Analysis: The textile sector is not indispensible for the economy

Published: August 27, 2012

The textile sector employs many, exports a lot, but pays little in taxes and impedes growth of other sectors.

The textile sector employs many, exports a lot, but pays little in taxes and impedes growth of other sectors. Local sales of publicly listed
textile companies, Rs (in millions).
KARACHI: 

Pakistan’s textile industry is not a child anymore. It should stop acting like one.

There is no question that the textile industry is Pakistan’s single largest industry. But the textile lobby has a penchant for exaggerating just how big it is. According to the 2012 Economic Survey of Pakistan, issued by the finance ministry, the textile industry itself constituted about 4% of the total size of the economy. If one were to charitably add the related cotton farming sector, that number goes up to only 5.6% of gross domestic product.

And while the government does not break down tax revenues by sector, estimates based on companies listed on the Karachi Stock Exchange (an admittedly imperfect measure) suggest that the share of taxes paid by the sector amount to less than 5% of the total revenues collected by the government.

There is no question that the textile industry is important, but it is not indispensible.

The problem with the textile sector – easily the single most powerful lobby in the country – is that it has grown complacent owing to giant walls of protection erected by the government.

The government provides cotton farmers massive subsidies on everything from fertiliser to water so that cotton prices in Pakistan stay lower than the global average. It provides the larger textile companies with gas so that they can produce electricity more cheaply, even at the expense of causing 12-hour power outages for the rest of the country. They are exempted from income taxes on their export revenues, with only a nominal 1% sales tax levied on revenues (other exporters also have this facility). Their machinery imports are exempted from import duties. And until recently, the government even paid most of the interest on the loans taken on by textile companies.

So what exactly does the Pakistani economy get in return?

The textile industry is correct when it says that it is one of the country’s biggest employers. The 2011 Pakistan Labour Force Survey estimates that the sector employs just over 1.5 million Pakistanis, a little under 2.9% of the total workforce. And it does provide for about half the country’s export earnings.

But is all of this enough? More to the point, is it even sustainable? Any reasonable analysis of the textile sector suggests that the answer to both of those questions is no.

The Express Tribune has compiled a special report on the state of the textile sector, the pressures it faces and the opportunities before it. Our nationwide team of reporters has spent the last month compiling data to put together this picture of an important Pakistani industry, and the picture we have gotten is not pretty.

The textile industry has essentially refused to invest in value-addition. The share of value-added garments as a percentage of total textile exports has remained constant for the last decade, suggesting that there has been no progress in trying to make Pakistan’s industry more globally competitive.

Some of the largest textile companies in Pakistan are willing to recognise that investments in productivity-enhancing technologies is a worthwhile endeavour. But the textile lobby insists on blaming the government for absolutely everything that goes wrong, insisting that the industry itself is blameless.

It is impossible to talk to any textile exporter or lobbyist (the two are often interchangeable) without hearing the exact same talking points: that the government should start paying their interest rates again and provide them with gas so that they can keep running their highly inefficient captive power plants, even while starving the rest of the grid of cheap fuel, forcing the government to fork over massive subsidies, which run up the deficit that in turn causes high inflation and the high interest rates that they complain about in the first place.

This problem of brazen exploitation is worst in Punjab, where at one point, the government provided zero gas to the power sector – causing the province to effectively shut down – so that they could keep supplying the textile industry’s captive power plants.

This industry still has some benefits, but it has rapidly turned into a cancer that is feeding on the rest of the economy. If the Pakistani economy is to thrive and become globally competitive, the government needs to divert its resources away from granting privileges to this over-coddled sector and towards higher growth sectors.

For the sake of ordinary Pakistani families being crushed by high inflation and power outages, the government must stand up to the textile lobby.

Published in The Express Tribune, August 27th, 2012.

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Reader Comments (22)

  • Nadir
    Aug 27, 2012 - 6:04AM

    Bravo!! Well said!!

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  • Aug 27, 2012 - 6:34AM

    indispensible or indispensable? although pretty good information put forward in the article.

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  • Hardliner
    Aug 27, 2012 - 10:21AM

    Hmm…… agreeable analyses

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  • Irtaza M. Awan
    Aug 27, 2012 - 10:30AM

    Speak up Pakistan! Our problems can only be solved if we first are honest and admit where we are wrong and what can we do about it. Enough of hype, lets stick with facts. There are many other sacred cows! in Pakistan, hopefully we will get the courage to speak up and take them to task!

