IN 10 months of this fiscal year, the overall manufacturing sector grew by 8.45 per cent and the large-scale manufacturing sector (LSM) by 8.75 per cent.
In the entire last fiscal year, overall manufacturing had recorded a growth of 9.9 per cent and the LSM 10.68 per cent. The LSM constitutes roughly 70 per cent of overall manufacturing.
The government released these numbers in the Economic Survey, ahead of the federal budget. Till last fiscal year, the Federal Bureau of Statistics used to post monthly data on the LSM on its website. But the latest data for this fiscal covers the first quarter only.
How, then, the government worked out 8.75 per cent growth in the LSM for July-April FY07? And how it calculated the growth in overall manufacturing? The Economic Survey does not answer this. It only gives production data of 21 industries besides making some remarks on a few other industries not in the list of 21. Traditionally the Federal Bureau of Statistics compiles and makes public the large-scale manufacturing data of 100 items.
Table(below) lists the industries whose production data are given in the survey along with their year-on-year growth rates in July-April FY07. The industries shown in the table represent less than 40 per cent of the LSM. How the remaining 60 per cent fared in FY07 is not known. Some left-outs include the industries producing value-added textiles, steel, leather, agricultural machinery, footwear, food and beverages and pharmaceuticals.
The third quarterly report of the State Bank offers data on the performance of the petroleum industry in July-March FY07. The data shows that aggregate production of 10 items in this industry declined by 5.7 per cent. Since petroleum industry makes up 7.8 per cent of the LSM, this decline also affected the overall LSM growth, and consequently raised the import bill of POL products.
With the LSM growth slowing down to 8.75 per cent in July-April FY07, it is obvious that the growth target of 13 per cent set for this sector for this fiscal year would be missed.
There are many reasons for this slippage. These include shortage of power; higher interest rates; a decline in cotton production; lack of innovative modes of capacity utilisation, dwindling investment in capacity enhancement and a surge in international prices of fuel oil, iron and steel and palm oil etc.
For the next fiscal year, the government has set 12.5 per cent growth target for the LSM. Meeting this target requires a clear identification of the factors impeding growth of the LSM and a practical approach towards addressing them.
“Power shortage across Pakistan is the number one reason for a slowdown in industrial production,” says Mr S. M. Muneer, an industrialist and ex-president of the Federation of Pakistan Chambers of Commerce & Industry (FPCC&I).
“Secondly, many industries are compelled to scale down their production levels due to very high interest rates. And most importantly, industrial activity is suffering in the absence of a one-window facility where all issues related to the utilities can be addressed timely.”
Industrialists say that the current power crisis has forced hundreds of industries to lower production volumes. Owner of a pet bottle manufacturing company in Karachi told Dawn that from the start of the summer, he is using generators to maintain a baseline production.
“But our generator collapsed one day and it took us three working days to get it repaired because the repairing company had to attend to hundreds of generators. They charged us Rs300,000, almost three times more than normal.”
That high interest rates are hurting industrial growth is not a misnomer. However, the reality is that industries across the world sometime live in high interest rates environment. How an industry becomes cost-efficient and remains so is something that many companies in Pakistan need to learn to survive in this competitive era.
But it is also true that depending upon a constant tightening of monetary policy and consequent raise in interest rates should not be considered the only effective tool to curb inflationary pressure. Hoarding, over-charging, cartel making and other bad business practices coupled with food supply shocks and bad governance in state-run institutions have a big hand in boosting inflation. So, if the policy makers continue to tackle inflation more through curbing demand pressures, it would, of course, lower production levels.
Practically, the budget for FY2007-08 is so much inflationary that extra efforts would be required to contain inflation without causing a slowdown in the output. The one per cent surcharge on all imports, minus essential items, is sure to push up prices of imported items, including raw materials for industries. And because of multi-layered supply chain in operation, the actual increase in imported items would be much higher than the rate of surcharge imposed.
Immediately after the announcement of the budget, prices of steel and paper rose sharply due to the five per cent increase in sales tax. Businessmen say that the increase in the minimum wages would also add to the cost of production, but observes point out that in majority of cases, industrial workers are hired on contractual basis and paid much lower wages than the official benchmark. Unskilled labourers working at factories normally get Rs80-Rs100 a day.
However, the fact that the prices of raw materials would rise in FY08 and interest rates would remain high in the fight against inflation poses a big challenge for the industrial sector.
The budget does offer some relief for textile-spinning sector, but it does not envisage a big change in supporting infrastructure for the industries to grow. Manager of a Karachi-based multinational consumer products’ company told Dawn that he spent three months in vain to get an additional water connection officially. “At last, we greased the palms of some officials and instantly got the connection. Now we are paying Rs1,000 per month and the arrangement is working well."
This and other such instances—and the fact that most industries nowadays purchase water from tankers, get power through generators and pay for the carpeting of the roads from their coffers—points to the government’s failure to provide a supportive environment for industrial production.
Similarly, there is a need for both the government and the private sector to work on ways for increasing capacity utilisation of large-scale manufacturing. Overall capacity utilisation was 66.3 per cent in the last fiscal year, which leaves enough scope for a continual increase every year. Automobiles, cement and fertiliser industries were good exceptions whose capacity utilisation rates were about 98 per cent, 88 per cent and 108.5 per cent respectively.
But textiles, the biggest industry, showed capacity utilisation of 59 per cent only. Worse were edible oil/ghee and sugar industries with capacity utilisation of 52 and 46 per cent only.
Clearly, these and other industries need to think of ways for boosting production for their own survival. And the government needs to provide them the required enabling environment —and not financial subsidies that make them overly dependent on the state support.
