The estimate of the Quantum Index of Manufacturing (QIM) for the month of July 2023 has recently been released by the Pakistan Bureau of Statistics. The decline in production observed in 2022-23 has persisted. The fall on a month-to-month basis in the Index is 3.6%, while on a year-to-year basis it is 1.1%.
The large-scale manufacturing sector must achieve positive growth in 2023-24 if a GDP growth rate of 2.5% to 3.5% is to be attained. The reason for optimism is that unlike 2022-23, the policy of physically restricting imports has been abandoned due to pressure from the IMF (International Monetary Fund). Therefore, production units ought to be able to import the inputs they need and invest in expansion of capacity.
However, there is need for some caution in the projection of the growth rate of the large-scale manufacturing sector due to big cost-push pressures. The industrial tariffs of electricity and gas are rising very rapidly, and the extremely high interest rates are not only adding to the costs of working capital but also discouraging investment in expansion of capacity.
There is need to examine how broad-based the decline is in industrial production in July 2023. The biggest industry which continues to see a fall in output is textiles. This is by far the largest industry in Pakistan, with a weight in the QIM of over 18%.
It experienced a very big contraction of 22% in July. This is perhaps surprising given that the volumes of exports of some textile items have shown big increases.
The quantity exported of cotton yarn and knitwear have increased by 37.8% and 26.1% respectively in July. As such, the fall may be more due to declining domestic demand or limited availability of cotton.
The biggest fall is observed in the automobile industry of over 66% in July 2023. It has effectively by itself reduced the QIM by 2 percentage points. Clearly, this is the lagged effect of the severe restrictions placed on the import of automobiles in 2022-23 and the severe contraction in demand due to the quantum jump in prices, both due to the big depreciation of the rupee and levy of additional taxes.
In fact, the output of cars in July 2023 is down by as much as 75% in relation to the level in July 2022. Perhaps surprisingly, the least decline of 19.2% is in the production of motorcycles.
The other relatively large industries which have shown a significant fall in output are beverages, POL refining, iron and steel products and electrical equipment of 6.7%, 2.3%, 2.7% and 22.4%, respectively. The decline in purchasing power of even large income households is revealed by a fall of 18% in the number of air conditioners produced/ sold.
Turning to the positive side of the growth in QIM, a number of industries have shown high growth rates and a strong recovery. The pharmaceuticals industry has achieved phenomenal growth of 54% in July. This indicates that imports of ingredients are no longer being restricted. Hopefully, this will improve the supply position of key medicines in the country.
The other success story is that of wearing apparel with a growth rate in output of 30.8% in July. This is clearly a reflection of the doubling of the volume of exports in July. However, the dollar value of export sales of readymade garments is down by 10%.
This raises doubts about the reported doubling of the volume of exports by the Pakistan Bureau of Statistics and the implication thereof on growth in production.
A major positive development is the big recovery in output of the cement industry in July with a growth of 35.2%. This indicates that there is some restoration of construction activity in the country.
Overall, the large-scale manufacturing sector is presenting a mixed picture, with significant persistent declines in output while other industries are caught up in the process of sharp slowdown since 2022-23.
The return to significant positive growth in the large-scale manufacturing sector is essential for directly raising the GDP growth rate and indirectly by stimulating activity in sectors like transport, wholesale and retail trade and finance. It will also imply higher demand for inputs like electricity and gas and contribute to alleviating the high level of unemployment in the country.
There is the risk that unless the large-scale manufacturing sector shows significant growth, the 2023-24 FBR revenue target will be very difficult to achieve.
The Government must avoid the imposition of additional taxes on the manufacturing sector and concentrate on expanding the base of progressive direct taxation.
The policy of no restriction on imports must continue and the market-based exchange rate policy continued to manage the current account. Hopefully, the coming months will see a significant improvement in the growth rate of the large-scale manufacturing sector, partly facilitated by the low-base effect.
Copyright Business Recorder, 2023