KARACHI, July 12: The Government has decided to prepare a roadmap “for the gradual reduction in very effective high protection granted to certain industries.”
Under the roadmap, the tariff regime will be rationalized in the medium-term except in cases of contractual obligations. The plan for further liberalization of the trade system is expected to be ready by the end of this calender year.
According to official documents, no industry had yet been identified, but the IMF classified certain industries as “mostly motor vehicles.”
A few years ago, the World Bank had identified seven industries that it said were not globally competitive and needed to be phased out. These included sugar, auto, fertilizer and steel. In the current year, automobile has been the fastest growing among the large-scale industries, helped by leasing facility offered by an increasing number of banks at a single digit interest rate.
The IMF has been able to extract a commitment from the authorities to prepare the roadmap for gradual reduction in tariff protection to industry despite some reluctance from the policy-makers.
An IMF review report notes that “the authorities view that this (existing) policy has helped create a fast-growing industry but felt that a better balance needs to be struck between incentives for investment in the sector and the interest of consumers in having access to vehicles at affordable prices.”
Over the past decade or so, the customs duty has been reduced from a maximum rate of 150-160 per cent to 25 per cent, depleting the tax revenue ratio from the external sector and encouraging imports of foreign goods. In fact, the IMF prescriptions have halted the process of diversified and balanced industrial growth and confined investments to existing export-oriented industries with domestic advantage. This policy has its own risks. Often exports become vulnerable due to slumps in targeted markets or because the foreign buyers shift to new markets. Price fluctuations are yet another problem.
The industrial economies reached the present stage of development over centuries of strong tariff protection. With fast changing environment, the emerging markets need a few decades of protection to compete with the developed markets. Premature moves can only result in sustaining de-industrialization.
How can local industry be as competitive as multinationals. In developing economies, the MNCs operate in a niche market. They are able to extract projected-related incentives in addition to industry-specific incentives that are generally available to everyone. Multinationals operate on a global basis with enterprises in developing states being part of the overall large- scale operations. They relocate their industries in different countries to cut costs.
Globalization brings about competition between two unequals and the consequences are there for all to see.
As the recovery of global economy is still uncertain, it is the time to keep industry buoyant through fiscal stimulus. Incentives are needed to achieve an investment-led growth.
The government has not responded to the demand of the manufacturing sector to allow zero-rated duty on import of machinery for fixed investments. Now, the NWFP government has asked the federal commerce minister to exempt import duty on agricultural machinery and for processing of precious stones and marbles for exports.
Encouraged by the IMF, the government is pursuing a revenue- oriented taxation policy that lacks a thrust for investment-led development and growth. The policy needs to be reversed.