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December 12, 2019

Industry in distress

Business

December 12, 2019

LAHORE: None disputes that Pakistan needs to improve its competitiveness for rapid industrialisation, which offers it a range of potential benefits including job creation, tax revenues, and economic growth.

The share of manufacturing in Pakistan has been declining constantly in recent years. Lower industrialisation of Pakistan compared with other regional countries is due to its lower competitiveness. In 2018 the GDP (gross domestic product) growth of Pakistan was only 3.3 percent while China, India, and Bangladesh grew at a double rate. We are also way behind in this department when compared with Malaysia, Indonesia, Vietnam, Cambodia and Myanmar.

Agriculture has the largest share in Pakistan’s GDP among China, India, Malaysia, and Indonesia. It also has the smallest industrial share in the GDP.

Pakistan ranks poorly on Global Competitive Index of World Economic Forum, The Heritage Foundation, and other rating agencies. Its institutions are weak, infrastructure crumbling, it scores low in health and education parameters. Its labour productivity is also the lowest among the regional economies. Pakistan has the most expensive and least efficient port systems in the region. It has the most outdated and expensive transport fleet. The freight of a 20-feet container from Karachi to Lahore, 1,500 kilometers away, is higher than the freight of the same container to Shanghai that is 16,000 kilometers away from Karachi.

The investors are reluctant to invest in industries as they cannot compete even locally with the imports. The competitiveness of Pakistan industries has been damaged by many factors.

The first and foremost is the high level of corruption due to institutional weakness. Input costs are high and where the costs are competitive, rampant smuggling and under-invoicing force even the efficient industries to close down. The institutions have connived with the smugglers and unethical traders. Every economy protects its domestic industry.

On paper, Pakistani authorities also protect the local industry but in practice Pakistani manufacturers end up paying more government levies than most of the importers. As far as the smuggling is concerned the tax-paid Pakistani products stand no chance against smuggled goods.

There is a maximum duty of 20 percent on finished products that are imported in Pakistan and are also produced locally. Then there is 17 percent sales tax on duty-paid value plus 6 percent advance income tax. There are certain products where the import duty ranges from 5-15 percent, while all other levies are the same. This look likes adequate protection in case of 5-10 percent import duty and heavy protection, while duties of 15-20 percent depict heavy protection. There are some importers that appeal to the government to further lower the duties on smuggling-prone items that the authorities duly oblige.

In some casse in order to pacify domestic manufacturers the authorities also increase the import duty on certain items. Still the manufacturers in Pakistan find it impossible to compete with imported products. There are many industries that even export their products and compete with the same imported goods by same supplier in global markets. But they cannot compete with them in the domestic market despite heavy protection. The local manufacturers pay no duty but only the same percentage of sales tax on their retail price.

They produce same or in some cases better quality products but still find few buyers because their price is higher than the imported stuff. Logically there is no justification for all industries that cannot compete with imports despite enjoying heavy protection. However a deeper look into the system would reveal the duties are imposed on the values evaluated by the officials.

The duty is collected at the Import Tariff Price (ITP) fixed by the government. This ITP is fixed very low in cahoots with the importers. Thus a product values Rs100 is imported at Rs10 or Rs25 and the duty and government levies are paid on that value. This means that on import value of Rs10 an importer would pay Rs2 as duty (20 percent duty) and Rs2.04 as sales tax.

On Rs14.4 (duty plus sales tax), he would pay Rs0.84 as income tax. Thus in all he pays Rs4.88 as government levies on an item imported at Rs10 but actually valued at Rs100. The Pakistani manufacturers even if they are as efficient as the foreign suppliers would pay Rs17 as sales tax on an item valued at Rs100. They would enter the market at a disadvantage of Rs12/hundred.

Had the same item been imported at the original value of Rs100 the importer would have paid Rs20 as import duty, Rs20.04 as sales tax, and Rs8 as income tax. His landed cost would have gone up to Rs148 and the local manufacturer would be on the driving seat. If the system is not corrected the deindustrialisation in the country would continue and we would become an importing nation.