This paper analyses the economic repercussions of persistent terrorism in Jammu and Kashmir (J&K) and explores the role of credit supply as a transmission channel between terrorism and economic activity. First, we estimate the direct economic cost of terrorism by constructing a ‘synthetic’ counterfactual of J&K. Our findings indicate that, in the absence of terrorism, J&K’s economy would have been more than one and a half times its current size. This translates to a depressed annual growth of 2.4% of over a quarter-century and a starker loss of 3.7% in per capita terms. Second, we show that terrorism contracts credit supply leading to reduced economic activity captured by night lights data. We further estimate the implications of terrorism on sectoral credit allocation and regional heterogeneity – personal credit and agricultural credit contracted more than industrial credit and the Kashmir region suffered a greater impact of terrorism than the Jammu region.