By the BBC's Anu Anand Reporting from Srinagar

India's Kashmir Valley is known for its beauty, but the region is also a potential economic powerhouse.

The government subsidies run out next year and then we really don't know what will happen

Watch factory worker

The valley produces a rich variety of fruit and handicrafts and has the potential to generate hydro-power.

But 13 years of insurgency have destroyed much of Kashmir's industry and future prospects are grim.

While the rest of India cashes in on globalisation, Kashmir is left struggling.

The HMT watch factory near Srinagar is functioning, but just barely.

The future looks bleak

This is one of the few remaining large-scale industries operating in the Kashmir Valley, but the equipment is old, the watches inferior and, despite millions of dollars in Indian subsidies to the state, this factory is failing.

One employee tells me she has had to wait months for her salary and even then she has to beg for it.

"The government subsidies run out next year and then we really don't know what will happen," she says.

"The government is abandoning us because all the Hindus have left the valley and only the Muslim workers remain."

Slow growth

All across Kashmir the economy and the people are suffering.

In the last 12 years our per capita income has not declined

Pervez Divan, civil administration

Tourism, once a mainstay, is dead. The only visitors to hotels are journalists, here to report on the violence.

Instead of cashing in on its many attractions - its temperate climate, its beauty, its bright young elite - Kashmir has been left behind on the economic ladder.

Government officials insist the economic picture is healthier than it looks, but Pervez Divan, the man in charge of the valley's civil administration, concedes there are still problems.

"In the last 12 years our per capita income has not declined. Our per capita income has risen by 4% every year in the 1990s," he says.

"Now 4% is not a bad rate of growth at all.

"But considering these were the years when the rest of India went through an economic boom and had an average growth of 6.5%, 4% doesn't look that good any more."

Creaking infrastructure

Kashmir also has a geographical disadvantage.

Nobody's ready to invest in Kashmir because of the political instability

Anis Maqbool, financial analyst

The valley is linked to India by a single road, so moving goods in and out is difficult - all the more need for investment to build Kashmir's infrastructure.

But Anis Maqbool, an analyst with the Jammu and Kashmir State Co-operative Bank, says investors have reason to be reluctant.

"Nobody's ready to invest in Kashmir because of the political instability. That is the biggest roadblock into it.

"Even if like there are lot of tax holidays out here, there are subsidies, banks are ready to give credit at a low rate of interest - so nobody's ready to risk his money out here when there's so much political instability."

"So that is the major stumbling block for everything, like infrastructure - the power is not there, the electricity, water, road linking, you know. So it all adds up."

'Wealthy' Srinagar

One of the things that is surprising about coming into Srinagar is that one hears about all the problems in the state - not just the insurgency, but the economic problems.

And yet in Srinagar itself there seems to be a tremendous amount of wealth.

Conflict keeps investment away

When you come in from the airport there are enormous houses being built, really grand houses.

The markets are full of produce. There does seem to be a great deal of wealth here.

But Anis Maqbool says Srinagar does not reflect the situation in Kashmir as a whole.

"The problem is not the great deal of wealth. You see the wealth is concerned with a very few people out here in Srinagar.

"In villages there are more atrocities and nobody takes cognisance of that.

"So the wealthy people, who can afford to come down to Srinagar and settle, are here.

"That's how you think that shops are full, people are around."

'Stability not subsidy'

When Indian Prime Minister Atal Behari Vajpayee was here recently he announced something like $1.3bn over several years for all kinds of projects in Kashmir.

The real point is what is going to the real needy people? Nothing is happening on that front

Anis Maqbool

I asked Mr Maqbool if subsidies like that actually reached poor people in the rural areas? Do they go towards public infrastructure? Where does the money go?

"Really the package given by Vajpayee is very, very vague," he tells me.

Much of the money will go towards existing projects aimed at improving infrastucture for defence purposes, he says.

Some will also go to security personnel, police, migrants and village defence committees, including relief payments to officers who get killed.

"So majority of all this money is going towards that, but the real point is what is going to the real needy people? Nothing is happening on that front."

As with so many of Kashmir's problems, the economy, too, is in desperate need of a political solution.

Stability not subsidy is what Kashmir needs most.