Friday June 14, 2024

Subsidies in a threadbare economy

By Mansoor Ahmad
January 10, 2021

LAHORE: Pakistan’s trade scenario is very disturbing. We boost our exports through subsidies to reduce trade deficit without analysing how much of this subsidy helps a subsector add to the country’s exports.

The system of subsidy is similar to the general subsidies we provide to the public that may benefit the poor as well. For instance, the subsidy on sugar and wheat is available to rich and poor on the quantity they purchase.

Or anyone purchasing goods from utility stores is eligible for the subsidy announced for each item. In the same way, a generalised subsidy is announced in power and energy for all subsectors of textiles to boost exports.

The contributions and the potentials of each subsector are not considered. In the last six months for example we made good progress in textile exports.

Apparel, the highest value-added sector, contributed almost 80 percent to the increase, the bed wear and towel sector contributed the rest of the 20 percent. Exports of yarn declined appreciably while that of fabric also remained in negative.

Despite subsidy to the entire textile value chain, the value-added exporters have complained of higher yarn prices and short availability. Time and again they appealed the government to withdraw the regulatory duties on yarn and fabric, which was removed.

However, the general tariff on these items is still in vogue. If the duty is removed there are chances that the exporters would opt for imports of yarn and fabric that would be cheaper than local supplies.

This would force the domestic basic textile industry to lower rates, improve efficiencies or go out of business.

Higher yarn and fabric rates are not justified as it erodes the competitiveness of value-added sectors. High prices are also unjustified because the incentive given to basic textiles was meant to increase exports.

The sector failed in this regard and kept its local supply rates higher than global prices because of protective tariffs imposed by the government.

One interesting point is that of each Rs100 subsidy that the state gives to textiles for power and gas, around 80 percent goes to basic textile (that registered negative exports and higher than global rates for local supplies).

Universally, basic raw materials are zero-rated for all industries as availability of basic raw materials at globally competitive rates ensures competitiveness of the products made in a country.

Yarn is the basic raw material for weavers and for value-added exporters that outsource it to smaller mills to produce custom made fabric. What is the fun in wasting 80 percent of the subsidy to a subsector that does not support export?

The Ministry of Commerce should have experts, who analyse the impact of each subsidy on different subsectors within a value chain. There are some other issues that need to be analysed too.

Textile exports remained negative when the sector was operating on zero-rating. Now that the exports are picking up without zero-rating would it be wise to reverse to the zero-rating regime?

Another aspect that needs debate is the new long-term textile policy. According to media reports, the total quantum of subsidies in five years would be about one trillion rupees (Rs960 billion or $6 billion at current rupee value). The policy envisages increase in textile exports from current $13.5 billion (tentative) to maximum $20 billion. This in other words means that by subsidising an amount of $6 billion, we expect exports to increase by 6.5 billion.

Is that increase worth the subsidy? Moreover, the industry would become addicted to the subsidies. Another point that needs attention is that the power and energy tariff for exporters is fixed for five years in dollar terms, while the allocation of subsidy is in rupees.

What would happen if the rupee devalues (it usually does)? The subsidy in rupees would not cover the additional cost. Would the government increase the allocation given in the textile policy?

These aspects must be discussed threadbare to ensure that the long-term policy is implemented in letter and spirit.

One more point that needs attention is that the trade deficit would go up once the exports pick up (we import around 40 percent inputs for exports). In the first six months of this fiscal the cumulative increase in exports was a little over $600 million (Rs96 billion) but the imports increased by over $1.3 billion in July-December, adding another $700 million to the trade deficit.