INDUSTRIAL POLICY AND SECTOR GROWTH IN PAKISTAN The study is to get a brief overview of recent history of industrial sector

in Pakistan, problems faced by different sectors of economy and in our opinion the factors which could improve these sectors. For the purpose of this study, following sectors were mainly focused: 1. Textile 2. Production 3. Small & Medium Enterprises The industrial sector in Pakistan has a larger potential to contribute but is on hold due to poor policy initiatives, cost of production, lack of innovation and diversification in products for meeting the needs of domestic and global consumers A decrease in industrial production during the first months of the previous year compared to the highest growth trends during FY 2004-05 and the necessity of boosting industrial production, raises many questions about industrial revival in difficult times of domestic fiscal and monetary constraints, power crises especially in a country like Pakistan, global economic recession and shrinking global trade. The government, at least theoretically, aims at pursuing an export-led economic growth to raise Pakistans share in global trade that during the last decade has decreased from 0.21 per cent to 0.13 per cent, according to World Trade Organization (WTO) data. How can this be translated into something concrete and real? This question has to be considered at the time to announcing the latest industrial policy as committed by the Prime Minister of Pakistan. Critical issues Industrial sector, the second largest sector of the economy mainly comprises light and large scale manufacturing and small and medium enterprises (SMEs). It contributed 18.9 per cent towards national GDP during the last fiscal year compared to its share of 19 per cent during FY 2007-08 and 53 per cent share of services sector and 20.6 per cent share of agriculture sector. The textile sector has been earning around 60 per cent of the Foreign Exchange earnings from exports traditionally but during the last fiscal year it earned 54 per cent of total Foreign Exchange earning with a decline of $1 billion in its earnings compared to Foreign Exchange earnings during FY 2007-08. The industrial sector has a larger potential to contribute towards national GDP but is on hold due to poor policy initiatives, lack of innovation and diversification in products for meeting the needs of domestic and global consumers, power crises and indirect taxes directly contributing towards the high cost of production and low quality of products. The other contributory factors in this context are inadequate fiscal and monetary policies, lack of modern infrastructure, poor quality of governance and lack of technical/trained human resource, inefficient use of energy and low productivity. Consequently, over a period of time industrial sector that initially grew with the help of government support did not equip itself with fast changing global market.

Development of the industrial sector focused on meeting domestic requirements of food, construction, transportation, home appliances and other needs but it hardly ventured to establish a strong base for export-oriented industries. Instead, the government encouraged increase in domestic consumption and resorted to indiscrete imports that met the needs of a few selected segments of society. As exports started stagnating during the last three years and domestic consumption also became sluggish due to erosion of purchasing power of the middle class because of the high rate of inflation and the slow-down in global trade, industrial production started taking downward slide. In the mean time fiscal and monetary policies and shortage of power started taking their toll on the growth of industrial sector also. Last fiscal year proved worst for industry because of these multiple factors. According to SBP monetary aggregated for last fiscal year, private sector lending by the scheduled banks declined by 95.58 per cent, from Rs 408.4 billion for FY 2007-08 to Rs 18.863 billion with a massive shortfall of Rs 390 billion. On the contrary public sector companies saw a substantial increase of Rs 119 billion during last fiscal year but their borrowing was not meant to help industrial sector. It was meant to finance oil marketing required for government owned major power utilities. The short fall in private sector credit was attributed to high interest rate, energy constraints and contraction in trade volume due to global recession. Unfortunately, Pakistan is yet to experience a successful industrial policy. The strategic trade policy framework for 2009-12 did not touch the textile sector. Its policy is yet to be announced. The textile sector needs a huge investment to move up from producing low tech and quality products to high quality products that have to be competitive in price in regional and international market. The issue of cost of electricity is likely to have large effect on industry when the government would withdraw 17.7 per cent subsidy that amounts to Rs 66 billion for first six months of current fiscal year as agreed between the government and IMF. High production cost of products for domestic consumption and exports is one of the key factors to determine competitiveness of exports. Textile is one of the examples under consideration. Textile products produced by Pakistan are less competitive than the products produced by the regional competitors. Bangladesh, a noncotton producing country and late entrant in export market had cut prices of their products by 20 per cent to survive in global recessionary environment with the result that exports jumped by 15.5 per cent to a hit record of $12.35 billion. All other regional players of textile products such as India, China and Vietnam have witnessed decline in their exports. The ongoing power projects, it is being feared could make electricity more expensive than at present. How would Pakistan compete in the regional or global market? This point has to be addressed in the forthcoming industrial policy. Industrial sector needs cheap electricity to bring down cost of production. The solution lies in addressing following important areas:

a) Reduction in cost of production by increasing tax-to-GDP ratio that should enable the government to reduce the burden of indirect taxes and subsidise electricity for industrial use. b) Tight monetary policy has lost its efficacy as an instrument of reducing inflation. The supply side of economy needs to be strengthened to reduce inflation. Interest rates should be brought down to attract more investments for industrial sectors. c) Development of infrastructure particularly with respect to creating more electricity and augmenting transport facilities for domestic trading and exports. d) Big projects of human resource development and upgrading skill level of work force in the country should be taken up with adequate foreign assistance, domestic and foreign investment to meet requirements of research and development and international standards in production of innovative value added products. e) Ongoing terrorism should be addressed at a faster pace to build investors confidence. f) Establishing stable political and security environment and pro-business fiscal and monetary policies. g) Setting clear objectives of industrial revival and growth strategy. h) Infrastructure deficit that includes road and rail net work, sea ports and power supply. i) Implementing research, development and good governance. j) High cost of capital required to improve investment and increase FDI. k) Improving on productivity, quality and innovation. l) Attracting huge domestic and foreign investment that is required to modernize industrial sector and streamline SMEs. These issues are inter-related and cant be addressed in isolation. They can be addressed only through a comprehensive strategy. Forthcoming industrial policy needs to address them on priority basis. Conclusion Revival of industrial sector in Pakistan is a big challenge in Pakistan. This issue should be addressed by public and private sectors as they both can more effective in eradicating the current issues being faced by different sectors and improving environment and human resource available in the country. The government should come up with the industrial policy. The fiscal, monetary and trade policies should have one direction of giving importance to export-led economic growth. Government should play its role in controlling the inflation, overcoming the power crises in order to reduce the cost of production and more employment opportunities in the sector. The private sector with the help of the foreign stakeholder can play its role in development the technical/trained human resource and deploying them in the production sector hence, improving the quality and sliding the cost of production and services. It is possible to achieve the goal of industrial growth by learning from the experiences of international and regional players. Reference: www.planningcommission.gov.pk
http://www.finance.gov.pk/finance_economic_situation.aspx www.pide.org.pk