BCom Notes Part II Economy of Pakistan Industrial Development

If you want to view other notes of this subject. Click Here.

If you want to view other notes of BCom Part II. Click Here. 

Industrial Development

Importance

Importance of Industries

Industries play a dominant role in the economic development of a country. Western countries enjoy all comforts and luxuries of life due to higher productivity of goods and services in their countries. This is due to industrialization. Unfortunately there were no industries when Pakistan came into being but now wit the efforts of Govt. and the people there is an improvement in this regard however more is required to be done.

The overall manufacturing sector continued on its strong positive trend during the current fiscal year 2006-07. Overall manufacturing recorded and impressive and broad based growth of 8.45 percent in 2006-07, against last year’s growth of 9.9 percent. Large scale manufacturing account for 69.5 percent of overall manufacturing registered an impressive growth of 8.75 percent in the current fiscal year 2006-07 against last year’s achievement of 10.68 percent. There has been a slight decline in growth in the manufacturing sector due to multiple reasons like reduced production of cotton crop, sugar shortage, steel and iron problems and the last but not the least global oil prices. All of these reasons contributed to reduced growth in 2006-07 but high levels of liquidity in the banking system, an investment friendly interest rate environment, a stable exchange rate, low inflation, comfortable foreign exchange reserves, stronger domestic demand for consumer durables and high business confidence among other things will again boost the manufacturing sector growth rate up to a reasonable level.

Main Industries

Main Industries of Pakistan

1. Textile Industry

The share of textile industry in the economy along with its contribution to exports, employment, foreign exchange earnings, investment and value added makes it the single largest manufacturing sector. It contributes around around 8.5% to GDP, employs 38% of total manufacturing labor force and contributes between 60-75% to total merchandise exports. Pakistan is one of the largest textile exporters in the world. The variety of products ranges from cotton yarn to knitwear. Garment made-ups and bed wear are most important export products with an export value of about $1.35 billion each. Knitwear, ready-made garments and cotton yarn also have important shares in total exports. Major importers of textile products are USA, European Union, UAE and Saudi Arabia.

2. Automobile Industry

The auto industry growing is fast and may soon begin to achieve economies of scale. The tremendous rise in automobile demand has resulted in increased production, giving a healthy impetus to industrial output and generating over 1,50,000 direct employment opportunities besides contributing tax revenue to the Govt. since 2001-02 the automobile market is growing rapidly by over 40% per annum. Long-term investment friendly policies of Govt. and up-gradation of production facilities considered as pre-requisite by experts.

3. Fertilizer Industry

In order to promote the use of fertilizer. Govt. offered various incentives, which ultimately resulted in excessive demand for fertilizer. The fertilizer use in Pakistan is a growth story in the field of agriculture. Presently they are 10 manufacturing units in operation. Out of these, four units are located in public sector and six are in private sector. The average annual growth of the fertilizer sector is at 6% per annum. Its share in GDP is 0.5%.

4. Paint and Varnish Industry

There are 22 units in organized and 400 units in unorganized sector for the manufacture of paints and varnishes. The per capital consumption of paints in Pakistan is low. The demand for paints and varnishes is rising due to the resurgence of housing and construction sector.

5. Cement Industry

Cement industry has shown significant growth. At the moment there are 27 cement manufacturing units in the country. The boost during the period in the performance of cement industry activity is because of high level of construction activity in country and increased development expenditure of the government.

6. Home Appliance Industry

Production of television, refrigerators, deep freezers and air conditioner has almost doubled in the last three years. The pace of growth in demand for home appliances is the direct result of the banks and leasing companies policy of consumer financing package. Many dealers have initiated their own schemes of easy installments, which is further increasing demand.

Economic Development

Importance of Industries in Economic Development

1. Increase in National Income

Progress of industrial sector of the country results greater production of goods and services. Output of goods and services is known as GDP. Increase in national income increases per capital income of the people. Higher per capital increases general welfare of people and standard of living of masses improves.

