Creating a Flintstonian society

Yabba dabba doo! The latest economic survey is here. But thats all the excitement there is to be, for the bedrock of the review shows the economy is gradually moving towards a model pre-modern society.
The commodity producing sector recorded a rise of only 0.5 percent last year - its lowest growth since FY93. This was made possible by below-potential growth in manufacturing sector that has been marred by energy and war-on-terror-led security related issues.
Energy shortages and political unionism at KESC are keeping businesses either at bay, or have ballooned their operational costs and business uncertainty, across the country. Meanwhile, Pakistans involvement in the war-on-terror that was supposed to keep the country away from being bombed back to the Stone Age is instead eroding the industrial base.
Spotting these trends, the labour market has been gradually shifting away from the formal industrial sectors towards informal, ill-taxed sectors like wholesale & trading. (See "Skill development to broaden tax net" for more details).
Even trends in the exports spell caution. On the face of it, exports have likely grown by 25 percent in FY11, against an average of 7 percent in the last 5 years. But beneath the surface, lie disturbing trends.
"A continuous decline in the share of manufactured goods to the overall exports is being observed since last few years as this share decreased from 78 percent in FY06 to 70 percent in 9MFY11," observed the latest survey.
In contrast, the share of primary commodities exports increased from 11 percent in FY06 to 18 percent during 9MFY11. This shift raises serious questions about productive capacity of the economy and the economys de-industrialisation, the survey asserts.
The composition of imports also shows a shift away from industrialisation. The import of capital goods, as a percentage share of total imports has fallen to 25 percent this year, from 36 percent seven years ago. Conversely, the import of consumer goods and raw material for consumer goods have increased from 10 percent to 16 percent, and 46 to 52 percent in the last seven years.
The times ahead also appear pro-luddite, as gross fixed investment has been declining substantially. From 22.5 percent of GDP in FY07 to 13.4 percent in FY11, this presents the lowest ever investment rate in four decades. The private sector investment has also witnessed a significant fall and recorded lowest ratio since FY99, according to the survey.
"Most alarming part of the composition of aggregate demand is coming from fixed investment. Its contribution to economic growth has become fractionally negative and this is the third year in a row when investment is negatively contributing towards economic growth," the survey warned.
Indeed, these are telltale signs that unless economic reigns are managed properly, the country might be heading toward the rubbles.
A SECTION OF CONFUSION
One of the initiatives to boost investment introduced in this budget is the section 65(D) of the Finance Bill.
The section allows tax credit "equal to hundred percent of the tax payable", if the company invests 100 percent equity to establish a new industrial undertaking for manufacturing or invest in the BMR of plant and machinery already installed in an undertaking in Pakistan.
Last year, the government had introduced a similar section (65-B) that gave tax credit equal to ten percent of the amount so invested. The presence of both sections (65-B and 65-D), according to Adnan Mufti, a partner at Shekha & Mufti Chartered Accountants, is creating a confusion, as both section incentivise the same thing.
Another tax expert at a leading accountancy firm says 65-D is confusing because it does not give any relation to the amount of investment. At present, section 65-D gives tax credit of 100 percent tax payable, which doesn make a lot of fiscal sense. The section is also "badly worded" in terms of specifying the extent of credit allowed in the case of BMR.
Then again, even if there wasn any technical confusion, the incentive is expected to achieve little. "Its very difficult for a company to start a project with only equity these days; debt is inevitable" a senior tax expert, whose firm also provides business consultancy, told BR Research.
Mufti is of the same view. "Incentives likes these are good in theory, "but if recent history is any guide, it is not likely to bear fruits given the damp economic and industrial climate of the country," he said.