The statistics on the Quantum Index of Manufacturing (QIM) has been released recently for the first quarter of 2024-25 by the Pakistan Bureau of Statistics (PBS). The numbers on the output in different industries in comparison with the output in the corresponding quarter of 2023-24 are disappointing in nature. Out of the 22 industries in the QIM, the majority, twelve industries have shown a decline in output.
Consequently, the overall index exhibits a fall of 0.8 percent in relation to the first quarter of 2023-24. There was a promising start at the beginning of the year, with 2.5 percent increase in the index in July 2024. Thereafter, it has been falling. The decline was 0.2 percent in August and a further decline of almost 2 percent in September.
The fall is disappointing because the Annual Plan of the Planning Commission has envisaged a 3.5 percent growth rate in the large-scale manufacturing sector in 2024-25. The expectation is that the sector will get a boost from improved inputs and energy supplies, on the back of anticipated fall in global oil and commodity prices, further easing of import restrictions, higher public sector expenditure, stability in the exchange rate and decline in interest rates.
The long-term trend from 2015-16, the base of QIM, to 2023-24, has been very adverse. The average annual growth rate was only 1.3 percent during these eight years, with the QIM currently at 111.95. Never before has the country seen such a low growth rate of the large-scale manufacturing sector.
Historically, this sector has provided for acceleration in the growth momentum of the economy. But since 2015-16 it has contributed to a plummeting of the GDP growth, with a growth rate less than even that of the agricultural sector.
We now focus on the growth performance of individual industries. This will also provide useful insights on the growth process in other sectors of the economy, given the strong forward and backward linkages of the industrial sector.
The first industry focused on is textiles. Here there is some good news. The garments industry has shown an exceptionally high growth rate of 17.6 percent during the quarter. Cotton yarn and cloth outputs have also increased by 8.8 percent and 0.8 percent, respectively.
The fall of almost 20 percent in the output of cotton in the last Kharif season has clearly not had any impact on cotton yarn production. However, this could be observed in coming months unless there is adequate import of over 3 million bales of cotton.
The growth in domestic output of the textile industry also appears to be in response to buoyant export demand, facilitated by the adverse conditions in Bangladesh. For example, there has been an over 16 percent jump in the volume of export of readymade garments. Overall, the value in USD of exports of the textile group has increased significantly by 9.5 percent.
The other industry which has shown a very high growth rate is automobiles of 26.4 percent during the quarter. This is clearly an example where import restrictions have been relaxed. Consequently, imports of the transport group have increased in dollar terms by 20 percent. In particular, the import of motor cars has gone up by 45 percent. The fall in interest rates has probably also increased the demand for car loans and thereby stimulated production.
The other very strong performance is apparently by the tobacco industry, with an extraordinary growth rate of 40 percent during the quarter. However, this probably reflects more the detection of output/sale of cigarettes through the track and trace system. This indicates less tax evasion and not the phenomenal jump in output. If the growth rate is actually lower of output, then this implies that the overall growth rate of the QIM could be even lower by about 0.3 percentage points.
Turning now to the industries exhibiting a negative growth rate, there is a clear pattern. The first group of industries comprises those where the outputs are used largely in building and construction.
This includes cement, iron and steel products, and fabricated metal industries, with very large declines of 19 percent, 12.6 percent and 24.5 percent, respectively. These three industries combined have caused a loss of 2.1 percent to the overall QIM. One of the prime reasons for this decline is the quantum fall in development spending, especially by the federal government in the first quarter.
The second group of industries which has shown a fall comprises those producing capital goods. This includes the electrical equipment, machinery and equipment and industries producing electronics, computer and optical products. Clearly, this reflects the big slump in private investment in the economy, especially in industry.
The implications of negative growth in the large-scale manufacturing sector, especially if it persists, are worrying in nature. The first impact will be on the GDP growth rate. The Official Plan target growth rate of 3.6 percent is unlikely to be achieved.
The second adverse implication is on tax revenues. The large-scale manufacturing sector contributes the largest share of national tax revenues. With negative growth and only moderate inflation in prices, the sector will yield only a modest growth in revenues. This will be much less than the required almost 40 percent growth in FBR revenues in 2024-25.
Overall, there are reasons to be skeptical about the positive signals being conveyed by the government on the new found economic stability which is expected to facilitate growth. This is not happening in either the agricultural or the manufacturing sector. There is the risk that both sectors will show a negative growth rate in 2024-25 or at best a low positive growth rate.
Copyright Business Recorder, 2024
The writer is Professor Emeritus at BNU and former Federal Minister
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