and dividends

6 November 2006 51

Shareholding Pattern

FOREIGN INST. INVESTORS

53.17%31.94%

12.05%

1.44%1.08%

0.32% NON RESIDENT INDIANS

BODIES CORP. / BNKS / INS. CO.INDIAN MUTUAL FUNDS

RESIDENT INDIVIDUALS

GOVERNMENT OF J&K

As on October 27, 2006

6 November 2006 52

One of a Kind

• Private sector bank despite government’s majority holding

• Sole banker and lender of last resort to the Government of J & K

• Only private sector bank designated as RBI’s agent for banking business

• Carries out banking business of the central government

• Collects taxes for Central Board of Direct Taxes in J & K

6 November 2006 53

• Fastest growing bank with 516 branches• 98 per cent business computerized

• Anywhere, Tele-banking and SWIFT

• Internet, SMS and Mobile Banking • Globally connected ATM network• Mobile ATM Service • Global Access Debit & Credit Cards • Live on RTGS System of RBI

Infrastructure

6 November 2006 54

Insurance joint venture with MetLife International . Distributor of :

Life Insurance products of MetLife (India) Pvt. Ltd. and Non-Life Insurance products of Bajaj Allianze General

Insurance Co. Ltd.

Providing Depository Services Offering Stock Broking Services. Collection Agent for utility services provided by State and private sector.

Financial Services Portfolio

6 November 2006 55

7.79.6

12.415

20.6

24.6

29.831.9

39.4

48.25

0

10

20

30

40

50

60

FY-96 FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04 FY-05

Rs

. in

Mn

.

Productivity per Employee

6 November 2006 56

Capital Adequacy : Most Comfortable

Tier I CAR (%) 13.6

12.5

9.6 9.3 9.1 8.98.2 8.0 7.7 7.6 7.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Corp.Bank

J&KBank

HDFCBank

UTI Bank SBI-C PNB BoB SBI ICICI VijayaBank

CanaraBank

As on 31st March 2005

6 November 2006 57

Asset Quality (net NPA) : Among the Best

2.562.30

1.96

1.30 1.19

0.30

0.00

1.00

2.00

3.00

% o

f NPA

s

Series1 2.56 2.30 1.96 1.30 1.19 0.30

STATE ICICI FEDER UTI J&K HDFC

6 November 2006 58

Operating Costs : The Lowest OPERATING COST / AVERAGE ASSETS % - FY-05

2.7

2.4 2.42.3 2.3

2.22.1 2.1

1.9

1.7

1.5

0

0.5

1

1.5

2

2.5

3

PNB HDFC SBI UTI BoB VIJAYA CORPBANK

CANARA ICICI ORIENTAL J&KBANK

6 November 2006 59

Super specialist banking

• Knowledge banking foray to create a niche in:

• Leather Branch in Chennai• Spices Branch in Cochin • Castor Branch in Mumbai • Could pave way for Commodity

Bank

6 November 2006 60

Addressing financial depth

J&K bank is a Corporate with a Community

It has a geographical region to itself which lacks financial depth

bank will bring about a financial deepening of the regional economy by monetising trade and replacing channels of informal finance

By creating a new financial architecture in the state

Consolidation of existing financial institutions by engineering a series of M&As

Thank you!