Growth in LSM

The PBS (Pakistan Bureau of Statistics) has released the estimate of the growth in the Quantum Index of Manufacturing (QIM) in September 2021. Compared to the corresponding month of the previous year the growth rate is only 2 percent. The growth rate registered in the first quarter in the QIM is 5 percent. The Annual Plan has projected a growth rate of 6 percent in the large-scale manufacturing sector, which is essential if the GDP growth rate of 4.8 percent is to be achieved this financial year.

The QIM stands at 139.8 in September 2021, with the base year being 2005-06. Therefore, the annual growth rate has been only 2.2 percent in the index during the last fifteen years. This is a period of perhaps the slowest growth rate of the large-scale manufacturing sector in the history of Pakistan and is one of the main factors responsible for the decline in the long-term GDP growth rate of the country.

The index is 139.5 for the July-September quarter of 2021-22. Four years ago, during the same quarter, the index stood at 135.0. As such the cumulative increase in the index since 2017-18 is only 3.3 percent. The government has used the growth in production/sales of motor cars and motorcycles as a key indicator of the buoyancy in the economy. Sales have indeed risen by a huge 89 percent in the case of cars in the first quarter. This is attributable to the slump in sales in the immediate aftermath of Covid-19 in 2020-21. But they are still below the sales in the first quarter of 2017-18 by 4 percent.

The big surprise is that motorcycles’ production has fallen by almost 5 percent. This highlights the larger negative impact of trends in the economy on the middle class as compared to the upper class. Sales of cars have been facilitated by reduction in taxes in the federal budget. However, the SBP has recently tightened the access to loans for buying of cars to contain imports.

The basic question is why the large-scale manufacturing sector is beginning to show some loss in its growth momentum, with the growth rate down to only 2 percent in September? The first explanation is the impact of higher prices on demand in various consumer goods industries in the absence of growth in real purchasing power of the people.

A good example is that of vegetable ghee. Due to the big increase in the import price of palm oil, the retail price of vegetable ghee has increased by almost 40 percent as of September 2021. Consequently, the quantity produced of vegetable ghee has fallen by over 5 percent. Other consumer goods industries which are witnessing decline in production are cigarettes, soft drinks, medicines, soaps and detergents, razor blades and TV sets.

There has been a perception that the construction sector has been leading the growth process in the economy due to the various fiscal incentives provided and much greater access to housing loans at relatively low interest rates. However, the growth in production of the different construction inputs tells a somewhat different story.

Cement production fell by 2 percent in September and cumulatively over the quarter the growth is only 2 percent. Other related industries like paints and varnishes and glass plates show a big decline in output. The only exception is the steel products industry which is showing a double-digit increase in output.

Turning to export industries, the textile sector has shown a low growth rate of only 1 percent in the first quarter. Even this may be overstated as during this period volume of exports of cotton cloth and art silk and textiles have plummeted by 75 percent and 64 percent, respectively. Fortunately, the quantity of exports of bedwear and readymade garments has gone up by 23 percent and 20 percent, respectively. Overall, the growth rate in the volume of textile exports in the first quarter is a negative 2 percent. How then could the sector have shown a growth rate of 1 percent unless there was unusual buoyancy in domestic demand for textile products?

What is the outlook for the large-scale manufacturing sector in the remainder of 2021-22? The first point to note is that the growth pattern in the first quarter has been extremely skewed. Over 40 percent of the growth has come from one industry, automobiles, which has a share of only 5 percent in the overall industrial value-added. At the other extreme, nine out of the 15 sectors within manufacturing have shown negative growth in output in September.

The outlook for the automobile sector is no longer so promising. As highlighted above, access to car loans is being restricted. Sales of motorcycles have already started declining. Measures to contain imports could lead to a further reduction in the import of vehicles. Interestingly, one more unusual development is that the production of bicycles has doubled, perhaps in response to the precipitate jump in petroleum prices.

Other factors which could impact negatively on growth could be the broad basing of the sales tax agreed with the IMF, by withdrawal of exemptions and enhancement in the tax rates on various industries. Further, there is likely to be a marked shortage of natural gas this winter, which will also limit industrial production. Also, a rise in electricity and gas tariffs will increase the cost of production.

Overall, the outlook for the large-scale manufacturing sector does not look as promising as it did at the start of the year. There is likely to be a significant shortfall in relation to the target growth rate of 6 percent. Inevitably, this will render the target GDP growth of 4.8 percent also out of reach.

There is also another matter of concern. Apparently, while the sales tax on imports has shown extraordinary growth in the first four months, the growth in revenues from this tax on domestic production has been very small. A decline in output growth rate of the large-scale manufacturing sector will also make it more difficult to achieve the FBR revenue target for 2021-22.

(The writer is Professor Emeritus at BNU and

former Federal Minister)

Copyright Business Recorder, 2021