Subsidising sick sectors unlikely to improve economic health

LAHORE: Markets are slipping through Pakistan’s fingers both at home as well as abroad not only due to flawed government policies but also because of lethargic private sector that parks resources elsewhere when the times are good and seeks subsidies in the days of distress. 

According to Transparency International’s corruption perception index (CPI), Musharraf era was the worse. The policies were almost a mirror image of what the present regime is pushing today. The business community’s then resentment against tough audits and relentless raids on their premises by the tax authorities was no different than today. All other governance factors were almost same; however, the economy gradually went into top gear post 9/11. It was due in part to a manifold increase in overseas workers’ remittances and the generous contributions made by the global donor agencies. United States of America too lavishly pumped grants into Pakistan in those days. 

It improved macroeconomic indicators and paved way for low interest regime. The businesses benefited from the new global situation. The textile sector minted money and secured state-of-the-art equipment from United States as their well established industries filed bankruptcies. The going was good and new investments at very low costs paid proved to be windfall for the investors. The newly introduced consumer financing products boosted sales of auto and home appliances sector. These sectors also had to increase their capacities. Even while sitting pretty, the textile sector sought and secured subsidies in the form of 6 percent grant for research and development on the exported amount. 

Since then, investment in all these sectors has been dying down bit by bit. The textile sector is running on up to 12-year old technology, which, in the age of disruptive innovations, is no better than obsolete. The money they accumulated during big time did not go into the upgrading technology but building real estate. A look at the profiles of textile tycoons would reveal that every big house has developed either a huge housing complex or a shopping mall. Well, you cannot export these immoveable assets.  They have lost export markets due to low-grade technology and their factories are posting losses, but they have secured their futures through investment in realty.

No government has so far been able to devise ideal economic policy. The Federal Board of Revenue (FBR) has always been accused of extortion and corruption. Legal proceedings are inordinately delayed. Police are as corrupt as ever. The SRO (statutory regulatory orders) culture continues to protect the high and mighty just like it did in the past. 

The manufacturing sector moved on the strength of concessions, waivers and subsidies. The governments the world over do play handholding role to support their domestic industries, but there’s a limit to it. Any industrial sector that fails to achieve global efficiency even after a decade of handholding deserves to be folded.

The state can provide concessions to a new sector because of its low volumes and it has to be minimal. When that sector starts growing the subsidy is gradually withdrawn over a period of 5-10 years. Any industry that is unable to operate on its own after ten years of subsidies should be closed down. When governments start subsidising unviable sectors more and more investors start investing in it and as a result the amount of subsidy also increases. A day comes when the government is no longer in a position to provide subsidies. When such a stage comes any sensible financial planner would withdraw all the government concessions before it is too late. 

Unfortunately, this has not happened in Pakistan. We have been charging full general sales tax (GST) on sugar, beverages, toothpastes, and many items but are afraid to charge full GST on fabric and garments. Planners fail to realise that in any economic distress the first thing that average households stop buying is clothing.

This is because they have the option to use the clothing they purchased in the past years. However, if an electric bulb breaks, a fan malfunctions, or sugar runs out then they have no other choice than to get these things immediately. The branded fabrics are sold at up to Rs5000 per meter. The brands start from Rs500 per meter. They are supposed to pay 2 percent GST. When consumers can pay such huge amount for the branded fabric why can’t they pay sales tax to the government. 

The truth is that pampering the inefficient textile sector would not reduce the trade gap but create a big hole in the government resources. After 60 years of constant concessions it is high time the government reward technology upgrade and value-addition in all industries including textiles.