The making of the British Empire in India on the one hand was guided by the centuries of experience that the British had accumulated as rulers in different parts of the world and on the other was based on economic rationale and political expediencies. It was for this reason that the nature of British rule in India varied across time and space with sovereignty directly asserted on regions politico-administratively less cumbersome but economically sound. Regions geographically tough and with low economic potential were ruled indirectly. Seen from this perspective the formation of Jammu and Kashmir in 1846 and the British decision of handing it over to Raja Gulab Singh was not a novel act in itself - indeed it was in complete agreement with the British philosophy of indirect rule. However, the political motives of creating a new state out of the Sikh state of Punjab can be better explained by placing the newly formed state of Jammu and Kashmir in the context of its immediate neighbourhood – Afghanistan-Punjab context – together with underscoring the impact of Russophobia. The present articles look at the formation of Jammu and Kashmir state from this angle and also point towards the fractures in Sikh polity which deepened after the death of Ranjit Singh marking a shift from centralized to decentralized polity.