THE government of Prime Minister P.V. Narasimha Rao has done much to modernise the Indian economy and raise living standards. But the world's largest democracy always attracts international attention when things go wrong. To a catalogue of man-made catastrophes that in recent times includes the storming of the Golden Temple in Amritsar and the assassination of a prime minister, must now be added the destruction of the Sheikh Nooruddin Wali shrine in the disputed and strife-torn state of Kashmir. New Delhi's difficulties in the country's only Muslim state are well-known: India faces a belligerent indigenous separatist movement it alleges is armed and directed by Pakistan's Inter Services Intelligence agency. Unfortunately, India's security forces are widely believed to have drifted into the type of systematic human-rights abuses practised by the guerillas. The burning of the shrine at Charar-i-Sharif now transforms Kashmir from a domestic problem with an important bilateral dimension into a serious international issue. The destruction of the shrine jeopardises the option of state elections, which have to be held by mid-July to replace direct rule from New Delhi. Instead, Mr Rao's Government should develop, as a matter of urgency, a well-planned package of proposals to grant the state the high degree of autonomy it once enjoyed. Simultaneously, generous economic aid is needed to help Kashmir rebuild itself from the ashes of five years of civil war. It is possible this may not work. New Delhi is so discredited in the state - and the separatists so violent and intolerant - that it may be difficult to find Kashmiri leaders with whom to engage in dialogue. But India must take risks now to avoid a deteriorating security situation in Kashmir and worsening tension with Pakistan. If the Kashmiri crisis spins further out of control, it could pose a threat to the stability that has allowed New Delhi to pursue economic liberalisation and that, in turn, would lead to a more widespread unease.