In a latest move, the ECC of the Cabinet has exempted, on January 13, imposition of the Regulatory Duty on import of capital goods required for various projects. The decision is termed as another blow to the crippling Large Scale Manufacturing (LSM) Sector, of which capital goods industry is an important constituent.
This negates the government's declared policy of facilitating local industry for the reasons of promoting import substitution and value addition and adapting export-led strategy. The Large Scale Manufacturing (LSM), which accounts for 70% of overall manufacturing, has witnessed steady deceleration for the third consecutive year, resultantly increasing import burden on national economy on one hand, and, on the other, having disturbed export targets.
The LSM sector suffered negative growth of 4.8% during fiscal year 2007-08 in relation to 2006-07. A variety of factors are responsible for lackluster performance of the sector, including political instability, massive power and gas load-shedding, higher input costs and other constraints, or, to sum up, structural weaknesses in the economy, to quote State Bank of Pakistan annual report for 2007-08.
The declining trend continues during the current fiscal year too. The sector witnessed a decline of 4% during the month of July 2008, 5% during July-August 2008 and 6.2% in the first quarter of the year (July-September 2008), over the corresponding periods of previous year. There was an overall 5.05% negative growth recorded in the LSM sector during the first 4-month period of the current fiscal year (July-October 2008).
The situation is reflected in the fact that trade deficit during the first half of 2008-09 year (July-December 2008) registered an all-time high level of $9.55 billion. In the past, the correlation of GDP growth was highest with capital goods manufacturing compared with that of the production of consumer and intermediate goods. During the recent years, however, capital goods contribution in total LSM has declined, from 6% share until the 1980s to nominal 3% since the 1990s.
No wonder Pakistan has lost its global competitiveness in 2008-09, as the country is now ranked at 101 out of 134 countries. In comparison, Pakistan was ranked at 82 out of 122 countries in 2006-07, according to a report. In this context, it is rather criminal that the need for reviving the LSM sector is being overlooked by the government. Textile manufacturing units have suffered largely, and are being closed down in record numbers.
Steel industry is in a shambles and there has been no investment in engineering industry for many years. Indeed, the government needs to adopt prudent approach and consistency in policies to improve performance of the LSM sector, on priority. This will be in line with the government's announced measures as per 2008-09 Budget, having set a target of 6%-7% growth for the LSM sector.
The "Asian Development Outlook 2008 Update" of the ADB has forecast that the economic growth in 2008-09 was expected to remain subdued at 4.5%, with a continued slowdown in manufacturing sector. More disturbing are the recent findings of the Commission on Growth and Development in its latest "Growth Report" that Pakistan needs 159 years to catch up with industrialized (OECD) countries, assuming it grows at the highest rate registered in the last ten years.
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