Economic Development & Industrial Revival


M. Abbas Raza

Pakistan’s economy is a producer’s economy, if it produces it generates revenues on import of raw materials and then on output, it generates employment and business activities thus enhancing overall economic development. According to the data released by the Pakistan Bureau of Statistics the overall output of large-scale manufacturing industries (LSMI) in the country during the last about a year has witnessed a decline of 3.5 percent as compared to the output of the corresponding period of last year. The stock market, the barometer of trade and industry, is also not stabilizing.
Despite government’s efforts and measures industrial revival it is not showing improvement, which is a very serious and an alarming situation for the economy, which is already under huge foreign and domestic debts. The Budget for 2019-20, with the primary objective of collection of taxes and duties through across the board documentation of economy has shied away the business zeal from the market leaving the consumers to the clutches of hyperinflation on one side and slowdown of the business activity on the other. The Budget lacks measures to improve the (i) ease and cost of doing business, (ii) revival of the industrial activity and increase in its productivity and competitiveness, and (iii) export enhancement etc. Arbitrary increase in gas, POL and electricity tariffs and non-announcement of a long term tariff and industrial policies with increased financial cost have further deteriorated and restricted economic growth in the country.
One may question the economic managers that which Article of the Constitution permits them to arbitrarily raise utility tariffs and POL prices to recover the losses caused by poor governance and raise resources from the sale of utilities and POL products instead of restructuring the organizations. Substantial depreciation and uncertain future of Pak Rupee on one hand is holding back both the manufacturers cum exporters and importers along with increased financial costs avoiding long-term business engagements. Resultantly it has become well-nigh impossible to do social, economic and moral justice to its people. Population living below the poverty line are being sacrificed in an attempt to attain economic advancement, absence of which has torn the fabric of our society.
Under the Finance Act 2019 customs duty on various raw materials / industrial inputs has been reduced from 3% to 0% in an attempt to incentivize local industry whereas depreciation of Pak Rupee and increased financial cost which has completely distorted the levels of tariff protection making windfall profits for some and for others industrial collapse, causing more bank defaults and bad debts.
Besides the reduction is merely an engineered cut in the customs duty rates. The incentives hardly take into account the concept of prioritizing the industrial economic activity. Same is the case with the changes in the Fifth Schedule to the Customs Act, 1969. It is obviously due to lack of a long term industrial policy considerations necessary for economic growth, employment generation and domestic revenue mobilization. For instance, the protection and import regime for automobile sector has adversely been affected by irrational and arbitrary decisions coupled with depreciation of Pak Rupee to the total disadvantage of the consumers. On one hand the SRO 52(I) 2019 dated 15th January, 2019 accords unlimited and unintentional protection to the domestic industry, whereas, on the other hand depreciation of Pak Rupee forced the local assemblers to raise the prices. Reportedly the local assemblers have cut down their production. These irrational measures have not only substantially increased the prices, affected the government revenues, but will also result in the closure of domestic vendor industry producing auto parts causing unemployment in the country. The Board of Directors of Indus Motor Company, while reviewing the company’s financial reports has also urged the government to introduce policies that accelerate economic activities across the board in the country.
The Ministry of Commerce and its attached department, the National Tariff Commission, under the Rules of Business, 1973 are responsible for determining the levels of protection for the domestic industry, its competiveness and to control the excessive cost to the consumers, however, both have been silent on the issue. The Draft National Tariff Policy, 2019 placed on the web site of the Ministry of Commerce generally takes into account some issues but the Finance Act, 2019 hardly implements any of its considerations.
The economic managers responsible for enhancing exports, in the STPF (2015-18), over looked the impact of anti-export bias resulting in the production of uncompetitive and non-sophisticated export goods. Lack of competitiveness retarded exports disabling the exporters to compete exporters of other countries. Whereas, lack of sophistication, which could have been evolved, through an increase in the quality of previously produced goods or by moving into new more sophisticated products, restricted export growth. Whereas GATT / WTO provides special dispensation under Article XVIII of GATT 1994 on Governmental Assistance to Economic Development for such purposes. Export of textiles, leather garments, surgical and sports goods etc. are classified as “low tech manufactures” or “non-sophisticated goods”.
Primarily the function of improving competitiveness of domestic industry falls under the National Tariff Commission (NTC). Earlier under the NTC Act, 1990 one of the major functions of the NTC was to advice the government on improving the competitiveness of domestic industry for promoting exports. Later the NTC Act, 2015 also had one of the functions “to improve the competitiveness of domestic industry”. In 2015-16 the NTC developed a criterion for improving the competitiveness of the domestic industry, however, it did not register and undertake a single case for improving competitiveness till date. Besides the government also did not refer any case to the NTC in this regard.
The key factors for export led economic growth are industrial competitiveness and sophistication. The developed countries achieved higher levels of competitiveness and sophistication through compliance of WTO agreements on Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Measures (SPS). This is also now forcing all countries to produce goods for exports according to mandatory international standards. Increased industrial competitiveness and sophistication will be a very important and significant contributor to the overall economic growth in general and specifically for enhancing exports of the country. The Commerce Minister has also recently hinted on the policy intervention in this regard.
A careful analysis of Pakistan Customs Tariff reveals that there are certain raw materials and inputs that are used in manufacturing of competitive and sophisticated / high value added products, however, they are still subject to statutory customs duty rates, as they have never been used in the production of sophisticated / high value added products, so far in the country. Neither the industrial nor the trade policy has prioritized such industrial sectors / products. In other words, there exists an anti-export bias in the tariffs for such sophisticated / high value added and internationally competitive products.
As an illustration, there are renowned home appliances manufacturing companies in the country producing gas heaters for the last 20 to 30 years, however, the gas heaters are not of international standards like Rinnai heaters, as they do not have the feature of 100 percent gas combustion and also do not have “no return gas valves”. Heaters having gas burners with 100 percent gas combustion feature and no gas return valve would make them safer, with low gas consumption resulting in saving gas as well. Another example could be that of fire retardant furniture (which saves human lives in case of fire). Pakistan is already exporting traditional wooden furniture and fixtures, however, it can increase its exports manifold if it produces fire retardant furniture, fixture and portable office furniture. This is also one of the mandatory standard under the WTO agreement on TBT. Inputs used in the manufacture of fire retardant furniture and components used in the manufacture of gas heaters with the features of 100 percent gas combustion and no return gas valve need to be provided at lowest rate of duty. These components presently attract higher duty rate in the range of 5% to 10% and there are no duty rebates on them as well.
The industry should identify the sophisticated and high value added products in demand in the developed countries and specify the raw materials required for their production and request the government for reduction / elimination of customs duties on them, bringing them at par with other export inputs. Only then mutually advantageous and reciprocal FTA would be useful with desirable trade balance.
Industrial revival, inter alia, has become inevitable for the economic growth of the country. Pakistan requires a well correlated tariff, trade and industrial policies which reflects the declared policy objective of industrial revival to produce import substitutes and export surplus with domestic and international competitiveness. This would require prioritization and incentivizing (i) Import substitution industries and export oriented industries, (ii) low value added industries vis-à-vis high value added industries, (iii) low-tech industries vis-à-vis high tech industries, (iv) labor intensive industries vis-à-vis capital intensive industries and (v) small scale industries vis-à-vis large scale industries.