Ending deindustrialisation

By Mubarak Zeb Khan | 6/10/2013 12:00:00 AM THOUGH he comes from an industrial background, Prime Minister Nawaz Sharif will face one of his toughest challenges in reviving the country`s industrial growth. This may not be an easy job, as deindustrialisation is deep-rooted. For the past few decades, the manufacturing sector has been beset with a host of problems, including an absence of an industrial policy, a crippling energy crisis, and a narrow industrial base. Policies pursued by previous finance ministers Shaukat Aziz, Shaukat Tareen, and Dr Hafeez Shaikh only encouraged and facilitated the services industry, particularly the consumption sector. Nothing substantial has been done for the manufacturing sector, and the role of the industries ministry was confined to monitoring prices, and it remained focused on a few industries, like sugar, fertiliser, automobiles etc. Industries ministers were found to be running the affairs of utility stores to `stabilise prices` in the past few years. Meanwhile, the size of the industrial sector in the overall economy has remained stagnant. For industrial development, the PML-N will have to finalise the industrial policy, coupled with fiscal incentives to resolve energy problem, and also encourage the use of alternate sources of energy through incentives like tax breaks. It should club together all ministries created for looking after the affairs of various industries, like the ministries of industry, production, textile and commerce, into one single ministry `ministry of commerce and industry,` as is the case in countries like India. A single ministry deals with production as well as exports in these countries. And while a draft National Industrial Policy was evolved in May 2011, it was not implemented. The policy document is apparently agood piece of research, and comes up with some ambitious targets, like eight per cent industrial growth per annum (with interrupted power and gas supply), creation of more than four million new jobs, and 100 per cent value addition in the manufacturing sector. It further claims that the policy will turn P a k i s t a n into a `world factory` in the next 10 years. The document also seeks to double the manufacturing output in the next 10 years, and expand the stagnant industrial employment from the current 13 per cent of the country`s total labour force to 20 per cent.While this looks good on paper, it raises the question as to how will the targets be achieved. However, these targets can be revisited to be fine tuned. Manufacturing has suffered mainly because of energy shortages, a sharp drop in foreign direct

investment into the sector, and a slump in demand in the international market. The existing manufacturing sector is unable to utilise the maximum possible capacity of the installed capacity due to the energy crisis. Statistics compiled by the ministry of industries show that capacity utilisation at 37 large-scale industries ranges between 30-60 per cent. There is a great potential for production of alternate energy sources, given that fiscal and monetary incentives are extended to serious investors from the industrial sector. Coalbased captive power generation is one of the ways to produce cheap electricity and gas for industries. While other sources for alternate energy must also be tapped, captivepower generation is comparatively more cost-effective and efficient. In the shorter term, the government can halve the sales tax on petrol, high speed diesel oil/furnace oil in the budget from 16 per cent to eight per cent. As fuel consumption is price elastic, this might lessen the reliance on gas as a source of fuel, thus making freeing it up for industrial purposes. Coal-based captive power generation, like power generation through `coal gasification,` can be encouraged by giving a five-year tax break to industrial units to make up the cost of gasifiers particularly to textile and steel re-rolling mills. The tax holiday may be linked with a six-month deadline for switching to captive power generation. This will not only provide cheap, round-theclock energy to textile industries, but also spare energy for other sectors. On average, one kilogramme of coal produces 2.2 m3 of coal gas and one kilowatt hour of electricity. If the price of coal is Rs6,000 per tonne, oneunit of electricity produced from it will cost approximately Rs7.5. Contrary to this, industries are buying electricity from the grid station at around Rs14 to Rs16 per unit. So, the off-grid electricity is much cheaper, while long transmission line costs are also saved. Similarly, industries that use boilers for processing textile, leather, food processing, sugar and chemicals need to be encouraged to pursue solar power generation to cut their costs. However, this switchover is only viable through various incentives that the government should consider in the budget. The clubbing together of multiple ministries into one industries ministry will also help to resolve governance issues like overlapping policies and pressure by interest groups to a large extent,. However, if no corrective measures are taken, exports of the manufacturing sector will continue to decline, and sufficient job creation will remain a distant goal.