The government has set an ambitious GDP growth target of 5.7 percent for the current financial year. The leading sector is expected to be the manufacturing sector with a growth rate in excess of 6 percent. This is consistent with historical experience, whereby periods of high growth have generally occurred on the back of a dynamic manufacturing sector.
According to the Annual Plan for 2016-17, a number of factors are expected to contribute to fast manufacturing growth. These include improved energy availability, better law and order situation, lower interest rates with subdued inflation. The PBS has just released the estimate of the growth rate of the large-scale manufacturing sector during the period, July to October, 2016. It is only 2 percent. There are clear indications of a slowdown. Last year, during the corresponding period, the growth rate was significantly above 4 percent. A growth rate of 8 percent will have to be achieved in the remaining eight months of 2016-17 if the Annual Plan target is to be achieved. This is clearly beyond the realm of possibilities.
Why is the large-scale manufacturing sector showing such a sharp decline in the growth rate? Apparently, power loadshedding of industry has been eliminated. As such, one of the major constraints to faster growth has been removed. This should have facilitated higher production. Therefore, the claim of uninterrupted supply of electricity to industry may not represent fully the ground reality.
The slowdown is due to a number of factors. First, manufactured exports are down. Within textiles, there has been a major fall in exports of cotton cloth of over 14 percent. Other products with significant decline in exports are leather products of 6 percent, chemicals and pharmaceutical products of 3 percent and cement of 7 percent.
Consequently, the output of the textile sector has shown zero growth, while the leather industry has witnessed a large decline of over 14 percent. The only industry which has shown dynamism is the cement industry, despite a drop in exports. There is some doubt about the state of the textile industry. The large fall in quantity of cotton cloth exported implies that production may have declined. However, PBS estimates that production has not been affected. Further, the derived demand for cotton yarn ought to have also been affected.
Second, the poor performance of the agricultural sector is visibly impacting on agro-based industries, which, including textiles, account for more than 60 percent of the value added in large-scale manufacturing. The growth rate of the fertilizer industry was very impressive in 2015-16 of 14 percent, aided by increased supply of gas. But in the first four months of 2016-17, the growth rate is down to only 4 percent. Apparently, there has been a build-up of inventories and the fertilizer off-take has been disappointing, despite a significant drop in prices. Other agro-based industries which have shown low or negative growth include cigarettes, vegetable ghee, cooking oil, wheat milling, leather, wood and agricultural machinery.
Third, domestic demand factors are also playing a role in restricting output growth. In particular, rural purchasing power has been adversely affected by slow growth in agricultural incomes. This is reflected in relatively poor performance of some industries producing consumer goods. The production of footwear is down by 28 percent; soaps by 1 percent; paints by 5 percent; sewing machines by 28 percent; matches by 21 percent; bicycles by 4 percent; and so on.
The automobile industry demonstrated exceptional dynamism in 2015-16 with a growth rate of 16 percent. In effect, it accounted for almost 33 percent of the overall growth of the large-scale manufacturing sector last year. This was due largely to the sales of cars under the Apna Rozgar Scheme, which has since come to an end. Now, the sales of cars and jeeps are down by 3 percent.
Another important sector is iron and steel, which has received an impetus due to expansion in construction activity. However, the impact of the closure of the Pakistan Steel Mills has not been fully allowed for by PBS. Fourth, a number of other industries have lost out in competition with relatively cheap imports, in the presence of an overvalued exchange rate. This includes industries like iron and steel, petroleum refining, paper and board, fertilizer, art silk and yarn and engineering goods The engineering goods industry has a witnessed a steep cumulative decline of 49 percent since 2012-13, due largely to imports from China.
Turning to small-scale manufacturing, the picture here also is depressing. Exports by SMEs have shown significant decline, as in the case of sports goods of 6 percent, surgical instruments of 5 percent, cutlery of 3 percent, auto parts of 27 percent and furniture of 8 percent. The negative employment implications are of some concern.
A worrying trend is the sharp decline in investment in the manufacturing sector. In comparison with the level in 2008-09 it has fallen in real terms by 32% last year. Currently, it stands at 1.4% of the GDP, substantially lower than the historical peak of over 3% of the GDP. It is recommended that the accelerated depreciation allowance for tax purposes is raised from 25 to 50% and the tax credit for BMR is also enhanced.
There is need to recognise that the slowdown in manufacturing also has downstream negative implications on the growth of various service activities. Almost 55 percent of wholesale and retail trade and 50 percent of transport and communications is in manufactured goods. Therefore, unless there is a, more or less, immediate revival of industry, the GDP growth target of 5.7 percent for 2016-17 is likely to be missed by a wide margin.
A number of steps need to be taken on a priority basis. Exports have to be incentivized and imports discouraged by appropriate measures, including a downward adjustment in the value of the rupee and a reduction in tariffs of utilities. The tax burden on a number of industries, like cigarette and cement, needs to be reduced. With low interest rates, banks must aggressively promote consumer financing of durables. Unless urgent and strong steps are adopted the economy is likely to remain in the 'low growth trap' in 2016-17.
(The writer is Professor Emeritus and a former Federal Minister)