The textile industry in Pakistan is facing a dilemma. Orders are good, especially if Trump’s tariff remains high on India. However, margins are razor thin, disincentivizing capital investment. Players are ready to take orders if they have surplus capacity, as margins are still positive.
However, groups are generally not willing to make fresh investment, as they are not sure about sustainability and the tariff position in the future. Moreover, the return on capital is low.
The lack of appetite to invest is not confined to textiles, as overall sentiments are similar in manufacturing. Pakistan has one of the highest income tax rates (including super tax) and one of the steepest energy costs, especially grid power. These two factors are the biggest hindrance to capital investment. Generally, investment to GDP is inversely proportional to income tax and energy costs. Without solving these two problems, investment is likely to remain shy.
The so-called advantage of cheap labor, know-how, and raw material availability is fading in the textile industry. There are examples of fresh investment in value-added textiles in China, while there are close to none in Pakistan. This is despite China’s labor cost being significantly higher than Pakistan. Other cost components more than offset the competitive advantage in certain cost areas.
Pakistan must import the majority of cotton from distant countries, and that increases the working capital requirement, which becomes costly due to high interest rates at home compared to others. Then GST is very high, and it is refunded at the consumption stage, further adding to working capital costs. Apart from that, port charges are higher, almost double what India and Bangladesh charge. Then there are cesseson moving goods from one province to another.
The above-mentioned costs are not usually considered big obstacles individually, but the toll becomes high after incorporating high energy and taxation. Pakistan’s energy cost is significantly higher than peers, and things have gone from bad to worse in the past couple of years in an effort to move industrial consumers to the grid. The only silver lining is the growing reliance on renewables, but base load is still required for industrial consumers.
Even if someone becomes self-sufficient in energy, higher taxation is a dampener. The government needs to lower it. That is why only those sectors where implied taxation is lower are attracting investment, in smaller ticket sizes, as they operate informally, which limits scale.
The government needs to make the incentive structure right, as business groups have surplus cash and are looking for investment. They are buying existing assets that are up for sale. They are looking to invest in mining, which is a long-term game. However, their eagerness to expand in their existing businesses is low. And if they do not find Pakistan attractive, they will continue funneling money abroad.
Copyright Business Recorder, 2025
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