The largest industrial lobby of the country, All Pakistan Textile Mills Association is up in arms over the import of subsidized cotton yarn; and not without reason. The import of cotton yarn from India has rocketed since FY12, following the resumption of tax rebates on raw cotton and cotton yarn exports by that country.
APTMA has demanded the imposition of a 15 percent regulatory duty on import of cotton yarn. But the value added textile sector wants GoP to let cheaper yarn imports flow in. The government has conceded partially to APTMA thus far, applying a third of the duty slab demanded; five percent.
But that is not enough to protect domestic yarn producers against low priced imported substitutes. Here's why?
Foremost; Pakistani Rupee is overvalued; it has been for quite some time now. Based on the real effective exchange rate as reported by SBP, the local currency is overvalued by 15 percent higher compared to end-FY12.
Secondly, regional giants including China and India are faced with overcapacity and are actively supporting various export sectors including textiles, machinery, automotives and steel. Whats more, they are going to persist with these policies until and unless domestic demand in those economies rises significantly.
Thirdly, despite lower CPI inflation, the textile sector is facing acute energy shortage and rising electricity tariffs as the government scales back energy subsidies.
Textile industry is the source of majority portion of exports, besides being a major contributor to jobs and GDP. Support for fair trade is a universally accepted ideal but the ground reality is that there is rampant dumping in the region and the domestic currency is strengthening against key export markets such as EU.
Spinning alone comprises about a fifth of all private sector credit from the banking sector. Clearly, the impact of subsidized fine count cotton yarn will not be limited to 30 spinning mills if government remains inert.
The government response; the import duty on cotton yarn, is patchwork where policy is needed. But patchwork only goes so far. Clear vision is needed on whether the country is to continue relying heavily on textile sector for jobs, exports and economic activity.
If the textile industry is to flourish, the government must take note of the emerging medium term trends in the industry. Simply spelt out; China and India have lots and lots of raw cotton. They have even more capacity to produce yarn. Their domestic demand has sputtered so both countries are trying hard to make their exports attractive to the world; and they are succeeding (India's textile exports to EU have jetted while Pakistan's have remained stagnant despite GSP Plus status).
Government policy must also be cognizant of domestic realities; energy shortage persists, fragile law and order and infrastructure continue to exacerbate production costs and timelines. Broad-based growth is simply not possible without spurring activity in textile sector. At the same time, documentation is direly lacking and structural reforms or even a true picture of the economy predicates documenting the entire cotton value chain from raw cotton, reaching yarn, making cloth, finishing and printing, to making garments will document close to half the economy.
If the value added sector is hurting from import duty on the import of their raw materials, let them use the DTRE facility to secure their own rebates. The argument that FBR has too few resources deployed for DTRE renewals and import applications holds merit. But that challenge requires lobbying FBR and government for greater efficiency on that front; not a free-for-all for every exporting country under the sun looking to export their deflation to this country.