2. Increase in Employment Opportunities

Industries create may types of employment opportunities. Disguised unemployment prevailing in agricultural sector is removed as labor moves for jobs to the cities. Increase in employments results increased savings, which is utilized for further investment in industries.

3. Increase in Productive Capacity

Industrialization increases productive potential. Specialization results in mass production of superior quality goods at a cheaper cost. Greater employment opportunities increase income; income increases demand for goods for goods and services and increases in demand increases investment in industries and other sectors of economy. Effective demand through acceleration principle increases investment and a small investment through multiplier effect increases national income many times and in order to meet demand of people productive capacity develops.

4. Development in Agriculture

Agriculture is backbone of the economy of Pakistan whereas agriculture itself depends upon the progress of industries. Industries produce all inputs that are needed by agriculture such as fertilizers, insecticides and machinery etc. Agricultural output such as cotton, sugarcane, edible oils, fruits, tobacco etc becomes input for industries. All these factors increase income of farmers. Thus agriculture and industries are inter-dependent sectors of economy.

5. Increase in Government Revenue

Industries provide revenue to the Govt. through different sources such as tax on the profit of the company, income tax, sales tax, excise duty, import duty, export duty. Thus industries provide a greater proportion of taxes to the Govt.

6. Improvement in Balance of Payments

Exports of industrial goods increases foreign exchange earnings. Likewise processing of raw material reduces expenditure on imports and foreign exchange earnings improve balance of payments of Pakistan.

7. Economic Stability and Political Domination

Arms, ammunitions, communication appliances, vehicles and other defense requirements are produced by domestic industries, which make defense of Pakistan strong. Industrialization provides economic and political stability. It provides name and fame in international community. Hence a political domination is achieved.

Industrial Development

Measures for Industrial Development

1. Industrial Trading Estates

Government has established industrial trading estates where the entire basic infrastructure such as road, communication, water, gas, power, banks, police protection etc., has been provided. Most famous industrial estate of Pakistan is Sindh Industrial Trading Estate.

2. Technical Training Centers

In order to remove shortage of technical labor, Govt. has established Polytechnic Institutes and colleges in various industrial cities.

3. Tax Concession

In order to develop industrial sector, Government has granted tax holidays and concessions to the industries.

4. Research Institutes

For progress and development of industries Government has established many research institutes, which are directly or indirectly assisting industrial sector. The most important research institutes are Pakistan council of Scientific and Industrial Research, Central Testing Laboratories and Pakistan Standard Institute.

5. Protection Policy

In order to protect new and infant industries, Government has adopted the protection policy for new industries i.e., Goods, which are produced by the local industry are not allowed to be imported, so that local industry may grow quickly.

6. Export Processing Authority/Zones

Separate export processing zones have been established where those industries are established which are engaged in production of exportable goods. Entire infrastructure is made available their and all facilities are given to these industries in order to increase export earnings of the country.

7. Export Promotion Bureau

This Government department helps in the exports of locally produced goods by arranging exhibition, seminars and inviting prospective foreign investors. It also arranges exhibitions of Pakistani products in international markets and disseminates different types of information for progress and development of industrial sector.

8. Provision of Industrial Credit

In order to meet loan requirement, both in local and foreign currency, Govt. has established many financial institutions such as Industrial Development Bank of Pakistan, Pakistan Industrial Credit and Investment Corporation., Investment Corporation of Pakistan, National Investment Trust etc.

9. Investment-Friendly Rate of Interest

Government has reduced rate of interest so that the investors may feel happy to borrow and invest in industrial sector. Low rate of interest increases margin of profit thus businessmen establishes more industries in the country.

10. Revival of Sick Industries

Many industries, which had were closed, are now being revived. Their dues of taxes, loans and interest etc have been drastically reduced and they are now being put into operation. This is being done so that the industries may become prosper and export earnings of the country may increase.

