LSM growing small; seen smaller

Economic growth for the fiscal year ending June 2015 is estimated to be 4.24 percent by the National Accounts Committee (NAC). Thats marginally up from both provisional FY14 growth number of 4.1 percent and revised FY14 number of 4.03 percent. But it is substantially lower compared to this years target of 5.1 percent.
The biggest culprit behind less-than-expected GDP growth is slowing large scale manufacturing (LSM) growth. The LSM is expected to have grown by 2.38 percent, its lowest increase since FY12. The target for LSM growth in FY15 was 7.1 percent. The less-than-targeted LSM growth comes on account of persistent energy shortages (especially of gas) which constrained activity in textiles, paper, leather & glass, whereas the delay in cane crushing also took its toll on sugar production in 1HFY15.
Meanwhile, full-year farming growth remains marginal despite estimations of better wheat crop. According to the second quarter report by the central bank, "most of the major kharif crops performed below expectations in FY15. For example, cotton and sugarcane (together accounting for nearly 40 percent of the total value of major crops) missed their production targets, whereas sugarcane could not achieve last years production level."
The headline figure to remember for commodity producing sector is the share of both farming and manufacturing GDP, which has hit record lows (as percentage of total GDP). It is pertinent to note that LSMs share in GDP has reduced to 10.62 percent from 12.3 percent in FY08.
The growth in services sector also missed the target. Full year growth is seen at 4.95 percent against the target of 5.2 percent. Growth in wholesale and retail trade stood at 3.4 percent against the target of 6.1 percent. But then, the 6.1 percent target for wholesale and retail trade was very optimistic in the first place considering that the sector had grown by an average 2.8 percent during the last five years.
However, what was missed by wholesale and retail sector was offset by huge growth in general government services, which is expected to be at 9.4 percent for full year 2015 as against the target of 4.3 percent. This growth is in line with last five years average of 9.4 percent, and was stoked by spending on military operation.
Capital deformation
The less-than-targeted GDP growth comes alongside slowing capital formation. According to NAC data uploaded by the PBS, gross fixed capital formation (GFCF) is expected to have slowed to 10.3 percent in FY15 as against an average growth of 13.6 percent in the preceding three years.
The growth in private sector GFCF, which contributes more than 70 percent to total capital formation, slowed to 5.2 percent in FY15, its lowest since FY10. This was largely due to (a) 13 percent decline in capital formation in large scale sector, against an average growth of 17 percent between FY12-FY14; and (b) 53 percent decline in capital formation in electric generation/distribution and gas distribution.
However, public sector capital formation has swelled 19 percent, thanks to 26 percent growth in capital formation of electric generation/distribution and gas distribution, as well as decent growth in construction, and finance & insurance sectors.
The moral of the story is that Pakistan needs to grow investment. With FDIs failing to pick up despite the incentives given in last budget, and with domestic capital formation slowing down - especially in the LSM sector - it will be difficult to graduate from stabilization to growth mode.