Industrial Development
B-Com Part 2-II Economics Pakistan Notes
http://karachiboardnotes.blogspot.com/Chapter 3 - Industrial Development
* Importance
* Main Industries
* Economic Development
* Industrial Development
* Small Scale Industries
* Privatization Policy
* Advantages of Privatization
* Disadvantages of Privatization
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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