IT looks as if the third national budget of the pro-business government of Prime Minister Nawaz Sharif — expected on June 5 — will not have much to do with reviving the sluggish manufacturing activity.

Analysts view the PML-N’s economic managers, who are tied by an IMF programme, as focused on austerity measures to achieve the revenue and fiscal deficit targets. The troubled manufacturing sector has been left to fend for itself with a difficult business environment.

A large number of industrial units have come to a standstill. The textile industry raised a lot of noise against the gas infrastructure development surcharge (GIDC), but its protest was not heeded.

Similarly, the government is also considering increasing the sales tax on domestic sales of five export-oriented industries from 2pc to 5pc.

But boosting manufacturing may not be an easy job, as deindustrialisation is deep-rooted. For the past decade, the manufacturing sector has been beset with a host of problems, including absence of an industrial policy and a crippling energy crisis.

As a result, large-scale manufacturing, which accounts for more than 70pc of the industrial output, has posted a paltry growth of 2.38pc so far this fiscal year, against the projected target of 7pc.

Boosting manufacturing may not be an easy job, as deindustrialisation is deep-rooted

There is no industrial policy, which is resulting in a lack of predictability for industrial development. A draft policy, evolved by the planning commission in 2009, was later discarded. A similar draft National Industrial Policy (NIP) was approved in May 2011. But the government is not yet clear on whether it should implement the NIP or do away with it.

The goal of an industrial policy is to create an enabling environment for broad-based industrialisation and encourage innovation in a wide range of sectors.

In the past decade, only policies that encouraged and facilitated the services industry, particularly the consumption sector, were pursued. And the role of the industries ministry has been confined to monitoring prices, and it remains focused on a few industries like sugar, fertiliser and automobiles etc.

Meanwhile, the Federal Board of Revenue has withheld billions of rupees in sales tax refunds and customs rebates of export-oriented businesses. This has created serious working capital issues for the industry.

The industrialists also want banks to re-schedule loans to give a breathing space to industries that are not doing so well.

The cost of production has gone up due to various factors, including costly energy. This, coupled with inadequate power supplies, has resulted in the manufacturing sector being unable to utilise its installed capacity. Data from the industries ministry show that capacity utilisation of 37 large-scale industries ranges between 20-40pc.

There is a great potential for producing electricity from alternate sources. Coal-based captive power generation, like power generation through ‘coal gasification,’ can be encouraged by giving a five-year tax break to industrial units, particularly textile and steel re-rolling mills, to make up for the cost of gasifiers.

The tax holiday may be linked with a six-month deadline for switching to captive power generation. This will not only provide cheap, round-the-clock energy to textile companies, but also spare power for other sectors.

It is time that industries come up with their own energy projects, while the government needs to play the role of an active facilitator.

Similarly, industries that use boilers for processing — textile, leather, food processing, sugar and chemicals — need to be encouraged to pursue solar power generation to cut their costs. However, this switchover will only be viable if the government incentivises it.

Manufacturing has also suffered because of a slump in demand in the international market, and the country is stuck as a supplier of low quality products. There is a need to increase production and efficiency to access newer markets. The trade surplus and the excess industrial capacity should guide the government’s market-access efforts.

The clubbing together of multiple ministries — like the ministries of industry, production, textile and commerce — into a single ‘ministry of commerce and industry’ will also help resolve governance issues like overlapping policies to a large extent. The single ministry would deal with production as well as exports.

However, if no corrective measures are taken, the manufacturing sector will continue to shrink further and sufficient job creation will remain a distant goal.

For industrial development, the PML-N will have to finalise the industrial policy and provide fiscal incentives to resolve the energy crisis.

Published in Dawn, Economic & Business, May 25th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play