11. Privatization Policy

Most of the State owned industries are inefficient and are running in losses, when these will be transferred to private sector, their administration will improve and non-development expenditures decrease to a greater extent, their efficiency will increase and such industries will be converted into profitable ventures.

Small-Scale Industries

Importance of Small-Scale Industries

1. Use of Local Machinery and Local Raw Material

Small industries can be set up easily because no technical and administrative expertise and training is required. Since in it local machinery and local raw material is used therefore no foreign exchange is required.

2. Employment Opportunities

These industries provide greater employment opportunities to local people. The disguised unemployment is reduced and migration of people towards cities for search of jobs is reduced. Since unemployment person can get job in small industries, the rate of dependent persons is reduced.

3. Increase in Standard of Living

These industries provide job opportunities, income of people increases, which result in the increase in standard of living. These also reduced income disparity between the rich and the poor.

4. Increase in Export Earnings

Foreigners heavily demand goods produced by small industries, which results in the increase in foreign exchange earnings of Pakistan. These enterprises increase name and fame of Pakistan in international market.

5. Act as By-Product and Subsidiary Industries

Small industries purchase wasted raw material of large industries to be used in their own production process, thus they increase income of large-scale industries. These industries manufacturing nuts, bolts and spare parts required by large industries at a very low price, hence both of them are benefited with each other.

6. Expansion in Home Market

SMEs produce goods keeping in view needs and requirement of local market therefore home market is expanded. Increased supply of goods increases business activity and national income. With increase in output the prevailing high rate of inflation can be controlled.

7. Diversification in Industrial Products

Goods using different types of material result in diversification of product. Different varieties of goods are produced according to the demand of different customer’s purchasing power.

Privatization Policy

Privatization is a process by which Govt. owned factories and services are transferred to private sector by their sale. Foreign investors can also purchase these industries and services. In order to sale Govt. enterprise open bids are invited from private sector. In some cases shares of the enterprises are sold through Stock Exchanges. Deregulation means reducing the rules and regulations and to make investment easy for local and foreign investors. Now any foreign national can set up his business anywhere in Pakistan without under going a complicated procedure of government permission. Privatization process varies somewhat depending on the nature of the asset being privatized, on the proportion of shares being offered for privatization and on whether a transfer of management is involved. Privatization Commission prepares the summary justifying the need for privatizing the property and the regulatory framework. Once endorsed by the Board of Privatization Commission, it is submitted to Cabinet for approval.

Advantages of Privatization

1. Increase in efficiency and Profitability

Most Govt. industries and services are inefficient and running in losses, when these will be transferred to private sector, their administration will improve and non-development expenditures will be reduced, their efficiency will increase and will be converted into profitable ventures.

2. Increase in Foreign Investment and Export Earnings

Privatization will increase foreign investment when foreigners will purchase them. Their production will increase which will more foreign exchange for Pakistan and if these enterprises are set up by foreign loans, these loans will be repaid out of the sale proceeds, which will reduce the burden of foreign loans.

3. Broaden the Base of Share Capital and Stock Market

Sale of enterprises through stock exchanges will broaden the base of share capital hence stock market will develop, because general public will be in position to purchase their shares and investment opportunities for general public will increase.

4. Decrease in Political Pressure

There are always political pressures on Govt. owned industries, banks and other institutions for employment of political workers and loan facilities from banks. When these enterprises will go in the hands of private owners then these illegal pressures will be reduced to a great extent.

5. Use of Latest Technology and Know-How

Private domestic investors and foreign investors will adopt latest technology and know-how for the increase in output and their profits. This will result in the increase in national product, thus national income of the country will grow.

6. Decrease in Deficit Budgeting and Increase in Infrastructure

Govt. enterprises usually run into losses and to keep them going. Govt. provides funds every year. After privation, Govt. need not to resort to deficit financing and the funds provided to these enterprises will be utilized for construction of social infrastructure of the economy.

