A GOOD economic policy must strike the right balance between conflicting interests, encourage investment and protect jobs.
In Pakistan, however, government policies on most economic issues entrench conflicts between the differing interests, instead of narrowing the gap between the lobbies representing them. This is because most decisions are made under political pressure of one lobby or another, instead of on the basis of economic rationale.
In 2010, for example, the government imposed a temporary quota on yarn exports under pressure from garment producers despite the monthly yarn production surplus of 60,000 tonnes. The idea was to compel yarn producers to cut their domestic prices. While the restrictions did hurt spinners a little bit, they didn’t help reduce domestic prices because of a global shortage and higher prices.
The quota controls were lifted once the All Pakistan Textile Mills Association (Aptma) effectively lobbied the country’s top political leadership against it. In the process, textile minister Rana Farooq lost his job. Investors’ trust in the government was shaken because it had allowed the free trade mechanism to be breached for political gains.
A similar situation has surfaced again owing to the unhindered inflow from India of cheaper fine count yarn, which is used to make lawn for the domestic market. This again underlines the divide between upstream and downstream manufacturers, with spinners demanding restrictions on Indian yarn to protect 30 spinning factories, mostly in Punjab, from going out of business.
Yarn imports for exporters of value-added textiles under DTRE and manufacturing bond schemes should remain exempt from any import restrictions for domestic consumption — Gohar Ejaz
Indeed, the increase in yarn imports from India appears abnormal. Pakistan’s yarn imports doubled to nearly 31,000 tonnes — or 43pc of its annual domestic output of 72,000 tonnes — in 2013-14 from a year earlier. Almost 80pc of the total imports came from India. In the first seven months of this fiscal, the imports have surged to 15,242 tonnes, with almost 13,000 tonnes coming from India.
Obviously, the significant price difference is driving imports of Indian yarn. Ilyas Mahmood, former chairman of the Faisalabad-based Pakistan Textile Exporters Association (PTEA), says while the price difference between local and Indian fine yarn had narrowed in the last year, imported yarn still had a price advantage of Rs25-30 per pound.
A recent BMA Capital report described cheap Indian imports as an ‘additional threat’ to the spinning industry, which is struggling to cope with the energy shortage and dwindling Chinese demand for its yarn.
There are two reasons for the difference in prices. “First, the production cost is much lower in India than in Pakistan because of lower electricity prices, cheaper credit and other factors. Furthermore, federal and state governments in India have allowed unstructured [not covered under the WTO regime] subsidies to yarn producers with a total impact of 12.5pc on prices, cutting their production cost from Rs279 to Rs244 a kilo,” Aptma chairman SM Tanveer said. He was citing a study on federal and state subsidies and rebates for textile exporters by a leading Indian textile manufacturer, Chiripal.
Compared with that, it costs a manufacturer here in Punjab Rs293 to produce a kilo of the same yarn.
Besides subsidising its textile exports, India discourages yarn imports by imposing various taxes, with a cumulative impact of 30pc. Pakistan has only a nominal duty of 5pc, making it an ideal place for India to dump its subsidised yarn.
“Over 40pc of the fine count yarn capacity has already closed. The government should implement remedial measures like imposition of 15pc regulatory duty on imports,” Tanveer said.
But weavers — especially the unregistered power loom sector and value-added textile producers — are opposing an increase in duty on yarn imports. They argue that such a measure will damage exports and is against the free market principle.
Ilyas doesn’t consider restrictions on Indian yarn as a solution to the issue. “It will affect our domestic market [of manufactured textiles]. The solution lies in the provision of uninterrupted energy to the industry at affordable prices and the implementation of policies to restore the industry’s competitiveness.”
Pakistan exports over a quarter of its yarn production of 2.4-2.5m tonnes because of underdeveloped downstream, value-added textile manufacturing. But exports are plunging, having dipped by 22pc to $874m in the first half of this fiscal from a year ago.
Aptma leader Gohar Ejaz views the situation from what he calls a bipartisan position. “It could be a tricky situation [for the government]. It must protect several hundred jobs and investment of mills affected by cheap imports without disturbing the free market mechanism in the textile trade.”
He doesn’t see any harm in restricting the entry of subsidised Indian yarn for domestic consumption because “it is causing injury to the domestic industry”.
Nevertheless, Gohar says the value-added exporters must not suffer at all. “Their access, under the free market trade principle, to their raw materials from whatever source they want to buy it from should be safeguarded. Thus, yarn imports for exporters of value-added textiles under DTRE and manufacturing bond schemes should remain exempt from any import restrictions for domestic consumption.”
Published in Dawn, Economic & Business, February 9th, 2015