Far more steps than have been taken by the government, rather gradually, are essential to promote large scale industrial investment so as to reduce the massive unemployment in the country.

One major step needed is reducing the taxes, particularly the indirect and trade-related taxes, says the World Bank (WB) and the Asian Development Bank (ADB), which have made a deep study of the economic problems of the country.

The two banks argue the government ought to mobilise far more tax revenues, but that should be direct taxes or taxes on income, and thereby reduce the low tax:GDP ratio, which is currently 13.8 per cent, marking a rise from the preceding year’s tax: GDP ratio of 13.2 per cent. The ratio should be raised to 20 per cent, although the two banks do not specify that target in their current recommendations for increasing investment.

The government says it increased the number of income tax payers last year by 234,189 and sales tax payers by 34,000. But when it comes to improving the tax:GDP ratio, what matters would be not a simple increase in the number of tax-payers but also the rise in the overall volume of the revenues after they had paid their shares of the taxes. How much of revenues they are able to collect from the flourishing and sprawling informal or tax-evaded economy?

The government has to act in three areas to promote large scale investment. It has acted on the first or circumstances have created the environment for a drastic reduction of the interest rates after they had been soaring at a very high level for long. Now not only the interest rates have come down to 4 to 6 per cent for credible borrowers with a good track-record with their banks but also plenty of money is available with the banks to lend. The banks are desperately looking for good borrowers to lend their surplus money and meanwhile are using their funds on the stock exchange as they get good dividends.

The second requirement of the investors is cheap and dependable electric supply. They are not able to get that. Instead many had to set up their own power plants or generators at a considerable cost at a time when money cost a great deal because of the high interest rates. We do not know when industrial investors will have cheap electric power without frequent and prolonged break-downs.

The third requirement of investors is low rate of taxation, if not tax holidays in the initial period. The investors have been pleading for tax relief at the machinery import stage. No doubt the import duty on machinery is only 5 to 10 per cent, but because of the heavy devaluation the rupee has undergone — from Rs3.35 to a dollar in the early 1950s to Rs57 to a dollar now — even the five per cent duty is a large levy on the importers who usually use borrowed capital.

Finance Minister Shaukat Aziz agrees in principle with the demand for doing away with import duty on machinery after much of that has been exempted from the 15 per cent sales tax. But the government needs the money, he says, and so, for the time being, has to collect the import duty on machinery.

If the country has to have large scale industrial investment, its cost as well as the cost of managing or running those industries should be low. But the cost of doing business in Pakistan is really high, although President Pervez Musharraf says that is low or as good as it is in any other country in the region.

The reality is the more the industrialization the more the tax revenues as industries in Karachi are supposed to pay about 40 taxes, federal, provincial and local. No other economic sector pays such a variety of taxes, and so many taxes, ending with the final 15 per cent GST on their products.

So the government has a vested interest in promoting industries and the tax relief given at the stage of investment would be more than refunded later when the industry is in full production. The government hence should have a long term approach to industrialization rather than focus on the small immediate gains as the industry is being set up.

If the industry is heavily taxed the outcome will be the smuggling in of the same goods, as has been happening in Pakistan.

The cost of the smuggling in of manufactured goods is estimated at 20 to 22 per cent, including the cost of bribing the customs and the police. Hence the IMF and the World Bank insist on Pakistan reducing the import duties and has brought them down to 25 per cent from 35 per cent two years ago.

But then the economy of scale too is in favour of the smugglers who may need to pay less to customs as bribe when they continue to bring in large quantities of smuggled goods. Hence heavy taxation on industry is counter-productive and enables the customs officials and police as well as the smugglers become richer and the government poor.Hence the ADB and the WB want the trade-related taxes to be brought down further despite the long tradition of the government relying on them excessively.

The finance minister and the governor of the State Bank, Dr Ishrat Husain, want a six per cent economic growth two years from now instead of the current 4.5 per cent.If that has to be achieved industrial investment has to be given plenty of encouragement instead of relying on only the agricultural growth. And more growth would mean larger tax revenues of many kinds.

Industrialists in the city have been protesting against too many taxes — as many as 40- federal, provincial and local. And that task of dealing with too many taxation officials can be frustrating and exhausting. And the more the taxes the larger the corruption as plethora of taxes have an in-built system of corruption. Less taxes and lower taxes would mean less of corruption and less waste of time and energy for the managers of factories with the taxation officials.

The two banks also want the government to spend more on development rather than a small part of the total expenditure. The development expenditure has now risen to 4.1 per cent of the GDP, after it had hit the bottom of 2.1 per cent two years ago.

In the 1990s,development spending was 7.1 per cent of the GDP; in the 1980s the average spending used to be 7.3 per cent of the GDP. And in 1980-81 it was as high as 9.3 per cent. If the government wants far higher growth and larger taxes, it should spend at least 10 per cent of the GDP on development for the next ten years. Otherwise the industries set up at a high cost may have neither enough power nor water nor enough of an educated and trained labour force. All these developmental factors are inter-linked and we cannot isolate them from each other without doing serious damage to the economy and the country as a whole.

Now that the defence expenditure is getting stabilised around Rs160 billion and the cost of debt-servicing is coming down the government should be able to spend far more on development and the social sector. But the dead weight in the government is the large force of over four million people employed by the centre, provinces and the local government. Too many of these men not only cost a great deal of money but also increase the spread of corruption and aggravate the red tape. This number has to be reduced but it is difficult for the parliament to do that as it has more than double of the salary and perquisites of the members of Parliament and the provincial assemblies. When those who do little for the country take too much for themselves, others who do a full time job in the government will ask for more and grab it when they can.