Disadvantages of Privatization

1. Increase in Tax Evasion

Private sector generally tries to avoid payment of taxes. Thus privatization of enterprises will result in the decrease of tax income.

2. Concentration of Wealth

Privatization of large industrial units and services sector such as banks and insurance companies will increase concentration of wealth in private hands. It means only rich people will reap the fruits of industrialization and the society will be divided between “haves and have-nots”.

3. Exploitation by Private Sector

Privatization will result in exploitation by rich people. They may charge more prices for their goods and services. They may terminate workers to reduce cost of production. Thus different types of exploitation may be started and the concept of welfare state for Pakistan will be jeopardized.

4. National Security Endangered

Telecommunication, Civil Aviation (Airlines) and railways if privatized then it would be a security risk for the country.

Natural Resources

National resources are backbone for the industrial development of a country. These resources play a dominant role in accelerating in the pace of progress and prosperity. Economic development of an economy is not possible without the availability of natural resources. Natural resources are divided into minerals, forests and hydro power/energy.

1. Mining and Quarrying

Pakistan has a widely geological frame work, ranging from pre-Cambrian to the present that includes a number of zones hosting several metallic minerals, industrial minerals, precious and semi-precious stones. Although many effort have been made in developing geological products, institutional, academic and Research and Development infrastructure, much remains to be done to enable this sector to take full advantage of its endowment. As a result of various efforts devoted for the development of mineral sector, resources of several minerals have been discovered over the last many decades, including world class resources of lignite coal deposits at Thar, Sindh, porphyry copper-gold deposits in Chagai, Balochistan, Iron ore deposits at Dilband, Balochistan, Lead-zinc deposits in Duddar, Balochistan, gypsum, rock salt, limestone, dolomite, china clays etc in the Indus Basic, ornamental and construction stones in the various parts of the country and about 30 different gems and precious stone deposits in northern Pakistan.

Mineral industry in Pakistan shows that over the last few decades this sector has been allocated very small amount – 0.45% to 2.46% of the total public sector expenditure since first five year plan reflecting its contribution to Gross National Product (GNP) of just around 0.5%. The mineral resources of a country are valuable means and measures of its economic and industrial growth. These are still more important for Pakistan because of its favorable geological environment and a large number of mineral resources in the country. Considering that substantial scope exists for the development uncertainties, it requires Government support and recognition of mineral sector.

The Govt. is fully committed to making the mineral sector in Pakistan one of the most profitable for the country. During the current fiscal year, mining and quarrying sector has registered a growth rate of 5.7 percent as against 4.58 percent of last year. The increased growth was propelled by strong growths recorded in magnetite-30%, dolomite-26.1%, Limestone-25.2% and chromites. To make this sector thrive more in the upcoming year the Govt. has already started various initiatives which is evident from the discovery and development of world class copper-gold deposits in Chagai, Balochistan by Australian Firms that would fetch $500 million to $600 million per year during the lives of these mines Development of Thar Coal field, one of the largest good quality lignite deposits in the world on completion, would provide additional source of energy.

2. Mines and Mineral Development Department

This department was created in Sindh in 2001 in pursuance of the National Mineral Policy, 1995. The department has taken all necessary steps for further establishing its field office. The province of Sindh has large quantities of minerals. In all there are 24 minerals which are being mined at present. The province also has large quantities of coal and granite reserves. The granite area which was previously inaccessible has now been connected with Karachi by network of roads and other facilities like Rest House etc. It is also proposed that Granite Park should be established at Nagarparkar. Karunjhar Range of Mountains in Nagarparkar has huge reserves of granite and other rock types of extractable thickness which has the potential to compete the international market.

