The slowdown in the pace of growth of large-scale manufacturing in the first quarter FY13 must be a cause of concern for the country’s policy-makers because it reflects everything that’s wrong with the economy.

The sector suffers from energy shortages, security conditions, political instability, sluggish investment, poor communication infrastructure, rising raw material prices and high cost of doing business. It also indicates the decreasing capacity of the economy to create jobs for more than 1.3 million young people entering the market every year.

LSM growth dropped to 1.85 per cent during July-September from 3.35 per cent recorded a year earlier. This was in spite of over four per cent increase in its output during September. The pace of LSM growth has been decreasing ever since the start of this financial year. In July, for example, LSM output grew by 0.60 per cent compared to 0.68 per cent a year ago. Similarly, it was down to a meagre 0.09 per cent in August from 6.26 per cent in the corresponding month last year.

A month-on-month comparison paints a worse picture about the state of LSM as it declined by 2.75 per cent in August over July. Even in September, the LSM output came down by 1.1 per cent from the previous month in spite of a year-on-year growth rate of above four per cent. The trend is unlikely to change significantly during the remaining three quarters of the fiscal year.

Official data show that food, beverages, tobacco, pharmaceuticals, iron and steel products, rubber products, petroleum products, chemicals, leather products and paper and board are the main driver of LSM growth. The larger shareholders in LSM like textiles, automobiles, fertilisers, wood products, engineering products, etc have shown negative growth.

“The slowing growth in the large-scale manufacturing shows that the country’s economy is contracting. The results of wrong economic and financial policies of the last few years are showing now. Chickens have come home to roost,” avers Almas Hyder, a leading auto vendor from Lahore.

LSM is an important sector of the economy. With manufacturing forming around 18.6 per cent of the country’s GDP (gross domestic product), LSM represents just under 12 per cent of the size of the economy, and accounts for 13 per cent of total employment and 70 per cent of the industrial output.

It grew by 1.2 per cent last year to contribute 0.66 per cent to economic expansion of 3.7 per cent. A slowdown signifies slower economic expansion, fewer new jobs and lesser exports.

According to the Economic Survey of Pakistan 2009/10, the large-scale industry employed 0.6 per cent less people in 2010 compared to 2005. Also, fixed investment declined to just over 12.5 per cent last fiscal from more than 22 per cent seven years ago. Since then number of jobs and size of fixed investment should have been further hit by multiple issues including energy gap, credit cost, reduced demand, etc facing the LSM sector.

Historical data shows that the economy had expanded at much more rapidly in the past when LSM grew at a faster pace as in the 1960s, 1980s and the first half of the 2000s.

While growing energy shortages facing the manufacturers, especially in Punjab, for several years now are largely to blame for decreasing LSM output, the role of other factors like deteriorating security conditions, increasing political instability, drying investment, poor transport and communication infrastructure, rising raw material prices and escalating cost of doing business cannot be ignored.

LSM output rose significantly in the last two months on improved gas and power supply to the manufacturers as reflected by escalation in its growth rate in September over the previous two months and the rise in exports of manufactured goods, particularly textiles during September and October. Additionally, the suppressed domestic and global demand too has affected the LSM growth.

“All these adverse factors are industrial inputs like energy or raw materials. If the availability of any of these inputs is disturbed or interrupted, the output is also affected. In our case, the supply of almost all these inputs had been disrupted for several years now. Hence, the growth of LSM has been hit hard in the recent years,” says Almas.

While the share of the manufacturing in GDP has dropped over the years due to the multiple problems facing the sector, it has prospered in rival economies (as percentage of GDP) like Thailand (35), China (32), Malaysia (28), Indonesia (27), Vietnam (21), Cambodia (19) against Pakistan’s 18.6 per cent.. —-

Almas is of the view that the decline in LSM represents ‘economic deflation’. Domestically, he says, LSM products have gotten out of the reach of the common man due to high prices, affecting their sales.

Moreover, there is policy level bias in favour of imported goods, which is taking over greater market share from domestic producers of the same products, he says, pointing to the import of 70,000 used cars over the last one year and 40 per cent drop in the sales of locally assembled units.

Internationally, he says, demand remains low due to the continuing financial crisis in Europe and recession in the United States. This is reflected in the substantial reduction in textile exports in terms of quantity despite growth in terms of their dollar value, he says.—Nasir Jamal