The memorandum of understanding by Dubai, part of the United Arab Emirates, is the first investment agreement by a foreign government in the sensitive region following the withdrawal of Kashmir’s autonomy and the division of the Muslim-majority state into two territories directly ruled from New Delhi.
Kashmir is claimed in full by India and Pakistan but ruled in parts by both.
The New Delhi government said the agreement will see Dubai building infrastructure including industrial parks, IT towers, multi-purpose towers, logistics centres, a medical college and a speciality hospital.
"The world has started to recognize the pace (at) which Jammu and Kashmir is traversing on the development bandwagon," Indian Trade Minister Piyush Goyal said in a statement.
The statement said different entities from Dubai had shown keen interest in investment in Kashmir.
However, investment is fraught with risks in the heavily militarised region as evidenced by a spate of militant attacks on civilians and a widespread crackdown by security forces that has left several people dead.
On Monday Indian authorities moved thousands of migrant workers in Kashmir to safer locations overnight while hundreds have fled the Himalayan valley after a wave of targeted killings.