Recovery in industrial production

The recent release of the estimates of the Quantum Index of Manufacturing (QIM), for the period of July to November, 2020, has strengthened the perception that the industrial sector of the economy is on the path to recovery after a severe hit to economic activity in the aftermath of the first wave of COVID-19. The QIM had plummeted by as much as 25 percent between February and June 2020, with adverse implications on employment, corporate profitability and tax revenues.

The PBS estimate is that the QIM has increased in the first five months of 2020-21 by 7.4 percent in relation to the level in the corresponding period of 2019-20. Even more positively, the growth rate in November was higher by over 14 percent over the level in the previous November.

However, there is a need to recognize that manufacturing output had started contracting even before the onslaught of the pandemic in 2019-20. The first five months of 2019-20 saw a 5.3 percent decline in output in relation to the level in the corresponding months of 2018-19. Consequently, if the latter period is taken as the benchmark then the growth in industrial output is 1.7 percent. Therefore, the recovery is still incipient in character and hopefully subsequent months will show a bigger rise in production.

There are also some problems with the PBS estimates of the QIM. There is an apparent lack of consistency between the growth rate in exports and in production by the textile sector. According to the last Census of Large-Scale Manufacturing, the two main product lines in the sector are cotton yarn and cotton cloth, accounting for almost 70 percent of the value added.

The export quantities of these two products are shown by PBS for the period, July to November, 2020, as having fallen by 31 percent and 32 percent respectively. Therefore, a positive growth rate in output of 0.1 percent in cotton yarn and a more or less unchanged level of production of cotton cloth seem unlikely. Overall, the 2.4 percent growth rate in the overall textile sector is perhaps exaggerated. This has led to an overstatement in the rate of growth in the manufacturing sector by over 0.6 percentage points.

There also exist some other estimation problems. The reported fastest growing industry is wheat and grain milling with increase in output exceeding 94 percent. Clearly, this cannot be a reflection of a massive jump in wheat procurement but more likely a reflection of the unprecedented high level of wheat imports. As such, this growth rate is likely to tapper off by June 2021.

Similarly, the production of cigarettes is shown as increasing by as much as 19 percent. Hopefully, this is not a reflection of the spread of smoking in the country. It is probably more the consequence of less tax evasion due to the track and trace system put in place by FBR.

There is also need to recognize that the recovery is narrowly based. Four industries, viz., cement; pharmaceuticals; cigarettes and fertilizer, have contributed collectively to almost the entire growth in the sector. The remaining 11 industry groups, with a weight of 60 percent in the sector, have collectively demonstrated near zero growth. Clearly, the recovery process has to be more broad-based for it to be sustained.

Another indicator of prospects for the sector is the level of investment in capacity expansion. Here the PBS data on import of industrial machinery up to November is not very encouraging. Imports of textile machinery and other industrial machinery have fallen by 6 percent and 25 percent, respectively. This does not auger well for medium-term growth of output in the manufacturing sector.

An effort has also been made to look at the pattern of growth in the 112 product lines covered by the QIM. Included in this list are a large number of consumer goods and consumer durables like cotton cloth, vegetable ghee, cooking oil, beverages, footwear, medicines, TV sets, sewing machines etc. Combined on the basis of revised weights, according to the SBP, the overall growth rate in these consumer items is a negative 5 percent. This unfortunately indicates the absence of any recovery in consumer spending on manufactured goods. The likely explanation is the diversion of expenditure by households towards basic agricultural food items in the face of rapidly increasing prices. This again demonstrates that there are limits to the extent of increase in supply of manufactured products due to lack of buoyancy in demand.

What then are the prospects for growth in the large-scale manufacturing sector for the remaining seven months of 2020-21? Clearly, even at, more or less, present levels of output the growth rate will spiral up from February 2021 onwards because of the big fall from February to June 2020. This will represent a somewhat artificial higher growth rate due to the lower base effect. Here again a more realistic assessment will need to focus on a comparison with the output level in the corresponding period of 2019.

The elements of risk relate to the on-going second wave of the pandemic. Hopefully, this will not lead to the same dislocation of economic activity as caused by the first attack. The emerging widespread use of vaccines and economic stimulus in developed countries are likely to facilitate consumer spending and lead to more imports from developing countries, including Pakistan.

Finally, there are some negative factors which could impact on industrial output. The first is the gas shortage which has already begun to limit production. There is the likelihood that the power tariff for industry and other consumers will be enhanced shortly and thereby raise significantly the costs of production.

Overall, the manufacturing sector has failed to play a leading role in accelerating economic growth in recent years. This is a necessary pre-condition for return to a GDP growth rate above 4 percent from 2021-22 onwards.

(The writer is Professor Emeritus at BNU and former Federal Minister).

Copyright Business Recorder, 2021