Chapter 4

Manufacturing sector
Pakistan developed a substantial Industrial sector in a very short time. The policy of import substitution, largely of consumer goods was initially aided by a high wall of tariffs and quantitative restrictions on imports and later through the growth of domestic and foreign demand. During 1951 to 1955, the manufacturing sector grew annually at 34%, one of the highest growth rate ever witnessed anywhere in the world. The growth was attributable to the low industrial base of the country at independence. During the 60s the govt pursued the policy of export expansion. The manufacturing sector grew at 16% during the 1st half but slowed down in the 2nd half to 8% due to war with India. During the 70s, the growth rate of GDP showed a decreasing trend. It fell to 4.84% . The manufacturing sector growth rate was also low due to policy of distributive justice(Nationalization) so it may be attributed that both GDP and manufacturing growth rate , move simultaneously in the same direction. This point was further clarified by the growth rates depicted in 80s when manufacturing growth rate increased to 8.21 annually so do the GDPs growth rate which increased to 6.45 annually. During 1991-1992 manufacturing sector growth rate was 9.71 and GDPs growth as a consequence rose up to 7.67. The manufacturing sector posted a growth rate of 3.56 percent during the current fiscal year JulyMarch 2011-12 compared to 2.96 percent of the same period last year. EMPLOYMENT: The manufacturing sector contributes 17.5% to GDP but employs only 14% of labour force. On the other hand, Agriculture sector contributes 21% to GDP and employs 45% of labour force almost three times than that of manufacturing sector. This is because of capital intensive phenomenon. STRUCTURE OF MANUFACTURING SECTOR:

Before we consider the impact of manufacturing sector on various economic variables it is necessary to study its structure which changed drastically during the industrialization process and it is the change in its structure which led to the change in employment and income distribution. Structure of Manufacturing Sector in Millions) Contribution Contribution of LS of manufacturing sector Years Manufacturing ( in GNP) Sector in GNP Total 1950-51 1955-56 1960-61 1965-66 1970-71 1975-76 1980-81 1985-86 1990-91 1994-95 1999-2000 2000-01 2001-02 1042 1727 2278 3816 5521 6588 9739 14872 78969 92561 108405 116623 121738 342 942 1394 2796 4293 4843 7153 11002 56577 67310 75699 82180 85466 % share 32.82 54.55 61.19 73.27 77.76 73.51 73.44 73.98 71.64 72.72 69.82 70.47 70.20 (Rupees Contribution of SS Manufacturing sector (in GNP) Total 700 785 884 1020 1228 1745 2586 3870 22392 25251 32706 34443 36272 % share 67.18 45.45 38.81 26.73 22.24 26.49 26.55 26.02 28.36 27.28 30.18 29.53 29.80

Technological Aspects:
In order to analyze the industrial sector it is necessary to have the quantitative instrument of the macro performance of manufacturing activity as well as the micro aspects of individual industries. One familiar instrument of macro analysis is the capital output ratio which is a useful indicator of the relative capital intensities not only for interindustry comparisons but also for inter sectoral analysis. For example; it shows that generally capital intensity is higher in heavy industry than in small scale industry. The coefficient of capital to labor is helpful in estimating the employment opportunities created by investment. If one of the objectives of industrial policy and development is to create employment opportunities with scarce capital, the knowledge of capital labor ratio is necessary which the case of small scale
2

manufacturing sector. For example, convert the capital-labor ratio in the LSM sector into current prices & say it is 20,000 per head, similarly for SSM sector say it is 5,000 per head which implies that LSM sector is 25% more capital intensive than SSM sector. As a result the investment in LSM sector has to increase at a much faster rate than in SSM. Now we can divide the manufacturing sector mainly into SSM & LSM manufacturing industries. We will focus on SSM industries due to the following.

