Tuesday October 19, 2021

Living on borrowed money

September 28, 2021

LAHORE: This government is making hectic efforts to improve the macroeconomic indicators, but its policies are contradictory. There is no balancing act however as improving one deteriorates the other.

For instance, it is trying to control prices through administrative efforts and subsidies without elevating the governance bar. Administrative powers could also be used to milk money from trade and industry, as the bureaucracy at the district level is corrupt to the core.

At the same time, no efforts are being made to reduce the cost of doing business in the country. When the state is increasing the power and gas tariff on a regular basis the cost of production correspondingly increases.

Another dilemma faced by the government is that as it increases the power and gas rates, the amount of subsidy granted to five exporting sectors also increases. The state lacking resources has to borrow money for subsidies as well.

With corruption in power and energy sectors at its peak the cost of power is also increasing because of continued depreciation of rupee. After an increase in power and gas tariffs, the amount allocated for energy and power subsidy would have to be substantially increased to honour the government's commitment to supply power and energy at fixed subsidised rates.

Interestingly, the amount of subsidy being provided on borrowed money would further increase if the exports increase. If the government defaults on subsidies, the exports would nosedive.

We are in a way making our exporters addicted to subsidies instead of making them efficient by eliminating corruption in all affairs of the government. Creating enough jobs to accommodate the millions of workers that join the workforce every year is the stated aim of the government.

The unemployed migrate in thousands to the cities. The state has opened langar khannas (free meal outlets) that provide food to the poor at these outlets three times a day.

The urge to seek employment is diluted when you are provided free food and accommodated for free in punnah gahs (shelter homes). These are purely public appeasing exercises that are counterproductive for the labour force.

The state could instead arrange food for workers that toil in the small factories. It would be a tough job, but at least those doing productive work would benefit instead of alms seekers who are becoming parasites on the society.

Those who recommended concessions on EV imports are most probably formulating the auto policy. Can we trust them? We have seen India, Thailand, Malaysia and Turkey emerge as exporters of vehicles and auto parts.

We do not export vehicles, and our auto parts exports are negligible. The last auto policy did bring in competition in the market until this government provided unimaginative concessions to the imports of electric vehicles.

Progress has now stalled. The investment decisions have been put on hold. Now the EV policy has again been tightened creating uncertainty in the auto market. The new auto policy should be announced after consultation with the industry. There should be an iron clad guarantee that the policy would not be tinkered with in the next five years.

Textile policy is still on hold. It was to be announced last year and later it was to beannounced at the start of this fiscal. However, there are no signs when the policy will be announced.

There is a tussle between the basic textile and apparel sector. The former is demanding duties on yarn and asking the government to refrain from slapping regulatory duty on yarn exports. The later wants yarn imports to be duty free, and urges to slap regulatory duties on yarn exports. How would the government satisfy both?

It is ironic that the apparel sector emerged due to the pioneering efforts of small entrepreneurs and today they lead textile exports, but the basic textile entrepreneurs that remained glued with spinning and weaving for 60 years, are advising the government about the benefits of value-added garment and knitwear units. The textile policy should give incentives to the apparel sector only.

Price control is the Achilles heel of this government. After failing to bring the rates of essential commodities down by nabbing hoarders and manipulators, the government is trying to please the public through subsidies.

It imported sugar that costs Rs120 per kg but intends to sell it through utility stores at Rs85 per kg, a subsidy of Rs35 per kg. In the same way, wheat has been imported at a higher rate and is being supplied to the mills at subsidised rates. It reduced duties of edible oil imports expecting the manufacturers to reduce the prices correspondingly, but the major brands instead increased the retail prices.

The finance minister has come up with the idea of providing many food items at subsidised rates through Ehsaas cards. It looks that the government is sitting on a goldmine from which it could dole out subsidies. In reality, we will have to borrow more.