Our economic policies have remained skewed towards large scale vertically integrated industry owned by eminent business tycoons with experience in strong lobbying and pressure tactics. They have been major beneficiaries of government's concessional policies and special packages. However, small scale disaggregated industrial sector having immense economic potential that can be tapped for socio-economic development of the country through effective facilitation from public and private sector remains neglected.
In Pakistan, SMEs and the disaggregated sector constitute more than 90% of all production capacity. They contribute substantially to economic growth and development, employing 80% of the non-agricultural labor force with a share of approximately 40%in the annual GDP. Thus, in the industrial progress of Pakistan the significance of the SME sector cannot be overemphasized.
On the contrary in our country it is the vertically integrated sector that reaps the benefits of far less sales tax being stuck with the government, import of duty free and sales tax free goods through DTRE and Bond etc., access to financing facilities through Long Term Financing Facility (LTFF) and Export Refinance Scheme which are not available to the disintegrated and SME sectors. The number of vertically integrated units is quite small and even though large in their size, they provide limited level of employment in selected location in big cities or their adjoining regions. Whereas, disaggregated sector is held devoid of any such facilities while they have large capacity to produce diverse value- added products of vast range, create employment in far-flung under-developed areas.
Pakistan's economy is largely agrarian and to supplement the agricultural sector, the successive governments had focused on large-scale industrialization in the past. The rationale behind this policy direction was to achieve self-sufficiency through import substitution and earn foreign exchange through enhanced exports. Unfortunately, we have not been able to attain both these objectives. Currently, Pakistan is facing an enormous trade deficit with huge inflows of imports substituting domestically produced products. With the prevailing economic conditions, alternatives are needed to sustain and revive crippling economy facing stagnant economic growth rate. The emphasis, therefore, needs to be shifted towards the small scale sector since economic indicators like high interest rate, record high devaluation of currency, elevated cost of doing business and low GDP growth rate are all contrary to the conditions required for the growth of vertically-integrated large scale production sector.
Worldwide, SME sector's contribution in the employment creation and towards GDP is higher for middle income countries than for high- income countries. In the middle-income countries this sector contributes over 95% of the total employment and about 70% of GDP while for high-income counties they contribute to over 55% of GDP and around 65% employment.
SMEs can be the key performing artists in Pakistan for improving innovation, competitiveness, entrepreneurship and the foundation of generating employment opportunities in great numbers, helping alleviate poverty which is the burning socio-economic issue currently. Nevertheless, unlike large enterprises in the formal sector, small and medium enterprises face financial constraints and technical limitations due to their small size, disintegration and a lack of organisation. This inherent downside of an SME makes it imperative that there should be a policy mechanism through which they get support in different functions of business including financial liquidity, technical upgradation, marketing, and human resource training and development.
Small-scale sector assists in local development since SMEs accelerate rural industrialization by linking it with more organized sector. These sectors utilize domestically produced raw materials as against large scale units that majorly rely on imported raw materials. They convert local raw materials into semi-finished items which are later utilized by vertically integrated units that have capital, modern equipment, and fine skills to process these into finished products that are then exported.
An industrial policy is required that focuses on integrating SMEs and disaggregated sector into vertically integrated advanced sectors. SMEs are the bridge between agricultural sectors raw materials and formal sectors finished products. This has remained the weakest link in our economy and hence we are largely reliant on imported processed raw materials and even imported products for everyday domestic consumption like textiles, gems and jewelry, grocery items, basic electrical fittings and sporting equipment etc.
According to Pakistan Poverty Reduction Strategy Paper, SMEs have a huge potential for the alleviation of poverty in Pakistan after agriculture and construction of housing schemes. Secondly, SMEs have the potential for participating and creating previously unsought benefits of a globalised and digital economy. There is a lack in the extent of globalisation and technology utilization in our country as compared to other regional competitors. Against this backdrop, the digital transformation and restructuring of industries in Pakistan is essential for promoting economic growth in the era of globalisation. One such opportunity lies in developing the cottage industry or Small Medium Enterprises (SMEs) because they are imperative for the sustainable growth and development of the economy of Pakistan.
In the past, several measures have been taken to stimulate and establish small industries in Pakistan which includes establishment of Small and Medium Enterprises Development Authority (SMEDA) in 1998. However, these measures lacked implementation, contemporary economic slowdown necessitates a multipronged policy initiatives like development of infrastructure facilities including plug and play facility, establishment of technical services and training centers. Adequate financing facilities at modest interest rates is the most critical factor in encouraging investment in small-scale sector along with tax concessions on investment for the new investors. There is urgent need of establishing dedicated credit lending institution to fund labor intensive units producing intermediately products in small scale self-employment units. Further, it is vital to ensure a level playing field to domestic industry against sales tax free imports through DTRE, Bond etc.
Supporting the SME sector will fulfil requirement of job creation, investment promotion, bridging trade deficit, increasing GDP, and strengthening economy, essential for the economic security of the country which cannot be achieved by a few mega projects.
Copyright Business Recorder, 2019
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