One key ingredient for moving on a sustainable economic growth path is to develop the agriculture value chains by reducing wastage and developing products catering to export markets. Some successful examples are led by the private sector without the active support of the government. Another one was in the process of being made before it was hit by high FED.
The formal packaged juice market is one. The potential is huge- both local players in the pulping business and multinationals in retailing and branding companies have a strong business case of scaling up and adapting the best international practices to become export competitive.
However, additional indirect taxation measures are becoming a roadblock. Successive governments have failed to expand the tax net and the reliance on collection is growing in the formal sector – be it any business.
There are two major externalities of this approach. One is the nurturing of the informal market, as the higher the commutative indirect taxes, the more is incentive to develop illicit markets – be it smuggled products or locally produced. The other is that the Laffer Curve comes into play – at a certain point increasing taxes becomes counterproductive, and any further increase results in a fall in the revenue collection.
In the juice market, both problems persist. And the first one creates health hazards as inferior and non-compliant product sales are spurring. The other issue is crystal clear as well. In the formal juices market, when FED of 5 percent was imposed in FY19, both pulp production and juices sales dipped and moved back on the growth path after its removal the very next year.
Then in FY23, the FED at 20 percent was imposed and this combined with GST of 18 percent has an effective indirect tax of 42 percent. That has resulted in a substantial decline in the value chain- the pulp production is almost reduced to half and juice sales are down by two-fifths.
The shrinking industrial base would result in even lower government revenues in nominal terms going forward – here the Laffer Curve is in play, where the Shahbaz government should learn from the Regan Regime in the US in the 1980s where reduction in taxes resulted in reviving economic growth. The learning is for many other sectors including the pulping and juices industry.
And in Pakistan, there is an extra focus on developing industries and value chains where exporting potential exists. Juices are one. However, the local industry needs to attain a certain scale and make investments to meet importing market standards. For example, juices produced in Pakistan have a shelf life of 6 months whereas the international market demands a twelve-month life and for that to happen, fresh investment in production facilities, research and development, and new technology is required. However, with declining sales, due to higher taxes, already planned investment is being shelved. It’s hard to find any fresh investment.
Having said that, there are exports of $15 million to thirty countries, and the potential is to increase it to $100 million in five years. Our mangoes, kinnows, and other fruits have distinctive tastes and are preferred by the diaspora market. The first step is to target them and then to penetrate other target markets. There are examples of great success in Thailand and the Philippines. The right policy framework can bring Pakistan into the league.
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