THE Nawaz Sharif government’s third budget, often referred to as the midway or midpoint budget, betrays its desperation to set growth in motion and create new jobs by pushing public and private investment in the economy.
Finance Minister Ishaq Dar has announced an array of tax, credit and other incentives for labour-intensive sectors like agriculture, construction and industry. But he cleverly avoided implementing exercises that could have affected his revenues in the short-term, upstaged his stabilisation policies and upset his creditors, particularly the International Monetary Fund (IMF).
The government will invest Rs700bn in large infrastructure projects to expand the economy by 5.5pc next year after failing to produce the modest targeted growth of 5.1pc this year. The target for this year will be missed by 0.9pc. “Public investments in infrastructure have a significant impact on growth and jobs,” Dar noted in his speech.
While many remain sceptical about the government’s efforts to boost its development investment owing to its failure to reform the tax regime, Punjab’s businessmen argue that the budget falls far short of helping them reduce their massive cost of doing business and attract new investments in capacity expansions and in new projects.
“The existing industries, if supported, have a better chance of growing faster than new projects,” said Syed Nabeel Hashmi, chairman of BBN Energy
Even farmers have rejected the incentives, contending that the finance minister did not address their real issue: the rising cost of their inputs owing to the imposition of the general sales tax.
“We were expecting the government to help us cut our cost of production and inputs by removing the GST on our inputs and providing subsidies to farmers that are commonly offered to the agriculture sector in other countries,” noted Ijaz Rao, a progressive farmer from south Punjab.
He appreciated the budget package for farmers, but said these measures would not cut their costs.
Meanwhile, exporters of manufactured goods, especially textiles, are disappointed that the budget fell far short in reducing their cost of doing business, which is making them uncompetitive in international markets.
“We were expecting the government to take steps like making exports zero-rated, abolishing punitive taxes like the GIDC, and releasing our tax and other refunds immediately to restore our viability,” said Ijaz Khokhar, a major readymade garments exporter from Sialkot.
“No such action has been announced. How do you expect us to make new investments when our old investments are in jeopardy, with the energy cuts curtailing our production and higher energy costs and taxes making our exports uncompetitive,” he asked.
The ‘disparity’ created by the government between the old and new investments in the budget is also bugging many manufacturers.
“The government has completely ignored the existing businesses; all the incentives are for greenfield projects,” insists Almas Hyder, chief executive of the Spell Group of Companies.
“While putting together the package, the minister has ignored the fact that only existing companies are poised for new investments; the greenfield projects take a couple of years before they can be implemented.”
With existing manufacturers reeling under massive power cuts and high costs, it would have been better if the government had extended the same incentives to them as well. The proposal to impose a 10pc tax on the excess reserves of listed companies has also left him wondering if the government wants companies to give dividends or invest in new jobs.
“I doubt if the incentives package for manufacturing will woo new investments unless the cost of doing business is also reduced for existing manufacturers,” he concluded.
Syed Nabeel Hashmi, chairman of Thermosol and BBN Energy, agreed. “I wonder why the government always ignores the existing taxpaying industry and gives special packages only for new projects or foreign investors. When it has to collect taxes it uses us for a ride but never cares to help us cut our cost of doing business.
“Common sense tells you that the existing industries, if supported, always have a better chance of growing faster and creating jobs in a much shorter time than the new projects. The incentives for greenfield investments will only encourage people to relocate their old machinery to new buildings and register as new businesses to avail the tax and credit benefits.”
Others, like Federation of Pakistan Chambers of Commerce and Industry (FPCCI) President Mohammad Adrees, also felt that the incentives have ‘created a disparity between the old and new investors’. “The government has made an attempt to revive investment and growth. But will it succeed? We shall have to wait and see.”
Some, like former Lahore Chamber of Commerce and Industry President Irfan Qaiser, expect the various budgetary incentives to attract investment in the services sector. But he added that the security conditions and the energy crunch remain major challenges for investors, just like the distorted tax system that does not distinguish between the poor and the wealthy.
“Still, I will say that it is the maximum the government could do under the given circumstances.”
Published in Dawn, Economic & Business, June 8th, 2015