I recently read an article about the futility of subsidising certain sectors of the economy, especially the textile sector which immediately reminded me of the sack race which we used to play in primary and high school.
What does the sack race have to do with the subsidy and what is the analogy between the two? For those who have never had the pleasure of playing a sack race (also known as gunny race) it is a competitive game in which the participants place both their legs inside a sack that reaches their waist and then are told to hop forward from the start to the finish line. A subsidy can be classified as Production Subsidy, Consumption Subsidy, Export Subsidy, Employment Subsidy, Tax subsidy, Transport Subsidy. The reader will agree, after finishing the whole article, that the Government is not paying any form of subsidy to the exporters.
Competitive equilibrium is a state of balance between buyers and sellers where the quantity of goods demanded is the quantity of goods supplied at a specific price. When the supply of goods exceeds the demand, the price falls. Conversely when the supply decreases but demand remains the same, the price increases. And when the cost of production increases, so does the sale price which reduces demand and the buyers go elsewhere.
This basic cannon of economics is applicable domestically and internationally as well, especially during the last couple of decades with the implementation of WTO rules and information technology. A buyer or a trader sitting in a remote village of Lalamusa, Pakistan, can compare the price of a shirt being made in Longyan, China with the price made in Hyderabad, Pakistan, by the click of a mouse. So, it is the endeavour of every manufacturer not only to buy, at the most competitive prices, the input raw materials, energy, labour and other services but also run their factory most efficiently 24/7. Moreover they want to apportion its fixed cost over maximised production, to reduce the overall cost of production of its products, and to remain competitive.
But where do the subsidies come in and why there is a misperception that the Government is giving subsidies to the export sector. The main stay of Pakistan’s export economy is textile, which is under threat for the last five years during which the cost of doing business has increased.
During the last seven years, Pakistan could add only two mill spindles and 6,000 rotors compared to 3.2 mill spindles and 36,000 rotors added by Bangladesh, and 19 mill spindles and 69,000 rotors added by India
As per a World Bank report on Ease of Doing Business, Pakistan’s ranking declined by 40 points in five years, from 107 in 2012 to 147 in 2017 against India which improved by 32 points, from 132 in 2012 to 100 in 2017. All the constituents of the survey relate to the Government’s policies or their implementation; the majority among them being Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Paying Taxes, Trading Across Borders, Enforcing Contracts, Resolving Insolvency, Transparency in Business Regulations and Good Practices. Our ranking has decreased by 40 points in the past 5 years; as a result, our ranking is now at 174 in 189 economies in ‘Trading Across Border’ indicators. This has explicit and implicit consequences in increasing the cost of doing business.
The textile sector is suffering due to inordinate delays by the Government in reacting to the changes in global policies, especially the pro-textile policies of our competitive countries. For example, a package of Rs 180 billion was announced by the Prime Minister for the export sector. However, the deal has come to a halt after the distribution of Rs 32 billion for exports up to 30 June 2017 which resulted in over 10% increase in garment exports.
The rules for the Technical Upgrade Fund — a part of the package — have still not been made even after expiry of 11 months. Neither the rules have been made till today nor the money has been allocated to repay the Duty Drawback of 3.5 percent to the garment sector which was due for exports on 1st July, 2017. Moreover, the admitted sales tax refunds of exporters, the figure is guesstimated to be Rs 250 bill, are pending. There are more dozens of applications pending for months to get approval of Zero rating of sales tax (which was announced in June, 2016) on purchase of coal, diesel and furnace oil. Then there is another misperception of various writers about the efficiency or lack of latest technology in production processes.
The textile industry has been continuously modernising their machinery. However, when an industry is continuously in the red, it first seeks to survive and then plans for modernisation. The prolonged load-shedding of 12/14 hours a day in the last 8 years, forced the textile industry to make their arrangements to produce electricity by spending millions of rupees on purchase of two generators, one to run on diesel (generation electricity at Rs 32/kw) and another one on gas; they had to invest on systems to produce steam from three sources ie coal, gas and rice husk or wood.
These huge investments could have enhanced the production capacity and modernised the machinery, but the industry’s foremost priority was to survive. Resultantly, during the last seven years, Pakistan could add only 2 mill spindles and 6,000 rotors compared to 3.2 mill spindles and 36,000 rotors by Bangladesh, while India added 19 mill spindles and 69,000 rotors. With the above impediments, the industry could not keep pace with the BMR.
The readers may now have guessed the analogy between the sack race and export sector. The restrictive nature of various factors is inflicting a heavy toll on the export sector which is carrying the burden of inefficiency of the energy sector by paying 20 percent of DISCO losses including theft and non-payment of bills (the textile sector has ZERO theft and pay 100 percent bills) whereas our competitors are not paying for the delinquent consumers’ bills.
We are paying USD 0.12 /kw including taxes of Rs 4.54 /kw (TR Surcharge, FC Surcharges, NJS, Excise Duty) on electricity bills whereas our competitors are paying US$ 0.05 without any other surcharge; export sector is incurring an expense of Rs 25 bill per annum on interest on the borrowed money to cover the shortfall in working capital created by sales tax refunds blocked by FBR which is not being incurred by our competitors; we get gas at Rs 1000/mmbtu against Rs 600 equivalent by our competitors; and a sword of Damocles is hanging over industries’ head in the shape of GIDC of Rs 100-Rs 200 per mill BTU for the previous four years which has been thankfully stayed by the High Courts. For the information of readers, the Gas Infrastructure Development Cess — GIDC is meant to be spent to lay pipelines for Sui Southern and Sui Northern gas companies which is being taken from the industrial sector although the intended asset will be owned by the gas companies).
The overall burden of the above factors renders the industrial sector generally and textile sector particularly uncompetitive on an international level. Hence the readers can very easily discern whether refund of a fraction of the above-stated taxes and levies, which should not have been there in the first place, can be called subsidy or the industry is just getting back what is due to them.
All the above factors are tantamount to a sack being put on the exports’ waist and then told to compete in the race. Unless the sack is removed there is no way that exporters can even remain in the race, let alone have a chance to win it.
The writer is a Chartered Accountant and can be reached at [email protected]
Published in Daily Times, December 6th 2017.