Large Scale Manufacturing

The manufacturing sector posted a growth rate of 3.56 percent during the current fiscal year July- March 2011-12 compared to 2.96 percent of the same period last year. A modest improvement was seen in Large Scale Manufacturing (LSM) in JulyMarch 2011-12. The growth rate in Large Scale Manufacturing (LSM) has recovered, largely due to good performance among the sub categories such as food, beverages and tobacco, paper and board, textile, non-metallic mineral products, pharmaceutical and leather products compared to negative growth seen during the second quarter of the current fiscal year. The Year to Year positive growth during the start of current fiscal year (July- Sep) can be partially attributed to export demand which has increased the production in the short run. Dismal performance was seen in the winter season (Oct-Dec) which was due to persistent gas shortages. Moreover, agro-based industries which were recovering from the impact of the floods of 2010, was again hit by another natural calamity in the form of heavy rains in Sindh during August 2011. The cotton crop is most vulnerable to floods and almost all major sugarcane producing districts were affected but losses to sugarcane were lower as the crop is relatively resilient to flooding. The floods also damaged industrial supply networks and rural demand and this coupled with severe power and natural gas shortages led to a number of key industries (textile, fertilizer, steel, glass etc) not operating at expected levels. LSM production began to revive in December 2011 as the impact of flood began to subside. A remarkable growth of 6.0 percent was witnessed in Feb-2012. This could also be attributed to the beneficial effect of specific policies on large scale industry. Effective fiscal policy helped in revitalizing the growth to some extent due to reduction in duties on beverages, automobiles, cement and air conditioners. This step was necessitated in view of the costly input prices and the need to absorb the volatility in the production of these industries. In addition, the growth in agrobased industries was based on increase in cotton (Punjab) and sugarcane production during the current fiscal year. In March 2012, the year to year performance of the sector turned negative by registering a decline of 3.7 percent owing to prolonged power and gas shortages.

Small Scale Industries:

Importance Promotion of small scale industry can help in achieving many objectives and, in particular , it can help in reducing the problem of widespread unemployment in the country. the expanding labor force. It can also be an important source of foreign exchange earnings, as it intensively uses the relatively abundant factor of production viz, labor. By relying on domestic inputs, it also economizes on foreign exchange. Contribution to GDP The role of manufacturing sector in the economy can judged from its contribution to the GDP. Its share in GDP has increased over time in Pakistan. The share of SSM sector in GDP has also increased in the history from 2.3% to 5.3%. Similarly the share of Small scale in total manufacturing has increased from 23% to 27% . Employment: The performance of Pakistans Small scale industry has been very impressive in terms of employment generation. It is estimated that about 80% of the total industrial labor force is currently employed in this sector. The capacity of small scale industry to generate relatively more employment is due to its use of labor intensive technology. The employment elasticity , which measures responsiveness of employment to changes in out put , also shows that the small scale sector has relatively greater potential for employment generation. The employment elasticity for large scale sector had been less than that of small scale over the time. Exports Small scale industries in Pakistan has great potential for earning foreign exchange. It is stated in 6th five-year plan that the engine of export growth will be agro -based in small-scale industries. The plan envisages a 15% per annum increase in the exports of output of small-scale industries. The share of manufactured goods in the total exports has increased considerably over time. It is difficult to determine the contribution of small-scale industry to total manufactured exports. However here are
4

some items which are mainly produced by small-scale industry. These are Readymade garments and hosiery, Carpets & Rugs, footwear, Surgical instruments and sports goods. It has been argued that large-scale industry is mainly concentrated in the import substitution sector which is heavily protected. Small-scale is not only an important source of foreign exchange earnings but it also economizes on foreign exchange by relying mainly on domestic machinery and other inputs. Growth of Small-Scale Industry Notwithstanding, the fact that small-scale industry has not been given a significant role to play in the countrys economic development, this sector does contribute greatly to value added in the manufacturing sector. The small-scale industry expanded more rapidly during the periods from 1969-70 to 1980-81. There were many factors responsible for this rapid growth. The Pakistan rupee was drastically devalued in 1972, which improved the competitiveness of the small-scale industry compared to the large scale industry. Prior to devaluation, the large scale industry could import machinery and raw material cheaply on an overvalued official exchange rate, whereas small-scale industry had no such access to foreign exchange. Devaluation also provided a boost to many export oriented small industries. Nationalization of industries by the Govt also forced investors to move to small-scale industry. Suggestions For Improvement Of Small-Scale Industrial Sector 1. The task of promotion and development of small-scale industry is largely assigned to the provincial governments, which pursue their policies through their respective small industries corporations. On the other hand, the commercial banks and other lending institutions are under the control of the Federal Govt. it is suggested that a committee, consisting of representatives from the federal & provincial govts. , provincial small industries corporations, and lending institutions should be formed to formulate a systematic policy for the promotion of small-scale industry in the country. The committee can coordinate & supervise the activities of the relevant institutions. 2. It is a well-recognized fact that lack of funds is a major constraint on the expansion of small-scale industry in Pakistan as only a very small proportion of units in the industry have access to institutional credit. Since the commercial banks and other institutions providing loans to small-scale industries are in the public sector, the Govt. can take appropriate policy measures to ensure that a larger amount and proportion of the funds go to small manufacturing units. In particular the role of the Small Business Finance Corporation(SBFC), which looks after the credit needs of small enterprises, can be increased considerably in this regard.