Mineral Resources

Mineral Resources of Pakistan

1. Natural Gas

Natural gas is used in domestic cooking, thermal power stations and steel furnaces and as a raw material for fertilizer industry and in CNG kits for transport purpose. It is used almost in every industry. It is found in Sui, Attock, Pirkoh and Kandhkot.

2. Petroleum

Petroleum or Crude, oil is used in transport, power-generating stations, in iron and steel furnace Petroleum is known as black liquid gold. Of the total requirement only 40 percent is produced with the country and the rest is imported from abroad. Crude oil is found at Jhelum, Rawalpindi, Badin, Attock and Mianwali.

3. Coal

Coal is used in thermal power station and in furnaces for making bricks. About 80 percent of cement industry has now switched over to indigenous coal from furnace oil that has saved considerable foreign exchange being spent on the import of furnace oil. Quality of coal is not very good. It is available at Dandot, Makerwal, Harnai, Lakhra (Sindh). The coalfield in the Sindh province has huge coal resources of about 175 billion tones. In view of the anticipated shortfall of electricity and other energy resources during the next 10 years, the maximum utilization of coal would be required in power generation and gasification. To ascertain commercial viability of mining coal from Thar (Sindh), German consultants have completed a mining feasibility on a specific block in Thar Coalfield.

The coalfields in the Sindh province have coal resources estimated at 175 billion tones. Due to high cost of imported energy, government has decided to enhance the share of coal in the over all energy mix from 5 percent to 19 percent by 2030. Over 80 percent of coal was consumed by the brick kiln industry thus reducing the supply available for power generation. Approximately 80 percent of cement industry has also switched over to indigenous coal from furnace oil that has saved considerable foreign exchange being spent on the import of furnace oil. The conversion of cement industry from furnace oil to coal has generated a demand for 2.5 to 3.0 million tons coal per annum.

4. Chromites

Chromite is used in making engineering tools and stainless steel. It is found at Chaghi, Muslim Bagh, Malakand and Zhob.

5. Copper

Copper is used in electrical equipment, power and communication transmission lines. It is found at Sandak, Chaghi.

6. Gypsum

Gypsum is used in the manufacture of cement, fertilizers and Plaster of Paris. It is found at Hazara, Kohat, D.G.Khan and Dandot.

7. Iron Ore

Iron ore is used in making steel and engineering products. Quality of iron ore is not of good standard. It is found at Kalabagh, Chitral, Hazara, Makerwal and Khuzdar.

8. Rock Salt

Rock salt is used for cooking as well as in the manufacture of soda ash. It is also used in textile and tanning industries. It is found at Khewra, Warcha and Kalabagh.

9. Marble and Granite

Marble is used for decoration in construction industry. It is available in great quantities at various places of the country.

10. Lime Stone

Limestone is used in manufacture of cement, bleaching powder and glass and paint industries. It has rich deposits in the country. Lime stone is found at Hyderabad, Potohar and at Khewra Salt range.

Forest Resources

Forest Resources of Pakistan

Forests play a very important role in the economy of a country. There is shortage of forests in Pakistan. Pakistan has 4.01 million hectares covered by forests, which is about 5 percent of the total land area. Eighty-five percent of this is a public forest, which includes 40 percent coniferous and scrub forests on the northern hills and mountains. The balance is made up if irrigated plantations and Riverain forests along major rivers on Indus plains, mangrove forests on the Indus delta and trees planted on farmlands. Though the forest resources are meager, it plays an important role in Pakistan’s economy by employing half a million people and fulfills one-third of the nation’s energy needs. Forest and Rangelands support about 30 million herds of livestock. Forestry sector plays an important role in soil conservation, regulates flow of water for irrigation and power generation, reduction of sedimentation in water conveyances and reservoirs, employment and maintenance of ecological balance.

