Saturday September 25, 2021

Reviving the economy - Part II

September 11, 2021

The first part of this article spoke about how it’s time the state reengineered its economy. Here are some of the measures that the state can adopt to bring the much-needed change. The primary and singular objectives of the state will have to be: food security, housing and utilities, education, health, and public transport, and employment and social security support.

The production structure and the public finance (taxation and expenditure) regime will have to be reengineered to meet the above objectives. In agriculture, survival has to take priority over comparative advantage. Food crops will need to take priority over cash crops. The objective should be self-sufficiency in essential food commodities: wheat, pulses, sunflower oil, onions, potatoes, vegetables, milk, meats, eggs, etc.

Part of acreage, released from cotton, will have to be redirected towards producing the above crops. Agro-ecological zones will have to be designated for specific crops, and appropriate fiscal incentive (subsidies) regimes should be put in place.

The manufacturing sector has to be rebased on local (agricultural and mineral) raw materials and developed for value addition: for example, rice in Punjab and Sindh, minerals in Balochistan, and fruit in Balochistan and Gilgit-Baltistan. Industrial revival and promotion will require fully serviced and functional industrial estates, and a considerable reduction in the GST rate on the manufacturing sector – from the current double-digit tax rate to single digits, even as low as five percent.

The state will need to return to the economic arena and lead the industrial development process. A major plank has to be the revival of the Pakistan Industrial Development Corporation (PIDC) – but with some nuance. Earlier, the PIDC’s mandate was to set up industries with government finance and government management. It then carried the unit to the commercial production stage and privatised it. The new PIDC mandate will require units to be set up in the public-private partnerships mode: government finance and private management. A private party may have the option of buying out the unit upon reaching commercial production.

The hypothesis here is that food crops, cotton for textiles, and domestic raw material-based manufactures will be consumed domestically. As a result, what is produced will largely be consumed domestically. The implicit assumption here is that the purchasing power to clear the market is available, which is clearly not the reality.

Part of the purchasing power will emerge from employment in farms and factories that are producing for the domestic market. The balance will have to be generated by a universal social security regime. Social security payments to families will enable them to purchase their needs, creating the aggregate demand for output – and completing the circular flow of income.

The above model opens wide a window for financing needs of subsidies for agriculture and social security. This will require an overhaul of the taxation and foreign trade structures. The economy can be viewed in terms of two gaps: the rupee gap and the dollar gap. The former arises on account of the excess of expenditure over revenues; the latter arises on account of the excess of imports over exports. Essentially, reduction in expenditures and imports will have to be effected for managing the economy sustainably.

The avenues for raising revenues in the short run are limited, given that the economy has become structurally weak – thanks to decades of inattention to infrastructure development. The onus for bridging the rupee gap will have to fall on reducing expenditures, particularly non-development expenditure and non-combat defence expenditure. Significant scope exists for both. In current values, a reduction of 20 percent or one trillion rupees will be called for.

The avenues for raising exports in the short run are also limited; the onus for bridging the dollar gap will fall on reducing the foreign exchange intensity of the economy, which means reducing imports. There are five windows whereby foreign exchange drain can be reduced.

1. All non-essential consumer imports will need to be banned. These include food, clothing, cosmetics, building materials, home furnishings, and so on, including pet food and shampoos. The resultant foreign exchange savings in absolute amounts is not likely to be large, but important to signal to the country’s elite that they cannot continue to live first world lives, while the majority of the people face varying degrees of malnutrition, hunger and homelessness.

2. Measures will need to be taken at power generation as well as consumption ends. All power generating plants using imported fuels – furnace oil, coal, gas – will need to be phased out. The medium-term objective of sources of electricity will need to be hydel, domestic coal, solar and, to some extent, wind – and a major push will need to be made in that direction. While the scope of quantum expansion in hydel power is now not as large as it was earlier (and hydel power availability is reduced during the winter months), considerable scope exists in developing solar power, particularly off-grid.

Also, a major effort will need to be made towards energy conservation by enhancing energy efficiency of farms, factories, offices and homes.

3. Long-distance goods transportation will need to be reverted back from road to rail. Rail uses one-third less fuel per kilometre/tonne compared to road transport, saving on oil imports and foreign exchange. The railway network will need to be rehabilitated and upgraded technically as well as institutionally. One option can be to set up a holding company comprising Pakistan Railways and the National Logistics Cell (NLC), with long-distance transportation by container trains and containers then loaded onto to trucks for short distance delivery.

4. Foreign ownership of enterprises, particularly in the service sector, and contracting out routine functions like garbage collection to foreign companies will need to be halted, except where foreign technical expertise is essential.

5. External loans will need to be acquired only for projects and only for the foreign exchange component of the project, with the rupee component financed through domestic resources. Acquisition of programme loans for budget support will need to be halted.

Concluded

The writer was a member of the 7th NFC and is now a member of the 10th NFC. Twitter: @kaiserbengali