3. Foreign markets should be surveyed periodically and small manufacturers should be informed of the demand for their products. They should also be informed of designs and quality of products so that they can compete in foreign markets. 4. Provincial Small Industries Corporations and other organizations have set up a number of training centers for workers. There is an equally great need to set up training centers for entrepreneurs of small-scale industry. A few basic courses of Management, Marketing, Quality Control etc. should be offered at these centers.

5. Last but not the least is the need for regular periodical surveys of the smallscale industry at the National level. In the absence of precise and updated information about the industry, the policy makers are seriously handicapped in working out future plans for this sector.

MINING
The Govt. of Pakistan framed National Mineral Development Policy to exploit the Mineral deposits and the following steps have been taken place in this case: (a) To provide higher financial allocation for mineral sector. (b) To expand the institutional framework for accelerated mineral development. (c) To set up semi-autonomous corporations such as Pakistan Mineral Development Corporation(PMDC), Resource Development Corporation(RDC), at federal level and Punjab Mineral Development Board, Sindh Development Authority, Balochistan Mineral Development Authority at provincial level. The production of minerals are important for the growth of mineral based industries due to their use in the other sectors of the economy such as energy minerals-coal; agriculture minerals- rock phosphate, gypsum; construction minerals- limestone, natural stones, etc. The most significant benefits to be derived from an expansion of the mineral sector activities are: expansion of employment opportunities; expanding business opportunities for local industries; increase revenue flow to the provincial and federal governments; technology transfer; and regional infrastructure development. Pakistan has a widely varied geological framework that includes a number of zones hosting several metallic minerals, industrial minerals, precious and semi-precious stones.
6

The government has extended special incentives for mineral development through public and private investment and facilitating private sector to contribute in this sector. To revive industrial growth, a 100 MW power plant was established by using Thar coal deposits based on underground coal gasification, which would convert into 1000 MW power plant. Efforts are for exploration and evaluation of coalfields in Sindh and Balochistan. These studies are aimed at enhancing the coal resource base, supplement power generation, and substitute furnace oil in different industrial units in the country. The indigenous problems faced by this sector are inadequate provision of the geological data base, limited mining experience and inadequate capital resources and finally the lack of infrastructure and security in geological promising areas.

Small & Medium Enterprises Development Authority (SMEDA): To develop the small and medium enterprises (SMEs) in Pakistan, the then Prime Minister had created a Small and Medium Enterprises Development Authority (SMEDA) in October 1998 as an autonomous corporate body at the Federal level with Prime Minister as its head. Its governing board consisted of a chairman and members from government and private sector. Its broad objectives were to; 1. Provide and facilitate support services to SMEs and to serve as key resource base for them. 2. Prepare a plan of action to revitalize the role of small business in the development of the country. 3. Serve as the voice of small business within the Govt. and to ensure participation of the private sector in the process of policy making. 4. Generate massive employment opportunities at significantly low cost. 5. Drive industrial growth towards value added exports. 6. Co-ordinate SBFC and other financial institutions in arranging finance for self-employment schemes.

Parallel to infrastructural support, SMEDA, in collaboration with international agencies like Japan International Cooperation Agency (JICA), Senior Experts Services (SES, Germany), Asian Productivity Organization (APO) and local experts, is providing technical assistance to SMEs in the relevant industrial units to upgrade their skills and improve systems. During July-March 2011-12, 27 industrial units have been the direct beneficiaries of this programme; whereas, 16 technical training workshops, seminars and awareness sessions were conducted. Major sectors facilitated under the Industry Support Programme are: textiles (spinning, weaving processing, garments, sportswear and apparel), auto parts, electric fans sector and furniture sector across the country. The factors that impede development of the SME sector in Pakistan are well-known. However, lack of support of concrete data and quantifiable research are making the task of securing attention of policy makers and key government stakeholders difficult. During 2011-12, SMEDA took the initiative of bridging this information gap through publication of the SMEDA Research Working Papers Series.