Rise in industrial production

The Pakistan Bureau of Statistics has released the data on the Quantum Index of Manufacturing (QIM) for October 2020. The good news is that the Index was up by almost 7 percent in the month and by 5.5 percent over the four months, July to October 2020.

This is a key indicator of the process of recovery in the economy after the devastating impact of COVID-19. Between February and June 2020, when the pandemic was at its peak, the output of the large-scale manufacturing sector plummeted by as much as 24 percent.

However, it is important to note that the sector had been showing a declining level of output in 2019-20, even prior to March 20 when the spread of COVID-19 started. From July to February 2019-20 the QIM had declined by 3 percent. Overall, the year 2019-20 has witnessed the largest ever decline in industrial production of over 10 percent. The biggest previous drop was in 2008-09 when it fell by 6 percent.

The new financial year, 2020-21, started with an increase of 5 percent in industrial production in July after a big decline in June of over 10 percent. Thereafter, there have been some fluctuations in the monthly growth rate, but by October the cumulative growth rate has risen to 5.5.

However, what is perhaps not appreciated is that the output level of large-scale manufacturing from July to October 2020 is still below the level as far back as in the corresponding period of 2017-18. It is truly a matter of grave concern that since 2017-18 there has been no growth in industrial production. This sector had traditionally acted as the leading sector in the process of economic growth. Clearly, the plummeting of the GDP growth since 2017-18 is largely attributable to the loss of buoyancy of the industrial sector.

The critical role in the process of economic growth of the manufacturing sector is the result of the strong backward and forward linkages of the sector with other sectors in the economy. This includes agriculture, electricity and gas, construction, wholesale and retail trade, transport and communications and banking and finance. Similarly, it has strong linkages with the SMEs in the sector. Overall, it is estimated that 1 percent growth in the large-scale manufacturing leads to additional GDP growth of 0.30 percent.

There is need to check at the reliability of the estimated growth rate of 5.5 percent in the QIM from July to October. There appears to be a problem with the reported magnitude of the growth rate of the textiles sector of 2 percent. This is the largest sub-sector within industry with a share in value added of 30 percent.

There are two problems. First, the two key textile industries, viz., cotton yarn and cotton cloth, are shown as having marginally positive growth rates. However, according to the PBS, the quantity of exports from July to October 2020 of the two textile industries has fallen by as much as 32 percent and 24 percent respectively. How then could the growth rates be positive? Second, with near zero growth rates in cotton yarn and cloth, the textile sub-sector is shown as having achieved a growth rate of 2 percent. Clearly, there is a need for PBS to check its estimates of growth in the textiles industry.

There is need also to appreciate that the base for industrial growth has been narrow. There are three industries, viz., cigarettes, pharmaceuticals and cement, which have shown high double digit growth rates of 20 percent, 14 percent and 24 percent respectively. Has the consumption level of cigarettes gone up so much because of the high stress levels of people after COVID-19? Clearly, this explains the increase in demand for medicines. The rise in production of cement is attributable to the strong incentive package announced by the Government for the construction sector.

The combined contribution of these three industries to the growth in QIM is 5.7 percent. This is more than the overall growth in QIM of 5.5 percent. Therefore, the rest of the large-scale manufacturing sector has contributed negatively to growth. In effect, almost 79 percent of industry has seen on average no increase in output. As such, growth in QIM has been characterized by a narrow buoyant base. It is clear that for the process of industrial growth to be more sustainable it will have to be more broad-based.

There has been mention in the media of the rise in sales of cars and motorcycles as an indicator of the economic recovery. 47,725 cars were sold during the first four months of 2020-21. The number sold three years ago in the corresponding period was 78,073. Therefore, sales of cars are still 39 percent below the level attained earlier. Similarly, the sales of motorcycles are 14 percent below the historical peak.

Turning to the outlook for the large-scale manufacturing sector in the remaining eight months of 2020-21, the major positive factor is the improvement in the prospects for the world economy and global trade following the spread of the new vaccines in developed countries and China. The volume of world trade could increase by 8 percent in 2021. This should improve the prospects for Pakistan's manufactured exports.

However, there are some negative factors which are more industry-specific in nature. First, there has been a quantum reduction in the cotton output and almost 5 million bales may have to be imported. Alternatively, there may be large imports of cotton yarn, for the first time. This will place the textile value-added component at a competitive disadvantage.

Second, some of the incentives given to the construction sector will be withdrawn by the end of December 2020. This could reduce the buoyancy in the demand for construction inputs like cement. Third, there is an emerging shortage of gas, which could negatively impact on industries like fertilizer. Fourth, we are seeing the second wave of COVID-19. This could lead once again to lockdowns and a fall in output and employment. Fifth, the impending rise in electricity tariffs could increase significantly the costs of production.

We hope that the growth rate of industrial production will remain in 2020-21 at least at the present rate of 5.5 percent. This is essential from the viewpoint of growth of employment, exports and tax revenues in the country.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2020