LSM collapse

The continuing struggles of the economy were illustrated by recently released government data on large scale manufacturing (LSM), which shrank by almost 8% year-on-year. The LSM decline also has a knock-on effect on government revenues, since less output and sales mean less tax revenue. LSM was expected to take a hit due to inflation and import restrictions (which led to raw material shortages), but the decline was still quite stark.

It has been a perfect storm of bad news, as high inflation and devaluation of the rupee mean people had significantly reduced purchasing power, so even what was being produced was not moving off the shelves. Even the IMF has been pushing for the withdrawal of restrictions to help right the economy, although the government has suggested it is not willing to do so until the next tranche of IMF funding is released to provide a cushion against an imports spike. It is also interesting that the biggest decline was seen in food manufacturing, which would lower processed food output and potentially impact food security.

PDM defenders may try to highlight how the pace of LSM shrinkage slowed significantly after their government took charge — LSM shrank 4.4% from July to January — but that is hardly reassuring. Also, even if the LSM contraction is stopped, the sector remains one of the few areas where large numbers of jobs can be created relatively quickly, meaning that if it is not doing well, there is no way the country will be about to address unemployment. Meanwhile, analysts also now believe that, far from the government’s initial projections of 5% growth, or even its lower revised projections, overall economic growth will be flat, based on the underperforming LSM sector. The best case scenarios are now about 1%, and the only silver lining appears to be that nobody is projecting outright economic contraction.

 

Published in The Express Tribune, March 20^th, 2023.

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