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  • Bitter Reality
    Aug 27, 2012 - 1:15PM

    Pakistan will get 13 Billion dollars against export of textile products. Will you please tell me any other sector which is bringing this much??
    Secondly if Govt cut gas supply to textile industry and provide it to domestic users, Will it add anything to the national economy in shape of Dollars??
    Why not cut gas of CNG stations first as the citizens of this third world and energy deficient country dont deserve such cheap rides?? Is CNG adding that much other than your personnel comforts and luxuries while you dont deserve this at all??
    For your kind information, all textile mills without power plant are facing daily 6 hours load shedding, while all other with power plants are facing 2 days gas load shedding. You will be glad to know that plan has been proposed to shut gas supply to gas industry during whole winter. Will you please explain how 70% Pakistani who ride a car after months are benefiting from CNG? If there are two much luxuries for textile sector then why we listen everyday that textile sector of Pakistan is in volatile phase. In country with export of $30.9 billion and import of $30.9 billion already having deficit of 9 billion dollars (for which you have to beg to IMF and world Bank plus your father USA), you want to jeopardize textile and increase that deficit to 21 billion dollars. furthermore, if India (also energy deficient) can provide uninterrupted and subsidized energy to their textile sector then why it looks to be a sin in Pakistan?? I know problems are there but first prioritize them and evaluate them as according to me a person sitting in a 2.5 million car doesn’t deserve a cheap fuel (I mean CNG) in an energy deficient country and his luxurious ride is adding nothing to national economy.

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  • Bitter Reality
    Aug 27, 2012 - 1:19PM

    Pakistan will get 13 Billion dollars against export of textile products. Will you please tell me any other sector which is bringing this much??
    Secondly if Govt cut gas supply to textile industry and provide it to domestic users, Will it add anything to the national economy in shape of Dollars??
    Why not cut gas of CNG stations first as the citizens of this third world and energy deficient country dont deserve such cheap rides?? Is CNG adding that much other than your personnel comforts and luxuries while you dont deserve this at all??
    For your kind information, all textile mills without power plant are facing daily 6 hours load shedding, while all other with power plants are facing 2 days gas load shedding. You will be glad to know that plan has been proposed to shut gas supply to gas industry during whole winter. Will you please explain how 70% Pakistani who ride a car after months are benefiting from CNG? If there are two much luxuries for textile sector then why we listen everyday that textile sector of Pakistan is in volatile phase. In country with export of $30.9 billion and import of $39.9 billion already having deficit of 9 billion dollars (for which you have to beg to IMF and world Bank plus your father USA), you want to jeopardize textile and increase that deficit to 21 billion dollars. furthermore, if India (also energy deficient) can provide uninterrupted and subsidized energy to their textile sector then why it looks to be a sin in Pakistan?? I know problems are there but first prioritize them and evaluate them as according to me a person sitting in a 2.5 million car doesn’t deserve a cheap fuel (I mean CNG) in an energy deficient country and his luxurious ride is adding nothing to national economy.

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  • pack up & leave?
    Aug 27, 2012 - 1:22PM

    though the authors intentions may be well-placed, the tone of this article is disappointing
    there can be no doubt that the ‘textile industry’ (which is an increasingly vague idea) has its flaws, and has been coddled the past few…decades.
    But to label it a cancer, is a disservice (perhaps an insult) to those inividuals who have invested not just their wealth, but their time and future in a nation with such an uncertain climate
    no man enters business wishing to see it fail or “grow complacent”
    Though some of the problems mentioned are true, I’d suggest rooting the causes of WHY this is the state of the industry, rather than attack it wholesale.

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  • Pk
    Aug 27, 2012 - 1:55PM

    Never have I read such a biased and misleading analysis in my life:

    (1) The author gives the impression that Pakistani cotton is cheaper than cotton abroad. This is false as farmers are allowed to export as much cotton as they want and always sell cotton at export parity. Moreover, Pakistani cotton is short-staple and has a high trash content which reduces it’s yield, resulting in higher costs for the consumers (e.i the textile industry). If any benefits from so-called “massive subsidies” it is the farmers, NOT textile companies.

    (2) To call captive power plants run by textile companies “highly inefficient” is again ignoring ground realities. To qualify for gas supply OGDC demands that captive power plants be atleast 60% efficient. Companies who cannot prove that they are efficient consumers of gas are NOT allotted any gas, ensuring that captive power plants are the most efficient producers of power in the country. If they were buying the inefficient energy from the grid it would lead to a larger shortage of gas.

    (3) The nominal 1% tax on revenues is only enjoyed by those textile companies who export more than 80% of their production. This is to facilitate the earning of foreign exchange for the country and build our reserves. Moreover this is enjoyed by a small percentage of companies as most Pakistani textile concern’s sell their goods locally.

    (4) While it is true that not enough work has been done in value addition, it should be remembered that the law and order situation makes the running of apparel units extremely difficult as the manpower required is hard to find and hard to train. How can an apparel unit in Karachi (the hub of apparel manufacturing) survive when it factories are shut due to constant strikes?

    This ill-researched and misleading piece of propaganda serves to only mislead the public and undermine the sector responsible for earning the highest amount of foreign-exchange and largest employer in the nation. Poor reporting.

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  • I am concerned
    Aug 27, 2012 - 3:13PM

    @Bitter Reality, Well said. Totally agree with you. In order to have a fair assessment, the writer must justify counter argument. What kind of value-added or worth will come if gas is just consumed for no return?

