The large-scale manufacturing (LSM) growth stood at 11.4 percent in Dec 20 and 8.16 percent in Jul-Dec. Everyone in the government and stock market is upbeat about this growth. Indeed, it is showing signs of economic recovery and reflecting on the growth in the manufacturing base.
The momentum of growth will pick up in the second half – especially in the fourth quarter of this fiscal when the very low base of COVID ridden months come in action (Apr-Jun). However, the LSM index at 167.2 in Dec 2020 is yet to reach the peak level of 170.2 in Jan 2019. This means the manufacturing is yet to get to the level it was in pre-burst cycle that started in FY19.
Having said that, the LSM data must be seen with a pinch of salt. There is nothing good about the data to talk about. It’s a production based data which is computed on the number of goods being sold. Virtually, no value addition in the manufacturing sector is incorporated in the LSM data.
The data collection within the limited set is not right. It’s based on firms based data and so called non-firms based data is not part of it. The data collection is based on three surveys – provincial, ministry of industries and OCAC – coordination between these is weak. The data is based on what is being fed by companies. Experts say that firms underreport data to evade taxes.
The weightages are based on 15 year old base – the economic mix has substantially changed since then; and the weightages were not even right at the time of last CMI survey. Hence, the LSM weightages are (at instances) poles apart from the actual data.
Many big industries are simply missing from the LSM data. In textile, the index comprises (primarily) of cotton yarn and cotton cloth. Subsequent, value additions in knitwear, garments, home textile etc are simply not reflecting in the LSM – the growth, based on export numbers, in the 1HFY21 is mainly in value addition – not captured by the LSM. Thus, the growth of 2.6 percent in the textile (weight of 20.9% in LSM) is probably underreported.
The second biggest sector within LSM is food, beverages and tobacco (12.4% weight). Here, high weight is of sugar (up by 72%) where production volatility jolts LSM growth up and down. But nothing of sugar value addition in biscuits, candies, bakery items and many other products is incorporated in it. No byproduct of sugar mills is part of it either.
Within food and beverages, barring soft drinks and juices, none of the other FMGC food products are included. There is no mention of milk and other dairy products – produced by the likes of Nestle, Engro, Prema etc. Cheese import substitution is happening; but nowhere is that recorded in formal GDP. No packaging and other value addition is reflected in it either.
Wheat and grain milling is in LSM; but bread and other wheat products making is not there. Cigarettes is a star performer (up by 14.6% in 1HFY21); but liquor production is somehow unchanged – the smuggled liquor is hard to find nowadays; but nothing in LSM is reflecting on the Murree Brewery growth. Anyhow, the food, tobacco and beverages industry grew by 20.2 percent in Jul-Dec.
Automobile is one sector (weight 4.6%) that is closely followed by the markets. Here, the data is based on the number of units sold. For instance, in cars and jeeps (up by 5.1%), it’s about the number of cars being produced. There is no distinction in the value addition by one car or the other. There is no difference in the price of the car being sold. Suzuki Mehran and Fortuner are treated as same in LSM. The overall automobile sector grew by 11.2 percent in 1HFY21.
The non-metallic minerals (weight 5.4%) is up by 20.1 percent in 1HFY21. Here cement is the star performer – production is up by 21 percent in the 1HFY21. Here the numbers are close to reality, as the product is homogenous. The cement sales are surprising many and is raising another issue of understated GDP. The cement per capita in Pakistan reached at the highest level in FY21 at 225 kg. This is similar to India; but our GDP per capita is much lower than that of India.
Cement numbers are not telling lies. But GDP and overall LSM numbers are probably not correct. A GDP rebasing exercise is on-going and once it is done, the nominal GDP probably will grow by at least 10-15 percent.
The PBS needs to seriously look at the LSM recording methodology revision. Value addition of the sectors should be added in it. The recording methodology must change. It should be similar to what China does – based on PMI data – something similar to Consumer Confidence Index being conducted by IBA and SBP.