FY18 was begun as a promising year for the Large Scale Manufacturing (LSM) sector. With 2M growth at about 10 percent, there were great expectations that the full year number may be the highest in recent memory.

Recall that at the time of the earlier-than-usual release of Economic Survey 2018, the National Accounts Committee had forecast a full year growth of 6.13 percent. The reality, however, often disappoints. The full LSM growth for FY18 now stands at 5.38 percent, according to latest data released by Pakistan Bureau of Statistics, lower also than the growth of 5.77 percent in FY17.

LSM’s growth drivers in the first half of the current fiscal year were vegetable ghee, soft drink, electric motors, TV sets. These were of course in addition to phenomenal growth in cigarettes, construction-led sectors and automobile. Performance in the latter two sectors continued throughout the year as public sector development program and CPEC related expenditure had a positive impact on manufacturing sub-sectors such as steel, cement and automobiles.

Steel for instance has benefited not only from increase in construction activities triggered by the PSDP and the CPEC, but also from the imposition of anti-dumping duty on finished steel products, housing schemes in private sector, and a surge in automobile demand. The surge in automobile demands was such that it forced local assemblers to produce in double sifts and makes investments in de-bottlenecking activities.

However, the country’s sugar industry was not able to capitalize on record sugarcane production as the crushing period got delayed mainly due to the row between growers and millers over price. While the third and fourth quarter FY18 did see some recovery in sugar production, the damage had already been leading to a 6.85 percent fall in this year’s production compared to a whopping 38 percent growth in FY17.

Cigarette production grew phenomenally after the government introduced a third tier in Federal Excise Duty and initiated a crackdown on illicit trade that benefited the formal cigarette industry. However, cigarette production slowed in the last quarter; in fact, it posted 62 percent decline in June 2018 – as the high based affect begun to set in. That affect should stabilize the growth in cigarette production in FY19.

The key challenge for the PTI is this. How to make LSM growth broad based because in recent years growth has mostly relied on a handful of sectors. And how to kick start growth in export-oriented sectors because even after the ‘export package’ announced by the PML-N government, production growth in export-oriented LSM sectors - notably textile and footwear – remains downright poor.

Lack of broad-based growth and weak performance of export oriented LSM sectors scratch away the polish from an otherwise relatively better LSM performance in the last two years.