State of the manufacturing sector

May 08, 2022

Should the state offer tax incentives or land and state of the art infrastructure in industrial estates?

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ew employment opportunities are mostly created by the manufacturing sector. In Pakistan, the sector is not growing. This is the main reason for widespread unemployment.

The daily wage workers and those employed in small/ micro industries enjoy almost no growth in their careers. Workers in large and medium industries alone have a chance to move up in their careers from machine helpers to operators; even go on to become supervisors. They have permanent jobs. They are rewarded as and when they improve their skills and become more productive. They work for eight hours a day and are eligible for overtime if they must work extra hours. They are entitled to yearly and casual leaves.

The manufacturing sector is a part of the industrial sector that includes mining and quarrying, manufacturing, power and gas production and construction. The share of manufacturing is the largest among these four. A decade ago, the share of the manufacturing sector in our GDP was 14.51 percent, of which LSM accounted for 12.2 percent and small-scale manufacturing for 1.25 percent.

In 2018, the share of manufacturing declined to 13.02 percent, of which LSM share was 10.29 percent and small-scale manufacturing was 1.52 percent. By 2021, the share of manufacturing had come down to 12.52 percent. The share of LSM was 9.54 percent and small-scale manufacturing 1.68 percent.

Our governments have been manipulating the statistics. The manufacturing sector is not in a good shape. The growth that we show in any period relates to the production that was recorded during the corresponding period the previous year. When production of cars, for instance, was completely stalled for some months during the Covid-19 closures, growth in the corresponding months next year was 50-100 percent.

That does not mean that the car sector is flourishing. The fact is that production even in the ‘high-growth months’ was lower than the production recorded 14 years ago in 2007-08. We have not added to the capacity in most of the large-scale manufacturing sector in the last three decades.

The cement sector is the only exception where the capacity has increased six-fold. Basic textile is another subsector where new investment has been made. But then more than 120 spinning mills have been closed over the last decade due to obsolescence of technology.

The automobile sector has also enhanced its capacity through the entry of new global brands. Still, we are producing fewer cars than were produced in 2007-08. The high-end car production has started overtaking the small car segment. The foreign exchange consumed on high-end cars is more than double that used on the 1000 cc or smaller engine cars.

When growth slows, growth in large-scale manufacturing goes down. It can even record negative growth. When growth picks up, the LSM growth picks up, too. The see-saw movement has been going on for the last 30 years with almost the same capacity.

We often talk about the plight of the SMEs. The SMEs are the suppliers of components and services to the LSM. They operate on low margins. In times of growth, the existing SMEs flourish as supplies to LSM increase. When the chips are down in LSM the SME supplies reduce and, in some cases, the volume of orders is so low that they operate in red. If the gloom prolongs, even well-established SMEs close down. Take, for instance, the fate of dozens of vendors of tractors that have closed shop as tractor production dwindled.

In the cement sector, the capacity has increased six-fold. Basic textile is another subsector where some investment has been made. But then more than 120 spinning mills have been closed in the last decade due to obsolescence of technology.

The expansion in the medium-sized apparel industries has been impressive in the last two years. These entrepreneurs mostly started with low resources but with hard work and dedication have gradually scaled up. They are not served well by the banks. The apparel manufacturers continue to reinvest what they earn to build capacity.

At the same time, they provide in-house training to their workers to make up for shortage of skilled apparel staff. The apparel exporters are the largest providers of quality skilled jobs in Pakistan. Unfortunately, the spinners and weavers that have huge capital have ignored the apparel sector for long. They have now started investing in this sector after seeing small apparel exporters overtake them in textile exports.

Currently, the top four exporters from Pakistan belong to the apparel sector (readymade garments and knitwear). Ten years ago, none of them was among the top 25 exporters. If the moneyed basic textile tycoons shed their lethargy, we may see robust growth in apparel exports and job creation.

Among the large-scale manufacturing sector, the cement units and sugar mills are monopolised and protected sectors. The number of cement units is almost the same as in 1990 when all of these were in the public sector. In the last 32 years hardly an entrepreneur or two have established new units.

The 24-25 units manage the prices by manipulating production. They have expanded the production capacity manifold. The three leading manufacturers have almost half of the total capacity. Sugar mills are mostly operated by political families having representation in the national and provincial assemblies. There is a complete ban on establishing new sugar mills, still many mills have established new units hundreds of miles away from their original setup under the garb of balancing and modernisation.

Only one such expansion was declared illegal by the courts when the political family was in power. Sugarcane, a tropical crop, consumes a lot of water. Even the World Bank has advised the government to stop growing sugarcane on a large scale. But its cultivation area continues to grow and has encroached on the cotton cultivation area.

The cotton crop needs much less water and is the basic raw material for our textile industry. But the political influence of the sugar lobby has prevailed with the result that Pakistan must import cotton worth over $2 billion per year to feed its textile industry. We can fulfill the entire sugar needs of the country at half the cost (if no sugar is produced) while our textile exports register a hefty increase.

Our manufacturing policies have many such anomalies. Governments grant huge tax incentives for establishing industries in underdeveloped regions to create jobs. Besides income tax, the waiver from 15-17 percent sales tax is so lucrative that many a time the established industries in other regions relocate their setup to the new area. Those that fail to relocate, close down. Thus, jobs are created in an area at the expense of the other.

Tax incentives should be limited to the industries that do not exist in Pakistan. Instead of tax incentives, the state should provide free of cost land in industrial estates with a state-of-the-art infrastructure and assured availability of utilities.

After sector-specific long-term policies (five years and more) have been announced, tinkering with the rules goes on. This impacts the business plans of investors who commit their resources based on the original policy. Ideally, there should be a single policy for all sectors that provides for a level-playing field to all. Else, sector specific policies should come for 10 years with iron-clad guarantees against any revisions.

The writer is a senior staff reporter at The News

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