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  • Curious Observer
    Aug 27, 2012 - 4:08PM

    It is extremely regretful that such ill researched remarks are coming on a prestigious website such as Tribune.

    The author of this article defeats his own article the minute he acknowledges that the textile industry earns 50% of the foreign exchange of the country. Does the business head of Tribune Mr. Tirmizi have any options to suggest what to do without this foreign exchange?Recommend

  • Farooq Tirmizi
    Aug 27, 2012 - 4:17PM

    Mr Bitter Reality,

    Your understanding of macroeconomics appears somewhat limited. The IMF and World Bank do not finance our trade deficit. They finance our budget deficit. The two are quite different.

    Secondly, we do not advocate giving gas to CNG or the domestic sector. We advocate giving it to the power sector. Here is how it would help the economy more than helping the textile sector: it would reduce the cost of electricity production in the country and eliminate the need for electricity subsidies while dramatically cutting back on power outages.

    In addition, that elimination of subsidies would cut the budget deficit by one-third, eliminate circular debt, free up bank lending as the government would borrow less, and reduce inflation and interest rates for all businesses.

    The difference between what you advocate and what we advocate is that we are looking for policies that benefit the entire economy, not keep it hostage to one sector.

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  • Farooq Tirmizi
    Aug 27, 2012 - 4:19PM

    Oh, and there is absolutely no way for a textile company’s power generation unit to be more efficient than that of a power company. So it is a highly inefficient use of the nation’s scarce gas resources to give gas to the textile companies for power generation rather than the utility companies.

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  • Parvez
    Aug 27, 2012 - 5:05PM

    I think the author has a very valid point. The textile sector is very important for the economy but in all fairness this industry has ‘taken’ more than ‘given’ to Pakistan just like the agricultural sector or the politicians or the armed forces or the bureaucrats or the judiciary………come to think about it who really has given back to Pakistan ?

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  • Aug 27, 2012 - 5:39PM

    Well done Tirmizi Sb…You have done excellent job for revealing the real face of texitle companies owners

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  • Dr. Mahmood Ahmad
    Aug 27, 2012 - 6:16PM

    I agree with author for most of analysis, i am on a visit to USA and always very keen to assess textile import of garments in high end stores like Wal-Mart, Sears, Macy, JC Penny ete, these stores are full of products from China, India, Bangladesh, Sri-lanka, Indonesia, Jordan, Egypt to name a few, you can hardly find any products from Pakistan. These countries might be benefiting from subsidy but look at their export levels compared to imports of inputs, in our case we have lost both the comparative and competitive advantage in textile sector, its only matter of time, new industries will emerge that be efficient and can compete in this new economic environments.

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  • Zahid Bukhari
    Aug 27, 2012 - 6:31PM

    While I agree in some parts to this article, the fact is that we need to tax all sectors of the economy, including the agricultural sector and the textile exporters as well. The notion that because textile exporters bring in $$ and create jobs we can’t tax them is not practical.

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  • Concerned
    Aug 27, 2012 - 7:02PM

    Textile lobby blackmails the government and get tax concessions and favours and still massively evades taxes and custom duties.Look at it,these textile guys have exported their machinery to Bangladesh and set up industries there.This should be investigated by FBR ( which is sleeping)

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  • John lennon
    Aug 28, 2012 - 12:03AM

    Awesome analysis man!!!!! Being a farmer, had to wait way toooooo long for such type of thing to appear in mainstream media. And dont even get me started on the cheap loans they get from SBP in the name of EOP export oriented project and then they import gas powered generator, fed by subsidized gas, which they use to sell the energy to government. HAHAHAHAHAHA, textile industry is a joke. Also, please find some time to write about the sugar industry of pakistan too. Industry that cant revamp its structure, even at subsidized loans, to switch from using sugar cane as raw material to sugarbeet despite the fact that pakistan has been declared water deficient country at various forums and sugar cane production has been identified as major crop that should be substituted in many government reports.

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  • Knotty
    Aug 28, 2012 - 2:14AM

    The writer admits that Textile sector accounts of HALF of all Pakistani Exports!!
    .
    A sign by HSBC Bank at Heathrow Airport London reads:
    .
    ……………………..’Pakistan is second largets textile exporter in the world’
    .
    Need I add more?

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  • Pk
    Aug 28, 2012 - 11:23AM

    @Farooq Tirmizi:
    If your issue is with the supply of gas then the CNG sector should be finished entirely. That would free up gas supplies for both the power sector and industrial sector.
    To hold the textile textile sector responsible for the shortage of gas and circular debt is absurd. These problems are due to the incompetence of the government, not due to the genuine needs of an industry.

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  • Pk
    Aug 28, 2012 - 11:25AM

    @Concerned: The myth that Pakistani industrialists are moving their machinery to Bangladesh is unfounded. I wish the proponents of this myth would come up with the names of the companies that have shifted to Bangladesh.

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  • Bilal
    Aug 29, 2012 - 6:51AM

    What a waste of time article, may be you can send me your address and i’ll send you my econ 101 notes :)

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