Total forests area of Punjab, NWFP, Sindh and Balochistan is 0.48, 1.33, 0.84 and 1.36 million hectares respectively. Pakistan being an agricultural country relies on sustained supplies of water and fertile soil. This is only possible when our forests and watersheds in the high hills are intact. Pakistan being a forest deficient country is facing timber and fire wood shortage to the tune of about 29 million cubic meters. There is need to increase the area under tree cover, not only to meet material needs of growing population but also to enhance environmental and ecological services being provided by the forests.

Importance of Forests

Importance of Forests in the National Economy

1. Raw material for paper, sports, silk, furniture and tanning industries.

2. Medical herbs and seeds for pharmaceutical industries.

3. Recreation facilities for tourism and camping.

4. Timber/woof for fire.

5. Reduce floods intensity.

6. Increase fertilizer of land.

7. Provide employment opportunities.

8. Causes rains.

9. Control soil erosion.

10. Fodder for cattle.

11. Provide employment opportunities.

12. Chemicals such as turpentine oil.

13. Leaves of forests provide natural fertilizers.

14. Forests are great source of recreation, natural beauty and attraction.

Energy

Pakistan’s economy has been growing at an average rate of 7.6 percent per annum and the government is making efforts to sustain the momentum going forward. Knowing well that there exists strong relationship between economic growth and energy demand government is making efforts to address the challenges of rising energy demand. These include import of piped natural gas from Iran and Turkmenistan, import of LNG, increase in oil and gas exploration in the country, utilizing 175 billion tones of Thar coal reserves, setting up of new nuclear power plants, exploiting the affordable alternate energy resources and overhauling existing power generation plants to enhance their generation capacity. In addition to increasing supply, there is a need to promote efficient use of energy resources as well. At present Pakistan meets its energy requirement of over 75 percent from domestic resources, around 50.4 percent of its energy need is met by the indigenous gas, 28.4 percent by domestic and imported oil and 12.7 percent by hydro electricity. Coal and nuclear contribution to energy use is limited to 7% and 1% respectively. While the widening of energy supply and demand gap remains a challenge for Pakistan, it also provides viable investment opportunities for both local and international investors.

Main Energy Sources

1. Hydro power.

2. Natural gas.

3. Petroleum.

4. Coal.

5. Atomic Energy.

Importance of Power/Energy

1. No industry can run without power/energy. All machines require energy to operate them.

2. No agricultural machine can function without it. Tube wells, tractors, trolleys, threshers all require energy i.e. electricity, diesel or petrol.

3. No transport and communication service such as trucks, cars, railways or aero plane can operate without energy/petrol/diesel etc.

4. No domestic appliances such as electric bulbs, television, fridge, juicer and blenders can function without the use of energy/electricity.

Causes of Unemployment

Population of Pakistan is about 154 million whereas the growth rate of population is about 2.6 percent per year. The total labor force is 47.67 million, out of which 44.01 million, is employed and 3.66 million is unemployed. The main cause of unemployment is as under:

1. High Population Growth Rate

Due to rapid increase in population unemployment rate is increasing very fast.

2. Low Rate of Investment

In Pakistan, per capital income is very low, therefore savings are very low, hence investments are less. Due to low investment are employment opportunities are not coming up.

3. Mechanization of Agriculture

Agriculture is under process of mechanization. Machines are replacing labor and creating unemployment. Migration from villages to cities is also a cause of increase in unemployment, as cities have already reached to the saturated level and could not absorb new job seekers.

4. Sick Industries and Privatization

Industries are facing many problems. Many of them are at the verge of collapse due to lack of availability of imported raw material, short of demand in local market, reduction in their exports and competition with foreign imported goods. Number of sick industries is increasing day by day which is causing unemployment in the country. Moreover due to privatization policy of the government, state owned industries are being sold out to private sector, where labor is being reduced thus causing unemployment in the country.

5. Decrease in Foreign Employment Opportunities

Due to war between Iraq and Kuwait, attack on Afghanistan and Iraq economic crises in Middle East and in other European countries, Pakistani workers have been removed from their jobs thus creating unemployment situation in the country.