Pickup in industrial growth ByMohiuddin Aazim

The growth in large-scale manufacturing which started inching up from the second quarter, has risen to 2.34 per cent during July-January.

In January alone, the LSM grew 7.5 per cent mainly because of a low base and a pick-up in international demand from the beginning of 2010. Officials anticipate full-year growth of at least 5-6 per cent against last year’s contraction of 8.2.

The industries whose outputs increased in seven months to January 2010 include cotton and cotton yarn, automobiles, fertilisers, chemicals, cooking oil, leather, soaps, detergents, pharmaceuticals, power looms and electric and electronic household items of daily use.

Revival of large-scale manufacturing, pickup in exports, decline in imports, overall growth in workers’ remittances, reasonably good cotton crop and increase in rice production have impacted positively on the economic performance so far this fiscal year.

But increasing fiscal deficit, continuing low tax- to-GDP ratio, cuts in development spending, growing power shortages and mounting foreign debts pose serious challenges.

Whereas industrial revival is in sight, it seems a resurge in agriculture is taking more time. Cotton output is up more than 12 per cent over the previous year but is still short of the target of 13.36 million bales. Officials of the ministry of food and agriculture say wheat output may be close to the target of 25 million tonnes. They say that winter rains in late January-early February have dispelled fears of initially estimated shortfall of two million tonnes.

Rice production for this year is estimated at 6.68 million tonnes, slightly below the production of the last year, but higher than the target of 6.4 million tonnes. Federal Food Minister Nazar Muhammad Gondal informed the parliament that sugarcane output has reached 47.03 million tonnes against the target of 56.527 million tonnes. This slippage in output, international prices and the government’s failure to eliminate unethical practices of sugar millers keep domestic sugar prices at record high levels. Livestock that had performed pretty well till FY08 is not growing fast due to water shortages and the army offensive in the NWFP and Northern areas. The agriculture sector looks unlikely to achieve the growth target of 3.8 per cent.

Banking sector is doing well. Its profitability is on the rise and it has also restarted lending to the private sector after containing growth of bad loans. This, coupled with renewed activity in transportation and retail sectors has brightened the scope for growth in the services sector. The central bank and the government expect to achieve GDP growth target of 3.3 per cent during this fiscal year. By the month-end, the State Bank would release its second quarterly report along with an outlook for the rest of the fiscal year making the picture clearer.

So far, borrowings from the IMF, rebound in exports after the easing of the Great Recession and increased remittances have contained the current account deficit and eased volatility in exchange rates. But a buildup in foreign debts and the consequent increase in foreign debt servicing in future would keep the economy under pressure. Clearly there is a need for faster domestic resource mobilisation.

The government is desperately looking for ways to accelerate the current tax-to-GDP ratio of nine per cent. From the next fiscal year, it plans to introduce value-added tax, enhance excise duty on cigarettes and on various services including banking and insurance, increase withholding tax on imports and levy capital value tax on real estate and capital gains tax on stock exchanges.

In all likelihood, it may not be able to levy agricultural income tax fearing negative political fallouts. Even the introduction of VAT from the next fiscal year is not certain as the Senate’s standing committee on finance has recommended its deferment for a year.

The recently-appointed Advisor to Prime Minister Dr Hafeez Shaikh has listed his priorities. He says he would improve financial management, economic discipline, governance and microeconomic framework.

He has also promised to try to achieve economic growth in a manner that its benefits can reach all citizens. But as for now, the government has reduced this year’s development to make up for the increased current expenses including for expensive war against militants. Actual release of development funds so far has seen a sharp decline, affecting uplift projects in such vital areas as education, health, water, power and poverty reduction.

Inflation still remains in double digits though the pace of its increase this year has been lower than in the last year. Given the fact that a huge increase in fuel oil prices in February is yet to show its impact on inflation from this month onwards, the annual inflation target of 9.5 per cent is likely to be met. As such, further easing of interest rates by the central bank looks unlikely.

Key office-bearers of The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) gathered at the Federation House Karachi last week to discuss the problems arising out of the increasing gap in demand and supply of electricity. They pointed out that the industry is suffering financial loss of Rs220 billion a year due to power shortages and so far 400,000 workers have lost their jobs. They urged the government to work out a long-term solution to this problem instead of resorting to unwise short-cuts, perhaps referring to planned rental power plants.

Currently, the country is facing power deficit of about 4500 megawatt that is bound to increase as the summer days get hotter in coming months. But so far, the industrial estates of Karachi have not reported major power outages as Karachi Electric Supply Company (KESC) is meeting their requirements at the cost of household consumers. In other parts of the country, however, industries suffer from power outages.

The continuing critical shortage of power is a source of worry for the manufacturing sector.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/pickup-in-industrial-growth-930