From Boom to Bust

The town of Pahalgam, long celebrated as a crown jewel of Kashmir’s tourism circuit, now finds itself at the center of a tragedy that has shaken the Valley. On a day that should have seen tourists trekking to Aru and fishing by the Lidder River, violence struck without warning. The attack, which left 26 tourists dead and several injured, not only claimed innocent lives but also delivered a devastating blow to Kashmir’s fragile economy. The immediate effects were felt not only in the streets of Pahalgam but across the Valley’s entire tourism industry, which had been eagerly anticipating a successful summer season.

In the immediate aftermath, airlines scrambled to arrange emergency flights. Hotels and guesthouses, once fully booked for the summer season, now report mass cancellations. Tour operators, artisans, and transport workers, all reliant on the steady flow of visitors now face an uncertain future. The tragedy has cast a long shadow over what was shaping up to be a record-breaking tourism year, exposing once again how vulnerable local livelihoods remain to sudden shocks.

The economic shockwave didn’t remain confined to canceled hotel bookings. Demand-side effects rippled outwards. Consumption patterns among local vendors — from fruit sellers to souvenir artisans — were immediately affected. Restaurant owners, ponywallahs, guides, taxi drivers, and seasonal workers are seeing their seasonal earnings collapse before they even began. The multiplier effect, usually a textbook advantage of a flourishing tourism sector, now functions in reverse. A single shock has dismantled spending across the vertical.

Kashmir’s economy has long displayed features of seasonal elasticity, heavily influenced by peak tourist months. In this context, tourism operates not merely as an industry but as a transmission mechanism — stimulating informal and semi-formal sectors, many of which fall outside strict economic accounting. In recent years, tourism had emerged as one of the more visible drivers of surface-level recovery post-pandemic, but with fragile underpinnings. The tragedy in Pahalgam, then, is not just about visitor counts or cancelled itineraries — it challenges the very confidence on which investment and economic expectations were building.

According to Kashmir’s Economic Survey 2024–25, the Union Territory’s Gross State Domestic Product (GSDP) grew by 7.06% in 2024–25 and 7.08% in the previous year. These numbers were read optimistically, with tourism seen as one of the sectors aligned to push growth forward. Some official estimates suggested that tourism accounted for around 8% of the GSDP, though several Kashmir-based economists believe the number is closer to 5% or less, when calculated conservatively.

Ejaz Ayoub, a Srinagar-based economist, explains the disconnect: “Tourism’s overall contribution to our GDP is marginal. The hotel industry [in this region] earns $324 million annually, which accounts for only 1 percent of our GDP. When considering the trickle-down effect through the secondary and tertiary sectors, which includes tour operators or individuals associated with the gig economy like the ponywallas, the figure can expand to $720 million. But that’s still very little compared to agriculture’s contribution.”

Even within this modest framework, tourism’s role as a sentiment builder for both investors and consumers cannot be overstated.

“The precursor for good economic activity is how much good news is coming out of the state,” Ayoub notes; “When tourism increases, a sense of positivity towards investment increases. In the last three years, the investment ratio in the region’s GDP has increased – albeit marginally.”

With the UT government targeting `2,000 crore in annual tourism investment through the 2020 Tourism Policy and an employment goal of 50,000 jobs per year, this summer season was expected to be a cornerstone in reaching that target. The hotel industry alone contributes approximately `2,700 crore annually, and with a multiplier effect estimated at 4x, the total tourism contribution could extend to `10,000 crore — roughly 5% of the total GSDP of `2.65 lakh crore.

Furthermore, from a macroeconomic standpoint, what Kashmir experiences post-Pahalgam is a classic negative demand shock. The expectations of both consumers (tourists) and producers (tourism service providers) have dropped, leading to decreased aggregate demand in the short term. This widens the output gap and threatens employment generation. For a region aiming at self-sustained growth, these cyclical setbacks carry structural consequences, especially if they become frequent or severe.

However, this is where nuance matters. While the psychological weight of such tragedies is immense, the actual composition of Kashmir’s economy remains diverse and somewhat buffered. When asked whether these setbacks will undermine long-term investment in the region, Ayoub responded:

“Political stability is the prime underlying condition for external as well as domestic investment. Any event that sends negative news and erodes the political stability directly impacts investor sentiments. Having said that... the region has a diversified economy which is backed by agriculture, handicrafts and services sector. Government investment and revenue expenditure is also one big risk-free component that supports the regional economy.”

This layered analysis gives space for cautious optimism. The tourism sector is vital — not necessarily in raw numbers — but as an economic accelerator, sentiment index, and employment engine. Yet the broader economic system, supported by public expenditure and traditional sectors like horticulture and handicrafts, acts as a cushion.

Still, sentiment is not easily rebuilt. Investment, both emotional and financial, relies on continuity and assurance. Pahalgam’s tragedy, although perhaps not catastrophic for macroeconomic indicators, strikes at the confidence architecture upon which development is scaffolded.

As a student of economics, I find myself contemplating the broader implications of such a tragedy. It’s not just about numbers and statistics; it’s about how economic recovery hinges on something more intangible: trust. In economic theory, we speak often of consumer confidence and its role in shaping the economy’s overall health. But what happens when that confidence is shaken, even for a short time? In Keynesian terms, we know that expectations drive demand. Without the optimism that tourism had begun to generate, we risk entering a vicious cycle — one in which consumer hesitation leads to lower investment, further stagnation, and heightened uncertainty. This is where the true challenge lies.

The question, therefore, is not simply how quickly tourists will return or whether the hotel bookings will pick up again. It’s whether the Valley can rebuild the sentiment index that once made it a sought-after investment destination. And if, as a society, we will be able to overcome this fleeting yet profound loss of trust and restore the vision of sustained economic progress.

Can Kashmir’s economy, with its reliance on fragile industries like tourism, build the resilience needed to absorb such shocks, or will it remain vulnerable to the cyclical volatility of external perceptions and political uncertainties?