Issues in the Industrial sector of Pakistan

Industrial sector of Pakistan consists of Mining and Quarry and Manufacturing. Manufacturing is sub-divided into Large-scale industry (80% share in manufacturing), Small-scale industry (14% share in manufacturing) and slaughtering (6% share in Manufacturing).

According to (Ministry of Finance, 2018), Industrial sector’s contribution to Pakistan’s GDP was 20.9 %. Which in 2012-2013 was 20.4% or an increase of 0.5% in 5 years – an average increase of 0.1% per annum. The contribution of Manufacturing in 2017-2018 was 13.56% that was 13.4% in 2012-2013 or an increase of 0.16% in 2012-2018 (or a growth of 0.03% per annum).

Out of these 13.56%, the contribution of large-scale industry to GDP was 10.8%, which was also 10.8% in 2012-2013. The contribution of small-scale industry to GDP in 2017-2018 was 1.88%, which was 1.6% in 2012-2013, or an increase of 0.28% in 5 years (or an increase of 0.056% per annum). The contribution of slaughtering in GDP also was constant at 0.9% in 2012-2018, while the contribution of Mining & Quarry decreased from 3.0% in 2012-2013 to 2.76% in 2017-2018.

From the above data, we can only judge that (i) Industrial sector’s contribution to GDP of the country grew by 0.5% in 5 years; (ii) But the large-scale sector of Pakistan did not show any growth in this period – 2012-2018. (iii) While the only minimum growth (0.28%) that came in the manufacturing sector of the country during the same period was from small-scale Industry.

Large Scale industry’s role in any country’s growth is that not only it contributes to GDP substantially, which in Pakistan’s case is 10.8%, but also gives employment to a large part of the labor force in the country and contributes to the export earnings for balance of payment and exchange rate stability. Large-scale industry has the capacity and capability to produce in very short period of time both consumer as well as producer goods.

When the contribution of large-scale manufacturing sector remained constant in the past five years, than that can explain both the current balance of payments deficit as well as the rapidly increasing poverty levels of the country when supply remains less than the demand for goods and services in Pakistan resulting in price rise of essential commodities.

A closer look at the large-scale manufacturing sector shows that:

Main industries in the Large-scale sector of Pakistan are, Textiles (21 %). Food, Beverages & Tabaco (12.4 %). Coke & Petroleum Products (5.5 %). Iron & Steel products (5.4 %). Non-Metallic Mineral products (5.4 %). Cement (5.2 %). Automobiles (4.6 %). Fertilizers (4.5 %). Pharmaceuticals (3.6 %). Sugar (3.2 %). Paper & Board (2.3 %). Electronics (2.0 %). Chemicals (1.7 %). Leather products (0.8 %). Wood products (0.6 %). Engineering products (0.4 %), and Rubber products, 0.2 %) etc. (Ministry of Finance, 2018)

Cotton Textile is the largest sector of the country and in 2012-2013; there were 526 mills in Pakistan, which came down to 408 in 2017-2018 (118 mills closed down in 2012-2018). Total yarn produced in 2012-2013 was 3.0 billion kg and in 2017-2018 total yarn produced was 2.27 billion kg (a reduction of 0.73 billion kg in 2012-2018). Total cloth produced in Pakistan in 2012-2013 was 1.0 billion sq. meters and in 2017-2018 was almost 7.0 billion sq. meters (or an increase of 6.9 billion sq. meters in 2012-2018). In US $ terms total cotton textiles produced in 2012-2013 were US$ 12.6 Billion and in 2016-2017 were US$ 12.2 Billion. Synthetic Textiles were US$ 0.4 Billion and in 2016-2017 were 0.2 Billion. Total Textiles produced in 2012-2013 were US$ 13.0 Billion and in 2016-2017 were US$ 12.5 Billion or a decrease of US$ 0.5 Billion in this period. (Ministry of Finance, 2018)

The difference between installed capacity and the production of the Automobile industry of Pakistan in 2017-2018 can be seen as: Installed capacity for cars in the country is 240,000, while total production in 2017-2018 was 146,000. Installed capacity for LCV’s in the country is 44,000, while total production in 2017-2018 was 20,000. Installed capacity for Jeeps in the country is 5,000, while total production in 2017-2018 was 9,000. Installed capacity for Busses in the country is 5,000, while total production in 2017-2018 was 500. Installed capacity for Trucks in the country is 28,500, while total production in 2017-2018 was 6,000. Installed capacity for Farm Tractors in the country is 100,000, while total production in 2017-2018 was 45,600. Installed capacity for Two / Three wheelers in the country is 2,500,000, while total production in 2017-2018 was 1,260,000 (Ministry of Finance, 2018). In other words, not all the industry except for jeeps is working to its full capacity.

