06th December 2017

Maqsood A. Butt FCA

SACK RACE , TEXTILE AND SUBSIDY

I recently read an article regards the futility of subsidizing certain sector of economy and
specially the textile sector which immediately reminded me of the sack race which we used to play
in primary/high schools in yester years. What sack race has 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 a
starting point towards a finish line. A subsidy is a form of financial aid or support extended to an
economic sector generally with the aim of promoting economic and social policy. It can also be
classified as Production Subsidy, Consumption Subsidy, Export Subsidy, Employment Subsidy, Tax
subsidy, Transport Subsidy. The reader will agree , after finishing the whole article---provided this
piece appeals him --- that 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, specially 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 endeavor of every manufacturer not only to buy, at most
competitive prices, the input raw materials , energy, labour and other services but also run its
factory most efficiently 24/7, to apportion its fixed cost over maximized production, to reduce the
overall cost of production of its products to remain competitive .

But where do the subsidies come in and why there is misperception that Government is giving
subsidy to the export sector. The main stay of Pakistan’s export economy is textile which is under
threat for the last 4 years during which the cost of doing business has increased . As per World
Bank report on Ease of Doing Business , Pakistan’s ranking declined by 40 points in 5 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 constituent of the survey relate to the Government’s policies or their
implementation; major among them being Starting a Business, Dealing with Construction Permits,
Getting Electricity, Registering Property, Getting Credit, Paying Taxes, Trading Across Border,
Enforcing Contracts, Resolving Insolvency, Transparency in Business Regulations and Good
Practices. Our ranking going south by 40 points in 5 years , alongwith our ranking at 174 in 189
economies in ‘Trading Across Border” indicators, has explicit and implicit consequences in
increasing the cost of doing business . Specifically the textile sector is suffering due to inordinate
delay by the Government in reacting to the changes in global policies specially the pro-textile
policies of our competitive countries. The recent example is the package of Rs 180 billion
announced , after dilly-dallying for over a year, for the export sector by the Prime Minister with
much fanfare, has come to a dead end after distributing Rs32 bill for exports upto 30 Jun,2017
which resulted in over 10% increased in garment exports. The rules for Technical Upgrade Fund ,
being part of the package, have still not been made even after expiry of 11 months as the
applicants are being continuously being informed by the State Bank. Neither the rules have been
made till today nor the money has been allocated to repay the Duty Drawback of 3.5% ( which
was reduced from 7% available from January to June, 2017) to the garment sector which was due
for exports wef 1st Jul,2017 . The admitted sales tax refunds of exporters , the figure is
guesstimated to be Rs250 bill, are pending . There are dozens of applications pending for months
to get approval for 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 modernizing the machinery with the updated technology . However, when an
industry is continuously in the red, it first seeks to survive and then plan for modernization. The
prolonged load-shedding of 12/14 hours a day in the last five 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 Rs32/kw) and another one on gas;
they had invested to buy systems to produce steam from three sources i.e coal, gas and rice
husk/wood. This huge investments could have gone to the enhance the production capacity and
modernize the machinery but the industry’s foremost priority was to survive. And with the above
impediments, the industry could not keep pace with the BMR. Was industry at fault ??

The readers may now have a clue of the analogy between 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 energy sector by paying 20% of DISCO losses including theft and non-
payment of bills ( the textile sector has ZERO theft and pay 100% 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 Rs25 bill per annum on interest on sales tax refunds blocked by FBR which is not being
incurred by our competitors ; we get gas at Rs1000/mmbtu against Rs600 equivalent by our
competitors; and a sword of Damocles is hanging over industries’ head in the shape of GIDC of
Rs100-Rs200 per mill btu for the previous 4 years which has been thankfully stayed by 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/others); export sector is not getting the promised Drawback of local taxes. The overall
burden of the above factors renders the industrial sector generally and textile sector particularly
uncompetitive internationally . 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 is it throwing some peanuts. Is
the famous idiom “ if you pay peanuts, you get monkeys” relevant here ???
All the above factors tantamount to a sack being put upto 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, what to speak of winning it.