The Pakistan Economic Survey has declared the year, 2017-18, as the best year for the growth of the large-scale manufacturing sector since 2006-07. The Quantum Index of Manufacturing (QIM) has been recorded by the Pakistan Bureau of Statistics (PBS) as achieving a high growth rate of 6.2 percent during the period, July to February, 2017-18.
However, there are some serious question marks about the achievement of this high growth. First, this has happened when, during the corresponding period of the first eight months of 2017-18, the Ministry of Water and Power reports that industrial consumption of electricity actually fell by 2.5 percent. This stands in sharp contrast to the growth rate of this indicator of over 9 percent in 2013-14, which was accompanied by a smaller increase of 5 percent in industrial production.
Therefore, the questions are: Has the manufacturing sector successfully made a big transition towards less energy-intensive industries? Have the existing industrial units suddenly become much more energy-efficient? Or have large sources of captive power been developed overnight? The answer probably is that this is the first piece of evidence that the growth rate of the large-scale manufacturing sector in the first eight months of 2017-18 has been significantly overstated.
Second, the high growth rate achieved last time of above 6 percent in 2016-17 in large-scale manufacturing was on the back of exceptional performance by the largest industry of Pakistan, textiles, that year. The production of cotton yarn increased by 12 percent and of cotton cloth by over 8 percent.
However, the pattern of high growth in 2017-18 is very different. According to PBS there has been no growth in the textile sector in the first eleven months of 2017-18, especially in cotton yarn and cotton cloth. This implies that the rest of the large-scale manufacturing sector has shown an even higher growth rate of almost 8 percent in 2017-18. Does this mean that the industrial sector of Pakistan is no longer reliant on an agro-based traditional industry like textiles and has made a transition to more modern technology-and capital-intensive industries?
What are the fast growth industries in 2017-18? Industry groups which have shown double-digit growth from July to May, 2017-18, are petroleum products, automobiles, iron and steel products and cement with individual contributions of at least 5 percent to the value added of the large-scale manufacturing sector.
Industries which have declined are chemicals, fertilizers, leather products and wood products. The group of industries in the chemicals category has probably been impacted more by cheap Chinese imports. The fertilizer industry has been hit by the gas supply constraint. The decline in output of leather products is worrying as this is a significant export industry.
The engineering goods industry of Pakistan has persistently witnessed negative growth in the output of TV sets, refrigerators, deep freezers, air conditioners, etc. These industries may be small but they confer significant technological externalities and need to be fostered and developed. However, they have been unable to successfully face up to competition from imports, mostly again from China and other sources.
There has been a veritable boom in the automobile sector, with cumulative growth of over 30 percent during the last two years. It remains to be seen if this is either the consequence of growing affluence in the upper middle class, both urban and rural, or that in 2017-18 the very high growth rate of 18 percent is the product of anticipated increases in prices due to depreciation in the value of rupee.
There are many surprises in the QIM estimates released by the PBS for 2017-18. The first is the reported decline of 7 percent in the output of sugar. This is in sharp contrast to the estimate of an almost 8 percent increase in the output of sugarcane. Has the efficiency in cane crushing suddenly declined? Has some sugarcane not been purchased by the mills? Or has the output of sugarcane been overstated by PBS to yield an artificially high growth rate of the major crop sector in 2017-18?
The other very unusual development is the phenomenal growth rate of 90 percent in the production of cigarettes after a big drop of 43 percent last year. Have the people of Pakistan suddenly starting smoking much more? The answer is hopefully a no.
The explanation lies mostly in the reduction in tax evasion following the rationalization of the excise duty structure. It is highly unlikely that production has actually jumped up by as much as 90 percent this year, especially in the face of stagnant output of tobacco in the country. Therefore, the actual growth of output by the cigarette industry has been vastly overstated. If this is overstatement is adjusted for then the growth rate of the large-scale manufacturing sector as a whole falls sharply by almost 2.7 percentage points.
The slowdown has become more visible after February 2018. The reported growth rate was 6.2 percent in the first eight months. It has fallen to 1.8 percent in March, 4.1 percent in April and 2.8 percent in May. Cumulatively, if the eleven month growth rate is estimated on the basis of reported figures it comes to 5.5 percent. Believe it or not, PBS makes a simple arithmetic error by reporting it at 6 percent. Of course, this may be intentional.
Given the absence of growth in electricity consumption, overstatement of the growth rate of the cigarettes industry, lack of growth in textiles and a visible plummeting of the monthly growth rate after February 2018, it is very likely that the growth rate of the large-scale manufacturing sector has been overstated for 2017-18. It is probably below 4 percent as opposed to the reported growth rate of 6 percent.
We, the independent economists, have had to devote a lot of time in highlighting the manipulation of statistics by the Pakistan Bureau of Statistics over the last five years. This has probably been done under pressure from the top.
The new government should have an impartial enquiry conducted on the quality of statistics disseminated by PBS. This is essential if reliance is to be placed on knowledge of the actual ground realities for implementation of proper policies in time.
(The writer is Professor Emeritus at BNU and former Federal Minister)