The installed capacity of Fertilizer industry is 9.0 Million Tons, but the industry produces a total of 8,250 Million Tons of all types of fertilizers. In 2012-2013 Total capacity utilization of Cement used was 75% but in 20117-2018 the capacity utilization of Cement Industry was 94%, or tone of the few manufacturing sub-sector that performed to its full utilization capacity.

Table 1. A few of the Large-scale Manufacturing Production of Pakistan 2012-2018 in Billion Liters, Tons and Numbers

Source: (Ministry of Finance, 2018)

From Table 1, it can be seen that out of an array of 24 products produced by large-scale industry of Pakistan, the increase in productivity of selected products from 2012-2013 to 2017-2018 was only in a few products. For example, Beverages that increased from 2.0 Billion litters in 2012-2013to 2.4 Billion litters in 2017-2018 (an increase of 0.4 Billion liters). Billets from 1.6 Billion Tons in 2012-2013 to 3.5 Billion Tons in 2017-2018 (an increase of 1.9 Billion Tons) and Nitro Phosphate, which increased from 0.3 Billion Tons in 2012-2013 to 0.34 Billion Tons in 2017-2018 (an increase of 0.04 Billion Tons).

All other products of Pakistan’s large-scale manufacturing showed a decrease of production from 2012-2013 until 2017-2018.

It is also interesting to note that (i) the entire manufacturing sector large & small (Except for Trucks and Farm Tractors) produces mainly consumer goods. (ii) Manufacturing of Pakistan produces mainly low valued products. (iii) (With the exception of Textiles and Cement that are exportable items), all manufacturing goods are a product of Import Substitute industry, which can therefore be categorized as poor quality and expensive products that only exist in the market.

As far as employment generation is concerned, Population in the country is 208 million distributed in 32.2 million households, out of which 61.4 million adults constitute the civilian labor force of Pakistan and 57.4 million are employed. Out of these 57.4 million, only 9.0 Million are employed in the Manufacturing Sector of the country (Ministry of Finance, 2018). In other words the sector that contributes 13. 56% to the GDP employs only 9.0% of the total employed labor force in the country.

The Manufacturing sector of Pakistan is primarily in the private sector that is seen as the generator of economic growth, and as the share of this sector is shrinking in the GDP, the GDP growth rates are also shrinking.

A large factor in the small growth pattern of the manufacturing sector is concerned is the lack of structural and technological changes in different sub-sectors of the large-scale industry which makes it cost-ineffective and inefficient. Also low productivity of labor is an important cause of sluggishness of this sector. Lack of management skills also contribute in the inefficiency of this sector. Lack of quality and standardization (especially environmental standards) is another factor that adds to the inefficiency of Pakistan’s manufacturing sector.

External inefficiencies that con are energy crisis that contributes to the high cost of doing business are the energy crisis coupled with high cost of energy sources, inefficiency of the tax regime and FBR.

On the demand side, When 80 % of the population lives with an income below PRK 1,000 a day of PRK 30,000 a month that is spent mainly on food, energy costs, utility bills transportation and medicines there is not enough money left for buying other goods needed for standard of living produced by the large-scale manufacturing sector.

In order to initiate growth in the country it is important to enhance the productivity of labor force through skill enhancement as we as increasing capital intensive capacity of the large-scale manufacturing sector

Researches show that in order to sustain long-term growth in the country it is important to:

• Entrepreneurship & Organization (Human Capital) – Introducing new and better forms of technological in the production process. Technological Changes including technological knowledge, new knowledge, better management strategies & skills (placing the right person on the right job) accounts for almost 30% of growth
• Capital – Production of capital goods in place of only consumer goods will enhance the stock of capital in the country and help spur long-term growth. Capital Formation is responsible for almost 20% economic growth.
• Labor – Giving better education, skill enhancement, productivity and modern work habits to the labor force. Education per Worker enable workers to perform proficiently in a particular discipline. Higher grades is a almost 15% impact on Economic growth
• Land – Ensuring property rights, equity, patenting of new innovation and effectively following rule of law in a transparent manner, as well as political stability has an impact on Economic Growth of 10%
• Economies of Scale resulted in almost 10 % of economic growth in any country.
• Good, purposeful and focused Government Policy can affect economic growth positively. Both corrupt practices and incompetence has an adverse effect on economic growth and productivity, because both are a drain on resources, increase cost f doing business and are inefficient behaviors with multiple negative effects.
• While weather conditions and other upheavals has a negative impact on Economic Growth of minus 2%
• One percent unemployment over the Natural Rate of Unemployment (of permissible 6%) has a negative impact on Economic Growth of minus 2%